Blain’s Morning Porridge – July 11th 2022: Inflation and Earnings set to take centre stage this week – likely to be a tough one!
“ Chaos is the law of nature. Order is the dream of man.”
This morning: Inflation will dominate the headlines while the US earnings season kicks off. The prospects for stocks on the back of falling numbers and crashing consumer sentiment bode ill for recovery, and strongly suggest there is further market downside to come in Q3.
Even though I am faced with this uncomfortably empty screen to fill with words of market and economic wisdom, it’s difficult to be unhappy this glorious morning. The sun is shining! I just had a great swim in the river, my wife and dog apparently love me, and I’m going on holiday next week.
As I said, the only fly in the ointment is writing this morning’s Porridge on the week ahead.
After last week’s strong US jobs report – momentarily suggesting there is less of a global recession threat – this week will reverse into rising inflation fears again, raising the higher/faster interest rate spectre. We’ve got a host of inflation numbers coming out, but also the shutdown a key Russia/Europe gas pipeline for “maintenance”, which many analysts think will crush European efforts to build winter reserves, promising further energy price spikes through the second half of this year. The talk in markets is all further China lockdowns, and Euro-dollar parity as inflation and recession look increasingly dangerous for Europe in particular.
There is so much to say about the up/down of markets, but I am not sure I can articulate it clearly! Therefore I think I shall go a bit free form this morning – throw a couple of ideas at the screen and see what happens:
- Broadly, markets are distracted and confused, not seeing the downright obvious. I’m trying to figure out how vulnerable that leaves them to shock and awe surprises, the actuality of the macro-outlook, and the systemic consequences of policy mistakes. The only upside in such conditions is they do create price moves that translate into opportunities!
Last week was an extraordinary lesson in markets – watching tech stocks recover on the hope recessionary expectations would mean a slower series of interest rate rises, thus raising hopes for accommodative central banks to juice markets higher to stave off recession. Doh! Some market commentators say it’s a reverse rotation out of value/fundamental stocks back into more speculative growth stocks – saying the 9 month tech bear phase is basically played out, and it’s time to buy corrected tech names…
Really? It called talking their book.
There is an assumption the market knows best, and will set the right price of everything, based on the market being the collective intelligence of all participants. Except it is not. The market has no memory and certainly doesn’t remember making the same mistakes over and over again. The market is just a voting machine. It’s a form of popularity contest – whoever markets/plugs their ideas/positions best, wins!
A good example of the kind of hype that propels stocks in febrile markets, and ridiculous false assets like cryptos and NFTs, is investors ongoing fascination with Cathie Wood’s ARK. The narrative is simple – it must be a great investment, look what it was worth! The papers are full of stories that support it: I saw a headline on CNBC about the charts suggesting a rally (but it was behind a paywall, and it’s probably bunkum anyway). Most of the stocks in the ETF have never, and never will make a profit. Market participants believe what they want to believe, and if they believe ARK is undervalued because only Cathie perceives the future – their call.
It’s not the market that is stupid – its participants!
The reality is nothing has changed about speculative tech stock fundamentals. Food delivery companies are still struggling to deliver food at a profit. Internet warehouses and subscription services are still struggling to make all the expensive approaches work. Media manipulation companies are still trying to persuade increasingly distracted used to let them monetise us through advertising. It’s all dressed in a wash of modernity, the next-new-new-thing, but Tech stocks that sound ever so clever and remain ever so unprofitable will likely remain so. And they remain vulnerable to shocks. This morning Tencent and Alibaba are leading further collapses in value after Chinese fines on their monopolistic policies. Regulation bites.
The next shock for markets is likely to be corporate earnings. Thus far they’ve been insulated by the pandemic reopening. The Q2 numbers start this week and will likely show the impact of long-term supply shocks, energy inflation and the increase labour scarcity as workers seek better paid employment. (If they don’t, be suspicious!) Corporates will put the best possible spin on their numbers, but the macro economic reality has to bite soon. As interest rates rise, and corporate credit spreads widen faster, leverage within the corporate sector will start to take down multiple credit zombies – overly indebted companies. All these years spend borrowing money at ultra-cheap rates to finance stock-buy-back programmes will be shown to have been valueless; the company bankrupted, and the stock tanked!
