Market storms roll in one by one, another Risk-off Week in Prospect

Blain’s Morning Porridge, 21 Feb 2022: Market storms roll in one by one, another Risk-off Week in Prospect

“Modern life is a muddle dictated by advanced technology, dated political systems and Stone Age impulses”

Today: The immediate financial market outlook is risk-off driven by Ukraine, followed by rising fears and concerns about inflation policy mistakes, wondering when to pick the bottom in the tech cycle to buy great ideas, why Boeing should be in jail, and longer-term concerns about where we are going in terms of transition. 

It’s a story of short, close, medium and long-term this Monday morning.. spiced with some vengeance..

Short-term the world wakes up on yet another nervous Ukrainian sunrise. It feels like another risk-off week. In the absence of information, it would be foolish to predict a war or to discount it. It doesn’t seem to benefit anyone, but the Western leaders are clearly convinced, so we can but wonder what intelligence they are in possession of? (I could ask in Boris’s case – any? but that would be churlish and beneath me to do so.) I would simply remind everyone of “dodgy dossiers”, Blair’s “truths” about Iraq’s WMDs wiping out the west in 15 minutes, and the Zimmerman letter…

My prediction – based on nothing more than common sense and hunch, and for what it’s worth:

• If Russia does nothing Putin continues to ratchet up points in terms of destabilising the West and markets. Backing down could damage him domestically. His goal is to keep up the pressure until something shifts in his favour.. seeking to win something like a promise of No-Nato membership at the rumoured summit meeting Macron is broking between Biden and Putin. That seems a more likely scenario than invasion… but I’m just a bond trader….and know nothing…

In the close-medium term, the immediate market debate remains all about inflation. What do central banks do? Continue to downplay the clear and present danger? Or actually take action? We shall find out at the next run of Central Bank meetings. The risks are massive:

• If they act, they risk a policy mistake.
• If they don’t act, they risk a policy mistake.
• If they acted earlier, they risked a policy mistake.
• If they delay, they risk a policy mistake.

Markets tumble on policy mistakes but love them. It means it’s not their fault when things go southerly at speed – it’s someone else to blame.

Judging how much and how quickly to raise rates when a large component of the inflation crisis is due to supply chain crisis – which will likely prove short term – is just one aspect of the central banking puzzle. The real issue is the policy mistakes are already in play, and the consequences across the economy in terms of wage demands, cost of living, basics and food costs, energy and runaway house prices are exacerbating expectations of worse to come, and the anticipated policy mistakes creating a downturn plus inflation = stagflation.

Simply put – inflation has many causes, but the way people react to the threat is probably the most important factor, and economists and central bankers don’t like phycology of crowds and mass expectations stuff.. it’s difficult and unpredictable.. But it’s also real.

In the medium term, the correction in disruptive tech stocks is well underway – Cathie Wood’s Ark is down roughly 56% from the moment its wings began to melt in the sun last year. I think that means the bubble has burst, but she thinks “innovation is in bargain basement territory.” I disagree. The correction is only in Phase 1, the acknowledgement fantabulous projections of future value start to unravel.

Phase 2 is when they are exposed as naked. The likelihood is more and more of the high numbers/zero profits stocks will struggle to maintain their price illusions vs increasingly real future values. Phase 3 is capitulation – good but profitless ideas acquired cheap by smarter firms that will make them work, while the dross sinks onto the pages of forgotten firms. Aside from ARK, the other key parts of my stupidity index are: Tesla is down 30% from its top, while Buttcon is down 44%.

There are some much larger stories still to come – about how some of the big tech names are going to tumble. I’ve already written much about Facebook, but other names like Peloton are also in the frame. We’re going back to basics as it unravels, but it will certainly create value when the froth blows away.

And speaking of basics: quick aside about Boeing

Last week Netflix launched its long-awaited documentary Downfall: The Case Against Boeing

I’ve written many times about Boeing since Nov 2018. There is nothing I’d fault in the programme. The author, Andy Pasztor of the Wall Street Journal dealt with failure, corporate greed and the firm’s utter indifference to the 346 people killed by their dangerous plane. He chronicled how Boeing tried to blame foreign pilots, their regulatory capture of the Federal Aviation Authority – which effectively made them self regulating – their Wall Street games, and finished on the $2.5 bln settlement Boeing signed which lets them off the hook for future criminal prosecution.

