Easy money was the drug that fuelled the 2010s and now it’s Cold Turkey Time!

Blain’s Morning Porridge – 7th December 2022: Easy money was the drug that fuelled the 2010s and now it’s Cold Turkey Time!

“A day that will live in infamy.”

This Morning: Doom and Gloom dominates the economic mood. Analysts are predicting just how bad it will be next year – but easy money was the drug that fuelled the financial excesses of the 2010s, the market is still addicted to it, and the current dire sentiment is cold turkey..

It might be the hap-hap-happiest time of the year, but it felt bah-humbug for me last night when I had to sneak out the excellent Shard Christmas party to catch an earlier train home after getting a shout the later one would be cancelled. While my workmates boogied into the wee hours, I had the company of a rather nice can of Gordons and Tonic in a packed carriage, laughing with other party refugees! Not so bad…

It reminded me how next week will be a nightmare in London. Train strikes mean it will be impossible to get up to the Smoke, so Mrs Blain and I are short-circuiting it all by driving up and staying. I’ll be doing lunches, dinners, shows, and a couple of presentations to talk about next year. If anyone fancies breakfast.. or coffee, let me know… I intend to have “muddied” my facility for rational thought by mid-afternoon most days.

Next year… is going to be just fascinating… If you thought 2022 was difficult.. well, no point worrying about 2023 today, because you are only going to have to worry about it tomorrow – all over again!

I am not going to buy into the misery and gloom that’s coming out of many City firms. They are all focused on scenarios like how interest rates will remain high to address entrenched inflationary pressures from commodities, agriculture, energy and wages, discretionary spending will be challenging as consumers struggle, recession will bite and companies will face a cull from depressed earnings and meeting the rising costs of leverage.

It will be tough. It always is. Markets go up. Markets go down. Figure it out.

What interests me more is sentiment – as the bull market euphoria of the last decade fades, across the globe it has left a deepening pandemic of economic depression in its wake. The news is resoundingly bleak – especially here in the UK where we are being told on a daily basis just how dire the economic outlook is. Crashing sentiment is a powerfully depressing economic force – influencing the way companies, government and consumers behave and plan for an increasingly uncertain future.

Misery is particularly pronounced here in the UK. It probably doesn’t help we’re now at the a*se end of what feels like 12 years of successively ever-less competent government. Rishi Sunak may be a good man (that’s a genuine question btw), but he was fatally wounded before he took office – and is now paddling his fraxious party towards electoral oblivion with a leaky sieve. We all know it. It colours the mood of the nation – mired in a slough of despond as everyone worries about jobs, money, their kids, health, and where the next meal comes from, we’re praying for change.

Nothing seems to work – from health, transport, IT, you name it – and it deflates us all. There is the nagging realisation it’s our own fault.. and maybe the break with Europe wasn’t such a good idea. If France beats England in the Footie on Saturday night – well.. that really won’t help and we should probably be hiding anything sharp.

The UK has collective depression, a dire condition brought on by the rot from the top down – and it infects everyone and everything. Across the public sector demotivated and fatigued state employees struggle to resolve multiple bottlenecks, while counting the days till they can retire on the guaranteed defined pensions. Across the private sector, recession and job insecurity is sapping moral as tired workers eye up their depleted pension pots and wonder if they will ever be able to retire. Everyone wonders if it’s worth it anymore…

Get over it! Cheer up.. It could be worse. Much worse. This is not Ukraine – pity and help them. We might still get power cuts… but the good news is the Sun will come back up in March. A general election, a new broom and who knows.. the spring might yet prove a time for economic rebirth.. If only we last that long..

Anyway.. enough maudlin moments about the bleakness of modern life.. How does economic depression relate to what we got to look forward to next year?

To understand next year… you really need to understand the last 15 years – and how crazy financial markets looked like they were pharmaceutically enhanced! That’s actually a good analogy of what happened. Monetary experimentation from 2008-2021 was the drug that wrecked the global economy. Today’s economic gloom is the cold turkey moment.

We’re only now beginning to understand why. The easy money drug made us believe multiple implausible things were gospel truths. The markets became an enormous succession of bubbles – but we couldn’t see them because we were in them and looking in all the wrong directions. We believed, accepted and invested in the most improbable of improbable outcomes.

Now the party is over, and drug is wearing off… Where are the flying taxis we were promised? Why did my Tesla not drive me home last night? What are my stupid Ape NFTs worth? Why is my Coinbase account showing a loss of 71% this year? Uber is just a cab-co? Amazon just a retailer? The metaverse is not a thing?

I’ve written too many times about how ultra-low interest rates, QE and rising debt distorted markets, the way the economy functions and the way investors think and what they were prepared to believe. These effects are only working themselves out of markets now – it’s taking time and its causing depression, just like cold turkey! Many analysts are still addicted to the thinking markets will ultimately be bailed out. Others think the current markets are normal, and about interest rates vs recession, but they are not.

The current down trend bear cycle (since December last year) is the first stage of an addicted market weaning itself off the easy money. It’s the reversal of the artificially induced 15 year Bull Market distortion fuelled by the drug of easy money. The bounce we’ve seen over the past 2 months are just the haverings of addicts thinking they are off the drug, so they jump back on it again..

The 2023 markets might be difficult, but at least they might start to make more sense.. and that will be a good thing… Stocks and bonds still have to correct to the true reality – which is not pretty. Easy money was a drug. It had consequences. These are still being worked through the system. The central banks know it. They will make it happen. And that means they will not reopen the easy money taps again… well not unless they have to.

The world’s economy travels forwards in clear cycles of confidence booms and busts. Its normal. We’ve just seen one cycle end, and the next one is beginning. I’m actually confident the new global economy we’re about to enter will prove an even more productive phase that the era of Big Teck – but we have to shake off the remaining addictions first.

I’m going to try to find time to write about the prospects for a new economy and growth cycle for tomorrow!

Five Things To Read This Morning

Saxo                            Outrageous Predictions for 2023

FT                                Solar power expected to surpass coal in 5-years, IEA says

Finance Monthly         US Midterms – A Crisis Delayed

BBerg                          This Legoland is a Cautionary Tale as an Era of Easy Money Ends

WSJ                             China Scraps Most Testing, Quarantine Requirements in Covid Pivot

Out of time, and back to the day job.. .

Bill Blain

Strategist – Shard Capital