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Let others do the worrying and focus on opportunity!

Pretty bleak headlines this morning –  sentiment is crashing. Excellent! In crisis there is opportunity. Where and what are they? For clues, look to how the authorities can address the looming crisis!

Blain’s Morning Porridge, August 23 2022 – Let others do the worrying and focus on opportunity!

“Laughing Shall I Die!”

This morning: Pretty bleak headlines this morning –  sentiment is crashing. Excellent! In crisis there is opportunity. Where and what are they? For clues, look to how the authorities can address the looming crisis!

Extra points to anyone who got this morning’s quote!

Ragnar Lothbrok was right! Sometimes the only thing left to do is laugh.. and smile at foolishness of it all. Remember Blain’s Market Mantra no 3 – Things are never as bad as you fear, but never as good as you hope. When everyone else is losing the will to live – time to stop, think and seize opportunities. Look for sensible bargains. Look for long-term themes. Arbitrage the inevitable policy mistakes. Sectors like power, energy, utilities, logistics, coal and drink – stronger the better – are the things we need.

On the face of it, there isn’t much to smile about this morning…. Any economic snapshot would be bleak indeed.

Citicorp economists predict UK inflation will hit 18.6% in January.

Even as Europe scrambles to build winter reserves, gas prices spiked after Russia announced unscheduled pipeline maintenance – raising fears it won’t be switched back on again. (Imagine building a massive castle to defend Europe, but leaving the water wells in Russia…)

Stocks and Bonds took their first major spanking since mid-July as players panicked about hints of tighter monetary policy to be announced by a hawkish Fed at Jackson Hole later this week. (Which means if Jay Powell gives the merest hint of accommodative policy, there will, no doubt, be a massive relief rally – but let’s see if we make it to Friday first…) Value stocks are an oxymoron.

JP Morgan’s CEO Jamie Dimon has told the bank’s uber-clients there is a greater than 20% chance the US economy is moving into “something worse” than a hard recession – which is a 30% chance. Ouch. He’s thinking about all the obvious easy to spot stuff – interest rates, quantitative tightening, oil, energy, China, Ukraine and War.

What could possibly be worse than a hard recession? I can think of a few things. Ask me again once Liz Truss is in office. I just can’t wait to hear her plans to deal with an uncontrolled chain reaction of rising pay-demands as wage-inflation goes critical, exploding personal and business default rates, surging unemployment and a winter of increasing discontent and power cuts. The likelihood her government will be overwhelmed is high and confidence in her competence is low. She might surprise us – anyone want to take that bet? Thot not.

A chum has already shuttered his manufacturing business – soaring energy costs killed him, but wages, a dearth of available skills, and supply costs meant it just wasn’t worth fighting anymore. Across Europe, businesses – from restaurants to SMEs are simply giving up – beaten down by a howling gale of inflation, energy costs, business bureaucracy and a dearth of anyone prepared to work for peanuts in increasingly marginal looking jobs.

Household incomes are in terminal free fall. My daughter just started a great new job, but is ever more broke as her monthly bills race ahead of her salary. “Forget grandkids– I have to eat first,” she told us. Apparently, Europe’s population is set to half in the next 100 years as young people can’t get on the property ladder young enough, or make enough disposable income to afford runaway childcare costs to raise their families. Kids are more a luxury good than a gold-plated sports-car. (Yesterday the lead story on our local news programme was a young trainee nurse having to give up her studies because the teaching university could not afford to keep the creche open..)

Surging mortgage rates, and banks increasingly unwilling to lend, leave my son trapped in a zero-sum rental trap – struggling to find a new place to live as rents for increasingly dismal accommodation in London have gone stratospheric. Despite a great job and a deposit, no bank will lend him the 5 times salary he would need for a London (actually 30 miles out in the burbs) shoebox.

As Bloomberg points out: London’s soft power and attractiveness as Europe’s defacto capital will crash as everything closes on the back of zero discretionary spending by the bright young things that made it such a wonderful (and cripplingly expensive) place. London will soon be as grey as Paris and as boring as Frankfurt.

