Blain’s Morning Porridge, 15th November 2021: Let’s Dance: Buy the credentials – Forget Reality, Baitballs and Financial Ergot!
“Where The Dance is, there you will find the Devil…”
This morning: Despite Global uncertainty, rising inflation, and potential slowdown, markets remain Euphoric. All irrational markets eventually pop. How much longer can the current market mood be sustained? Longer than we think…
One phrase pricked my confidence in markets this weekend: I listened to a distinguished market analyst describe his premier stock pick, without a trace of irony, as “you should buy, because this has all the credentials of a top meme-stock.”
Oh dear. When market pricing is determined primarily by the fashion sense of flash-mobs it’s probably time to hang up my hat and go with them… but, of course… I won’t. My spidey-senses are all-a-tingle. I sense a madness in the air, a contagion on the loose. Is it just a disease? Something wicked this way comes… and we all know what it is….
What fuels them? Call it meme, blame it on FOMO, describe it as irrational rationality, but the basis of current price action makes little apparent sense to anyone who’s spent a career trying to read the markets’ mood. Any serious market journal will warn every single indicator is screaming overbought, citing: a looming global supply chain recession, the stagflationary threat, record PE multiples still rising despite consensus earnings have peaked, markets hitting successive peaks, short-sellers being forced to bail-out, one-way record options volumes. I could go on… we all know the tide eventually goes out, but all pretend we know when. (That’s actually a very poor market metaphor: tides are completely predicable, sell offs are not!)
What we do know is in such euphoric markets everyone gets caught up in the dance… Everyone buys – no matter how improbable, how unlikely, how bright the warning signals are flashing, or how borderline fraudulent unicorn poop smells. In this market… No one can hear you scream. It really has become a game… Keep dancing.
Who cares about the fundamentals of a company’s future earnings potential and growth outlook, profits & margins, price, accounting, management, governance and social value-added, when all that matters is how outright speculation on how any name might appeal to the behaviour of the herd? When the determinant of market success is being in tune with the mob and being able to swim with it… then who needs market sceptics like me? (Best answer to that question gets a free subscription…)
Let’s swim with the fishy metaphor a little deeper.
The market is behaving like a shoal of sardines; dodging, diving and swimming in a coordinated mass to snap up the latest trend, theme or FOMO thread. However improbable the stock, SPAC or crypto might be – the mob will swim with it. But here’s the thing… 99% of the fish that swim in the sea are bait – food for something bigger. They swim in shoals as a defence. When the bigger, hungry predators arrive they form tighter and tighter bait-balls, until suddenly some massive whale comes from down deep and swallows the whole shoal in a single gulp.. Ouch! Or it might be an Orca stunning the baitball with an unforeseen but well timed slap of its flukes.
Just how over-priced are markets? Who knows? Who can tell..? Are they about to pop? The combination of speculation, options madness, the irrationality of memes, artificially low rates and inflated asset prices have never combined to drive markets like this in my lifetime.
But, I have seen markets behave irrationally many times before. Irrational markets inevitably pop. The question is when and what triggers the tumble.
Usually, it’s a relatively small part of the overall market that succumbs when it wakes up to the madness of crowds. Often it’s the reverberations, the contagion from a collapse in say, Commercial Paper funding markets or mortgage securities valuations (2007), that then drives a cascade of consequences across the whole financial market, leading inevitably to a much wider market stumble and sell off.
This time it is different. Because what is driving the madness is well known, and pretty much understood by everyone – the distortions at the core of market pricing in interest rates. As I’ve written so many times before; “In Bond Markets there is Truth.”
It’s dead simple: If bond yields are too low then money is too cheap = inevitable financial asset price inflation (pushing up stock market prices). It really is that simple. Markets have been distorted and juiced by artificial bond rates since QE. When is the market going to wake up to that reality? When the distortion ends…
So until rates normalise the dance will continue. I am tempted to suggest the market is afflicted with something like Ergot, the rotten fungus on rye that drove crowds into ecstatic dancing madness during the Middle Ages. Extra points if you can identify the song:
“Caught in the chaos of the market square
I don’t know what, I don’t know why, but somethings wrong down there,
Their bodies twistin’ and turning in a thousand ways
The eyes all rollin’ round and round into a distant gaze
Oh, look at that crowd”
Mother please… it is just a disease..? Well maybe it is.
The symptoms of Ergot Investing include: credulity in get-rich-quick schemes, an unjustifiable belief in easy riches, an infection in the part of the brain that quantifies risk to constrain speculation, intense paranoia other investors might be achieving better results, and a dangerous delusion zero experience is not a handicap. In other words, exactly what’s happening today.
Financial Ergot occurs when artificially low interest rates soak the market in distorted prices, triggering the fungus of financial asset inflation, and making market participants believe a serious stupid number of things each day.
Stastically gold miners never got rich. It’s the folk that sold them shovels and pans, booze and female company that did. I doubt anyone will remain rich holding HairyDog Cryptocoins, SPACS in a failed politician’s non-existent media empire, or $100 bln electric truck makers who’ve sold a couple of hundred prototypes.. but as the fervid minds of the market crowd lap it all up, the predators, from crypto-exchanges, Cyber Shucksters, Tesla Barkers, Robin Hoods and others will be milking the opportunities and making out like bandits..
And the biggest predator? The whale that’s going to swallow the baitball of markets whole? Well that will be reality; the expectation of rising interest rates bringing back a degree of normality to markets.
Historically Ergot caused your limbs to fall off from gangrene, or you danced yourself to death. Financial Ergot is a little different – the only thing that can cure it is a sharp, painful destructive shock. Many investors sincerely believe in a mythical power called the Fed Put which immediately rescue tumbling market. Their belief system says Central Banks and Governments won’t stop the party. They won’t raise interest rates for fear of causing a taper tantrum meltdown.
Not that raising rates would help at this stage.
How would hiking rates now solve inflation? What we can most definitely say is raising rates is not going to solve Chip and Energy supply chain meltdowns, or reduce the number of ships queuing to unload at ports around the planet. Neither will a rate hike solve wage inflation which threatens to cascade through economies: give one worker a pay rise today and the plant will strike as everyone else demands more.
Nor will wage inflation be short-term.
Earlier this autumn I was talking to restaurateur chum of mine and she was close to despair. She simply can’t get staff. Experienced, trained competent staff have left the catering sector in droves – attracted by higher wages, better conditions, and more social hours from the likes of Amazon. (Same thing in the haulage sector.) It’s left my chum struggling with barely trainable school leavers and “unreliables” who she knows will repeatedly let her down at the last minute. She’s contemplating cutting service to 3 or 4 days a week.
She knows the only solution is to attract staff back to the industry with higher wages, shorter hours, social shifts and better conditions. But to put up staff wages and raise costs means higher prices – it’s called wage inflation. It’s happening across every single part of the economy… Whatever Central Bankers would have us believe about “transitory inflation” – wage inflation and price adjustments are going to have a very significant effect on the real economy.
Normalising interest rates at this stage won’t put the already uncorked inflation genie back in the bottle. All it would likely do is precipitate the inevitable end of the irrational markets dance… so central banks and governments are unlikely to run the risk… which means….
Crank up the volume, keep dancing and keep buying! Yay! (Queue Daft Punk and One More Time)
Five Things To Read This Morning
Out of time, time to do the day job…