I’ve come to a very simple conclusion about economics. The reason it’s called the dismal science is it’s basically chaotic. Economics is all about analysing events to understand what happens next. But events have a path all of their own – we can plot broad expectations, but not the increasingly unpredictable consequences that ripple outwards from every decision like a nuclear chain reaction. The way in which inflation and interest rates will impact the economy is very well documented and understood by students of economic history – perhaps not so well by inexperienced investment managers – the ones who buy the hype.
One of the biggest risks to markets is always policy mistakes, the obvious one being central banks triggering a recession through the pace of interest rate hikes, or being too slow to address inflation.
But there are equal risks in politics.
There is a frightening headline on Bloomberg this morning – 4.5 million UK families are already in financial trouble as a result of financial distress. More are struggling with the consequences of higher energy and food prices. Wages have failed to address inflation, and the welfare net is full of holes. Food banks and free school dinner schemes have been instituted by concerned individuals around the country. Even the financial services industry will not be immune – the BBerg article noted workers are cutting their pension saving contributions.
Yet, the headlines in the UK are all about the multiple number of Conservative Politicians putting themselves forwards as our next prime minister. I forced myself to watch the Sunday Political Shows, and read the papers to understand their approach – and came to the conclusion most of the challengers are economically illiterate.
Only one of them seemed to connect the urgency of the situation – the need for tax cuts to boost jobs and consumer sentiment to address the looming stagflation/recession threat, but all the interviewer wanted to know about was his non-dom status 2 decades ago. Its going to be that kind of constest – how clean they are. Not how they will save the UK economy. Most of other candidates seemed blithely unaware of the reality on the streets.
The biggest threat to the UK Economy is the urgent need for decisions, but the fractured government is going to be spending the next three months listening to candidates blather about how different they are to Boris.. Words… just words.
Five things to read this morning
FT – BoE under pressure as UK companies plan for extended period of inflation
FT – Did US Inflation accelerate in June?
Torygraph – Putin Most Likely to cut gas supplies to Europe
BBerg – JP Morgan Explains Why the Bond Markets Keeps Getting Shocked
WSJ – Twitter did not seek a sale. Now Elon Musk Doesn’t Want to Buy. Cue Strange Legal Drama.
Out of time, very late, and back to the day job..
Bill Blain
Strategist, Shard Capital
7 Comments
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The downright obvious is that the EU and the UK allowed the US to get them into a created proxy war with Russia. And Russia will win that war. And now the UK is contemplating Liz “Tank Girl” Truss as a leader. If that happens I will box up and ship you the USA’s trophy of having the stupidest leaders in the world.
Indeed, it’s quarrel in a far away country, between people of whom we know nothing.
Bjorn
If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breathe a word about your loss;
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: “Hold on”;
If you can talk with crowds and keep your virtue,
Or walk with kings—nor lose the common touch;
If neither foes nor loving friends can hurt you;
If all men count with you, but none too much;
If you can fill the unforgiving minute
With sixty seconds’ worth of distance run—
Yours is the Earth and everything that’s in it,
And—which is more—you’ll be a Man, my son!
If, indeed.
Being reluctant to bet it all I’ve laddered 13 and 26 year US Treasury Bills, increasing the purchase amount significantly when each tranche matures. This week for the first time I’ve placed and order for the 52 week tenor.
Don’t crave the earth and everything that’s in it, just a nice, safe income stream for the duration of the idiocy prevailing in the markets, politics and the courts.
Given the news reports about bank runs in Henan China, I wonder if this will have a spillover effect to the rest of the world.
the problem would be rather a spillover to chinese politics
if you have nothing to lose, the sky’s the limit
It will be interesting to see if this all comes to a proper recession. By ‘proper’ I don’t mean the hiccup that was 2008 et seq. The wrinklies amongst you will recall the end of 1974 in the UK. Post Burmah Oil going bust, nothing had any value at all. Houses, commercial property, stocks, bonds, nothing at all. Early in 1975, when the market bottomed, it was because there were no buyers left. (Yes, there were still plenty of sellers, but if no buyers anywhere, why try to sell). The pain of that time was intnense, but it was a time when people tried to save for the future, so most had a few pounds tucked away. Today, may the Lord help the majority if it happens like it did then.