And just to show I am on the right (ie left) side of the radical divide; Tory MPs fulminate at the temerity of workers demanding wage hikes to cope and keep their families fed, while counting the billions they made from their VIP access to pandemic supply contracts. (Straight out of Private Eye: take a look at the number of MPs with links to gambling.. and wonder why, like me, you voted for them… oh yes… Jeremy Corbyn, but he’s gone now!)

And remember – things can always get worse!

It’s rarely something foreseen that crashes markets or crushes economic activity. Let’s chuck a few no-see-ums into the mix:

  • What happens if the new avian flu currently killing millions of wild birds in Europe and Asia jumps into humans? (It is already infecting other mammals.) Its increasingly clear the payback on Coronavirus is greatly increased non-covid deaths and economic instability – yet global authorities are adopting a “No one is safe till everyone is safe” approach, arguing lockdown overkill is better than risking the Swedish solution – “we might not be so lucky next time.” I was recently reminded Spanish flu killed on a scale multiple times worse than Covid – and that’s the kind of thing pandemic scientists are still expecting.
  • Super volcanos – apparently we dodged a bullet last year when the biggest blast in decades occurred out in the Pacific, took out Tonga, yet didn’t trigger a “year without summer” – which could become a decade if Yellowstone was to erupt.
  • Or how about a China Blockade of Taiwan, effectively killing the Global Chip market?
  • Or Donald Trump MAGA surrogates winning the Midterms and impeaching Biden and his team early next year. (I mentioned this yesterday and received a death threat from a 63 year old American who told me he was a good Christian… Whatever.)

On the other hand… we are an inventive species, we have a history of coping with ice ages, biblical floods, war, famine and plague. We survived the last financial crisis – and we shall survive this one. The trick will be coming out of it financially intact and healthy.. And that means getting radical in terms of what is dross and what isn’t. As I’ve said before – value stocks are not. Warren Buffet just did his best ever deal at the age of 1000+ buying Occidental.. What will attract support, and what won’t?

We will need growth to recover. Priorities are already changing. ESG is being superceeded by a renewed race for Growth and Prosperity. Rich economies that can afford the luxury of a clean environment is an excellent long-term goal – but we need to get back on track by sorting out the basics, the fundamentals of state. That means some radical solutions are required at a time when political systems in the west are ill-prepared to deliver what is required.

How are the authorities likely to cope? Figure that out – and arbitrage them!

This crisis is going to deepen. It will require action both in terms of monetary and fiscal measures. It will require a rebuild of the state. Central banks may be a little more careful, and avoid the massive income inequality issues trigged by the response to the 2008 Global Financial Crisis. Politicians will be keen to avoid the kind of endemic fraud that went with their pandemic bailout schemes.. But the bottom line is this is turning into a massive global financial crisis which will force action.

What needs to be fixed – its a long list, but here are a few priorities:

  • Power & Energy Security
  • Heath
  • Social Security
  • Utilities and Infrastructure
  • Defence

Invest accordingly..! More on this later this week..

No time for five things this morning..  Out of time, and back to the day job!

Bill Blain

Strategist – Shard Capital

20 Comments

  1. I’d add national water and food security strategy to your list of things to fix! As a Scotsman, you should be proud that Scotland has recognized its potential as a “Hydro Nation”.

  2. Not sure about the quote but the last line of Wagner’s Siegfried is ‘Leuchtende Liebe, lachender Tod!’ (Light of loving, laughing death!) and that didn’t end well.

  3. “we are an inventive species, we have a history of coping with ice ages, biblical floods, war, famine and plague.”

    True, but we have evolved into a litigious species armed with hordes of bureaucrats ready to frustrate any solution to something as basic as childcare. We have A. Millions of square feet of empty office and retail space often right next to, B. The stores and businesses that complain they cannot find enough workers. Surely A+B can be used to offer to C. The millions of young couples who need but not cannot find affordable childcare or am I overestimating the organizational ability of modern mankind?

    • Hah – I think I would prefer the Tyrion Lannister approach:
      “To die in my own bed, with a belly full of wine, someone else’s wife [deleted], at the age of 80”

  7. Another cracking Porridge, Bill
    A true no-see-um to add to the mix: A Carrington Event – the last “once-in-50-years” one was before we had microchips, UHF communication signals and very low energy GPS signals, which will all be fried at the next one! As much investment thesis around that as there is around “Moon Fall”.
    https://en.wikipedia.org/wiki/Carrington_Event

  8. 10 hours spent in A&E last night/this morning. Entered at 6pm. Left at 4am. Took 5 mins to read an X-ray and tell me it wasn’t a fracture and here’s a splint. Don’t get me started on schools. Our energy bill is set to double from £250,000 to £500,000 this winter. This is the result of 10 years of austerity. Chickens are coming home to roost.