It makes me angry. Boeing executives should be going to jail, if not the Sparky chair. While Investors tell us how critically important Corporate Social Responsibility (CSR) and Environmental, Social and Governance (ESG) investing principals are, how is it corporates can avoid responsibility and be accountable for the actions?

The facts are brutal: 346 people dead because Boeing’s top brass tried to cut costs, hide truths, and lie to regulators all in the pursuit of bigger bonuses. That behaviour is evil. It is not an acceptable business risk. If not murder, then culpable manslaughter at the very least.

Denis Muilenburg, the former CEO of Boeing should be held accountable and pay the consequences. Instead, he got a $62 million payoff when the board lost confidence in his ability to continue deflecting the truth. He is now fronting New Vista Acqusition, a SPAC targeting tech, aerospace and defence – with a $240 mm cash pile looking for opportunities to continue to share his particular brand of managerial excellence with us all.. Puke on him and the other Boeing sh*ts.

And back to reality… the Long Term

I don’t know if anyone else read about the Car Transporter that is on fire in the Atlantic? It’s got 4000 VW and Porche cars onboard, and it’s on fire. Apparently, lithium batteries on electric cars are the problem. A standard lithium battery burns at 1000 degrees plus. They don’t go out when doused in water. That’s why Lithium trucks are such a problem – if one flames at a distribution hub, it will take the whole warehouse down with it. My point is Lithium batteries are apparently one of the great crutches of saving the planet from climate change – solving everything overnight about dirty polluting petrol and diesel ICE vehicles. Except they don’t. They create their own problems – which will in turn need to be solved.

Meanwhile, I read 35% of crypto-mining is now in the US. Many other countries have banned it due to the amount of power it consumes. As the value of crypto plummets as the barkers try to find the last few greater fools, the crypto-miners have found a new game. They are selling back the energy they contracted to buy at enormous profits and switching their drilling rigs off. Go figure what that means for the economics of fake currencies.

Finally – an aside: Dubai Expo 2020

I spent yesterday wandering round the Expo 2020 in Dubai. 192 presenting themselves to the world. Some nations have gone big. Others… not so much.

Spending a Sunday with thousands of tourists from around the globe made me wonder: “What was the greatest thing the British Empire ever did for humanity?” Well, it taught these parts of the world overflown by the Red, White and Blue Union Jack how to queue. The queues for many pavilions we exceedingly long, and many of the guests obviously didn’t have the innate advantage of birth that being from Commonwealth nations entails.  

It would be impossible to visit all the pavilions so I picked a few. China – very big and all about how China has discovered space travel, landed on the moon and invented GPS. Saudi Arabia – which missed the 50% of their population who are presumably women completely as you go up an escalator taking you through the nation’s history. The presentation was wonderful, highlighting real beauty in a land we all think is sand, sand and more sand – but was rather spoilt by officious bored staff policing the queues. Brazil – I wondered why I bothered. Apparently, it’s a great and wealthy nation that isn’t burning down rain forests.

One “interesting” pavilion, curiously the one with the longest queue, was the UK pavilion which looks fantastic.. from afar.

But then you queue and queue some more, eventually going past some display exhibits with all the stuff the UK has invented and given to the world.. all of which can probably be found in the average suburban attic back home. Finally, And you enter the actual pavilion itself which is stuffed with…. absolutely nothing. Nada. Zero. Not so much as a sausage.

Just a wonderful utterly empty and pointless space – which I suppose says it all about post Brexit Britain under Boris. (I actually got talking to one of the staff, who admitted her shame – telling me the usual question from Brits on holiday is… “so how much did this IKEA prefab cost?”)

Five Things to put you off Breakfast this morning:

FT – Big Oil on course for near-record $38 bln in stock buy-backs

WSJ – Fed Leans Against Expectations of Half-Point Hike in March

BBerg – China’s Latest Default Warning Takes Shock Factor to Extreme

Torygraph – Britain’s chronic homeownership inequality can be beaten – with higher rates

FT – Inside Peloton’s epic run of bungled calls and bad luck

Out of time, and back to the day job..

Bill Blain

Strategist – Shard Capital