Holiday lessons, and what’s next for markets?

Blain’s Morning Porridge, August 1, 2022 – Holiday lessons, and what’s next for markets?

“Good times never seemed so good, so good, so good……..”

This Morning – Not an insightful Porridge this morning, but let me tell you a story about lessons learnt on holiday and what’s likely to dominate the news flow in August ahead of the September market!

After my obligatory 2 weeks not reading emails or picking up a phone (it’s an FCA rule!), it’s good to be back in the markets.

Before I get back to the important matters of the global political economy and prices – today will be about me catching up with what I’ve missed with colleagues, my mail-box and clients! Congratulation to the English Lionesses for winning the Footie last night – a welcome distraction from UK politics!

But first, let me share my holiday story with readers. Please skip the following section if Blain vs the Gods of Fickle Fortune does not interest you.

The Batfish Cruise 2022

She-who-is-Mrs-Blain, Dee-jay our adolescent salty sea-dog, and I just spent the last 2 weeks sailing round the Channel Islands off the coast of France in our sailing yacht; Batfish V. It proved an “interesting” trip (in the Chinese sense) after some discarded fishing gear wrapped round our propellor and damaged the gear box off the west side of Jersey. In short, we lost our engine completely.

A classic No-See-Um. It was a bright sunny day while we were motoring north towards Sark – when suddenly our plans had to change completely as a result of an exogenous shock. As circumstances changed, we adapted. As we were drifting in rocky waters we called the coastguard for assistance. We had to take a snap decision to take an expensive commercial tow back to Jersey where discussions with local shipyards were along the lines of; “we’re very busy, but could fit you in next week for a couple of grand cash to take a look..”

We weighed it all up. Our solution was to sail Batfish back to the UK without an engine – that’s what sailing boats are supposed to do after all!

But there was literally zero wind for the next few days as we sat in a particularly unattractive commercial harbour, then a summer storm blew in. We decided to go in the wake of the storm and set sail in big lumpy seas to Guernsey. Unfortunately, the sea was rough but the wind died again – it took us 8 hours of wallowing in horrible waves before we ghosted into the St Peter’s Port marina where we had to wait for another weather window to sail back to the UK. (We loved Guernsey btw!)

We had to time our trip carefully, waiting for a good wind to power us 100 miles up the French coast, across the English Channel and home to Hamble. We also had to factor in the strong spring tides – which surge through the Islands. They key was catching the north-going tide through the Alderney Race 20 miles to the North of Guernsey. The weather forecast Saturday morning looked good: 10-12 knots of Westerly Wind, and the tide meant setting off at 5 am.

We got a tow out the harbour from a German yacht – thank you Sea Alder! Unfortunately, the wind did not materialise – it was a couple of knots from the south. We hoisted our spinnaker (the big floaty balloon shaped sail), and tried to play for the tide. Frustrating, but we worked it! We managed to catch the North going tide, and despite only 6 knots of wind, were doing 10 knots over the ground as we sped past Alderney 5 hours later just before the tide would have turned and swept us South again.

Then it was a slow wallow across the English Channel. As the light winds shifted the pair of us had to hoist and drop the sails and trim them constantly to keep up our momentum. At times we were completely becalmed, and that was just before we had to cross the shipping lanes doing less than 4 knots. Big 50,000 tonne commercial freighters aren’t particularly manoeuvrable, but at least 2 of them altered course to let us through. One thing that struck me was the heavy volume of shipping traffic heading up the Channel into Europe, but precious little heading out – suggesting, perhaps, a fall in exports? I saw at least one car transporter riding very high in the water heading west. (Riding high means it was empty!)

Late in the afternoon, the predicted wind finally kicked in about 12 hours late and we then powered our way across the Channel, sailing past the Needles Lighthouse at the Western End of the Isle of Wight about 10.00 pm as the dark descended. We were fortunate to catch the tide up the Solent and sailed into our berth in Hamble about 1 am on Sunday morning. Exhausting, but worth it. Even as I write this Batfish is being lifted and repaired.

The lesson?

Sailing, like markets, is subject to shocks.

Plans have to change as the circumstances alter. We adapted, make hard decisions (like when to sail, to get the yacht home to be repaired by people we know, and weighing up the weather risks), and we had to keep revising these plans. This morning, a gale warning for later today has just be issued by the UK Met Office. Just as well we didn’t wait!

Back to markets

While I now know far more about how yacht engines work than I did before, there are a large number of on-going market themes I need to explore through August before the new financing season kicks off in September! Markets are all about pricing demand vs supply and accounting for risk. All these inputs are unclear at present – and the biggest risk of all is policy mistakes by the authorities, which could be political, geopolitical or monetary. (How much blander a statement could I make?)

•  Inflation and growth – Central banks remain in hike mode to address inflation. Politicians don’t like it. Comments critical of Central Banks failing to cope with the exogenous shocks that triggered the current inflation crisis, or bankers saying we are close to the natural interest rate, are all part of the fug obscuring the real issues: how does the global economy adjust to the new reality? Solve the following: supply chains, geopolitics, energy costs, growth and climate change.
• The Euro – currency weakness, recessionary risks, energy crisis, Russia and kompromat, and political stability weigh heavy on the Eurozone, and have attracted much comment about the inevitability of a new destructive European sovereign crisis. Trying to coordinate the incomplete monetary union of Europe has always been an exercise in containing chaotic crisis, but don’t write off Europe or the Euro yet.
• UK – Sunak vs Truss. Two contenders promising to undo the mistakes they made in government just weeks ago. UK politics has become a distraction from the very real economic crisis facing UK consumers and industry, the need to re-invent national bureaucracies (from the NHS, education, tax, housing, security, transport, infrastructure, regional policy and defence) away from London. Truss looks the likely winner – can she address the rot? I increasingly find myself sympathetic to Scottish Independence.
• US – Everyone still loves the dollar, and why not!
• Stocks – whatever we think about inflation and market valuations its clear there is still enormous potential still out there. Folk are going to keep buying mobile phones, watch TV and consume. July was a good month for stocks, but don’t be fooled. The mood has changed – speculation is out, consolidation is in. In times of easy money speculation works – now it doesn’t. In market terms it means buy companies with solid dull, boring, predictable income streams. Let Cathie Wood of ARK worry about her speculative tech moon-shot valuations – which are failing to reach orbital escape velocity!
• Bonds – I’m getting keener on the bond markets – figuring a lightbulb moment is coming re “real” inflation vs valuations. Will write about this later.

Full porridge service will resume tomorrow! Today, I’m playing catch up.

Bill Blain

Strategist – Shard Capital, London