    • Same here in NZ Jason and think you’re on the money about the chickens

  9. Great summation of the world at large, but in chaos there is opportunity. On this side of the pond there is an initiative to turn leverage geothermal energy as a truly sustainable power source. Whilst waiting for the super volcanoes, why not tap a bit of the earth’s heat by drilling down nearly anywhere to produce boiling water and/or steam. It’s not limited to Iceland and Hawaii.

    The U.S. Department of Energy has announced major funding awards for six geothermal Deep Direct-Use research projects, including a National Renewable Energy Laboratory (NREL) study that will explore the feasibility of geothermal heat integration at natural gas power plants in East Texas. The U.S. defense agency requested information on 7 Marchre lated to powering at least 14 installations by geothermal.

    The state of Texas has established the Texas Geothermal Energy Alliance (TXGEA) is a Texas-based, Texas-led advocacy organization created for the purpose of advancing geothermal energy in Texas. Texas utility Centerpoint Energy (CNP NYSE) is leading the charge whist paying a 2.25% dividend.

    You may want to mull the potential of geothermal projects in the UK, seems like the big theme, obscure type of opportunity that you find enticing.

    Would appreciate a Blainesque comment on the idea.

  10. Excellent article. What is truly sad is that I see no way out. Europe and Chinese and Asian demographics are dead. All of those societies have large and growing numbers of older, not working, high health care cost people. Meanwhile the Globalists have destroyed manufacturing in most of the Western world. The US is a service economy where burgers are flipped, coffee is handed over, and the financial markets invent more ludicrous products every day. And the remaining children frankly do not want to “work”. Plumbing? Electrical? They want a college degree where they work from home in front of a computer in their PJ’s. There is a complete lack of serious leadership all thru the Western world. You might hate Putin. But Putin, Macron, Tank Gurl Truss, Scholtz, and Biden on a stage. If the building caught on fire, who would you look to for leadership? So high costs, no leadership, and no future. Is there any wonder people are “quitting”? IF China can fix their demographics, I believe the future will be a Russian and Chinese duopoly. IF China fails? Wow. Hold on for a ride.

  12. Bill, I’ve read your commentary for a long time. While I don’t disagree with most of what you say, you seem to avoid the elephant in the room. We in the West (led by the baby boomer generation) have pulled future earnings/prosperity/incomes increasingly to the present for the past 30-40 years. That wasn’t free. Yes payment for that was postponed and possibly hidden for a long time, but the bill is coming due, and all the issues you talk about in the above and elsewhere are directly or indirectly largely a result of this situation. I only know of 3 ways to remedy: huge productivity gains, stealing from the rest of the world, or taking the pain of possible decades of repayment in the form of really bad inflation/lower standards of living or deflation/depression (also lower standards of living). Am I missing something?

  13. You are all so gloomy today! As Winston is alleged to have said (roughly): The Americans can be counted on to do the right thing – after they’ve tried everything else. You must admit we are energetically trying everything else!!

  14. excellent ! Ragnar Lothbrok, my sons favourite TV character !
    Question is what returns diversified investors in Public Equity/ Bonds and will make in the next few years; inflations adjusted that is …
    if I read your article then I can’t wait to cast the lines and just go sailing and come back when normailty returns (if ever ….?). already postponing business trips due to the high cost of traveling … $10K for a BA ticket to South Africa, no thanks this time around.
    Thankfully I locked in prices for the new boat on the price list of 2021, my best call of the last year 🙂

  15. The reason the Tonga volcano didn’t didn’t trigger a “year without summer” as I understand it is because it threw up an insane amount of water which will actually warm the earth temporarily. But if we’re lucky maybe all that water will end the drought in the American west. A Yellowstone type of eruption which could become a decade with no summer because if Yellowstone was to erupt it would throw up an incredible amount of volcanic ash, blocking the sun like pinatubo and mt st Helen’s

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