Blain’s Late Morning Porridge – 5th October 2021: Fraxious Markets, Real Inflation Fears, and Opportunity!
“Full fathom five my father lies…”
This morning – Fraxious markets as stocks wobble, fears rise, energy prices spike; what’s to worry about? Preparing for inflation would be one thing – but being ready for opportunity is another!
(Bit of a discombobulated porridge this morning because I’ve spent most of morning chatting to colleagues in the office when I should have been focused! Yay!)
Running into an old chum at Waterloo Station this morning we shared quick notes on markets – our conclusion is… “fraxious”. Excellent…
There are certainly plenty of reasons to… be concerned. Yesterday’s tumble in tech stocks, Facebook being singled out for a particular gubbing later today in Washington, the ongoing weakness in stocks as buyers absorb the news out China (Evergrande is not the only property firm being crushed), oil prices hitting a seven year high with no sign of downside, and even as the US continues to flirt with a potential default the week after next, Democrat leaders are gunning for the Fed. And let’s add a bit of climate panic as extraordinary rains blocked London roads – it’s the end of the world… again. Knightsbridge is flooded! Unheard of!
Fraxious markets? We love them…! When all around are running scared, starting to panic, losing their heads, liquidity has dried up, Harrods is sodden, and further downside seems inevitable… that’s when opportunity is screaming out! As the fears escalate, remind yourself: Markets are never as bad as you fear, but seldom as good as you hope.
The trick is picking the winners and losers…
This morning’s John Authors column on Bloomberg makes a fascinating observation: its only in the UK we’re getting really worried about stagflation. He quotes the current energy fears, the deepening logistical crisis, the lack of Europeans to drive our lorries, and concludes its no wonder the Brits are convinced we face galloping inflation and a crushing recession. The only thing that’s booming in the UK is fear!
It’s a fascinating perspective. He might be right. I’m very aware, from doing US podcast guest slots and chatting to US clients that there is a global concern about “stagflationary headwinds”. In the UK the stagflationary gale is very tangible. It affects our mood. At the moment… the classic “We’re doooomed Captain Mainwaring…” vibe dominates our thinking.
Let’s get honest. The imminent collapse of everything in the UK is massively over-hyped, which is probably due to the ruling Conservative Party having their conference this week. The easiest way not to panic about the UK is to not read any UK newspapers or watch the BBC. There is nothing guaranteed to make the nervous more nervy than our media battering ministers with leading questions. (Generally I like UK media – especially when they are fulfilling their proper role of goading and riling self-important politicians. It’s the hours of endless wokery and faux concern that’s so annoying.)
What we need to do is recognise reality.
There is a new spike in gas prices underway this morning as the scrabble for winter fuel continues. One of my colleagues sagely pointed out the price of oil has reached a seven year high, but supply is still far below demand. He pointed out the number of drilling rigs looking for oil is less than half the level it was in 2014 when Oil last skirted with $80. He pointed out demand for petrol is rising – because people haven’t been sharing cars due to the pandemic. The only area where demand for oil is below pre-pandemic levels is Jetoil – airlines have still not recovered. Shipping lanes are at their busiest in decades!
The reality is energy prices are not in a temporary state of shortage – demand will consistently outstrip supply across most energy products through the coming winter and as economies recover. Oil production is still 40% below pre-pandemic peaks. So, let’s stop worrying if energy inflation is real or transient, and figure what we are going to do now it’s here. It was oil prices that triggered the massive stagflation of the 1970s, and this time oil is further constrained by ESG and Climate Change.
When inflation strikes:
Conventional wisdom says buy linkers. Tick.
Conventional wisdom says buy real assets. I love the story of a German businessman taking a wheelbarrow load of cash to the bank. He turned away for a second, and someone nicked the wheelbarrow, leaving the cash on the pavement.
Conventional wisdom says bonds are not a great option under inflation – but, hey, you get your principal back… how much less its worth in relative terms is the question. Corporate debt, Junk and EM is going to lose – returns will be selective.
Conventional wisdom is be selective on equities… Consumer incomes take time to catch up inflation, so demand for goods and services will fall. But, real non-financial correlated assets are in demand. There will always be some bugger wanting to drink Chateau Lafitte with coke…
Inflation is as destructive to companies as it is to people. Demand becomes increasingly less stable and difficult to predict. Many companies which loaded up high debt levels will see that debt inflated away – but Zombie companies which have only survived due to ridiculously low interest rates will struggle with higher rates – at last freeing up the market niches they’ve been blocking.
Conventional wisdom says Gold is a good inflation hedge – which is not necessarily proven, but over time looks to hold.
Unconventional wisdom includes crypto. As I am sitting in our London office writing this one of our nippers (the very smart, clever young people running ourt funds, and running rings round our prehistoric thinking) has just suggested cryptos must be a good inflation hedge. If he thinks so… My view remains Cryptos are nothing to with hedging inflation – they are speculative pixelatedbollchocks based entirely on the premise there will be a greater fool to buy them. (That said – I am thinking about a crypto-currency based on a real asset – which I will explain when I’ve got my head around the concept.)
No time for five things to read this morning… normal service tomorrow.
Out of time and back to the day job
Strategist, Shard Capital