Markets stronger than we expected, and things may even be getting better in the UK!

Blain’s Morning Porridge – Jan 13^th 2023: Markets stronger than we expected, and things may even be getting better in the UK!

“I simply can’t keep quiet about the immense damage Brexit is doing…”

This morning:  Global Markets have started 2022 on a stronger footing than many feared – the issue may be too much focus on short-term positives while long-term embedded problems remain unaddressed. Even the outlook for the UK may be improving – and a change in politics will allow the fundamental rot at the core of the economy to be cauterised.

Friday the 13^th is a dangerous day to get bullish… so I won’t.

I will remain cautious. We are 2 weeks into the 2023 market, and despite all the fears and predictions of more gloom, there really doesn’t seem that much to worry about? Yesterday’s slowing US CPI number – down to 6.5% – was just what the market expected and wanted to hear. Inflation remains high, but the market is happy because it’s declining – some folk are even worrying about deflation later this year! Alongside still strong US employment and growth signals – there is no strong signal for the Fed to ease, but it allows them to reduce the scale of future hikes. Market loves it.

Because the skies have not fallen upon our heads these first few weeks of January, everyone is back to focusing on the immediate picture. Markets are generally up and there is lots of talk about reasons to be cheerful about how we are going to avoid a deep global recession, the momentum for growth in the US, strong labour markets supporting consumer spending. and market technical showing strong support levels for absolutely everything. Even the FTSE (the UK’s stock market, lest you have forgotten) looks set for a new high.

Something is wrong. I am pinching myself to check I’m awake!

Markets seem to be taking a very shallow dive into the multiple issues facing them. I’m looking at the overall picture and silently screaming it’s not just about immediate interest rates, inflation and growth, but the wider economic picture of unravelling the market distortions inflicted by 13 years of QE and ultralow interest rates, and the deeper reality of distorted work forces caused by early retiral post pandemic, corporate balance sheets, infrastructure, geopolitics, and the ongoing supply chain risks…

As I say I am silently screaming… no one is listening. Which is not unusual…

What’s actually going on… aren’t things supposed to be bad this year? I’ve been warning that if 2022 was it bad year, the 2023 being a nailed on good year is not terribly logical and does not necessarily follow. The market disagrees – it desperately wants a better year than 2022, so that’s what it is giving itself!

My best advice is run with it, but don’t be fooled by it. I’m going to stick with my key market mantra: Things are never as bad as you fear, but never as good as you hope. There are plenty of reasons to be be positive, but equally a host of reasons to conclude the great unravel of all the market distortions left after the QE decade are not worked through yet. Tread with caution is my default option for the time being.

If there is anything to be positive about, it might be here in the UK. As we all know the UK is absolutely the worst economic basket-case on the planet following the Truss/Kwarteng debacle last September. I suspect politicians around the globe are sweating – by the Grace of God that could have been them.

It’s difficult to even get particularly angry about UK politics as our current third team rotation of Tory minsters go through the motions. Committed to ideological rote, inflicting the wrong policies to cure the wrong economic malaises, picking fights they can’t win, denying the downright bleeding obvious policy mistakes, while offering blithe assurances/lies the economy is safe in their hands, and only their hands… Its so predictably boring.

The UK’s fundamental problem is we are into the last few years/month of a tired, broken, discombobulated government that has been flolloping around ever since David Cameron’s party lost the plot over the Brexit vote. The political/populist vacuum at the core of government was made worse by the incompetence of the official opposition party, Labour, which kept Boris and the Tories in power in 2019 – and we all remember what happened next.

The debate never got to the stage of making Brexit work, but got mired in civil war on the ideology of Brexit. The opportunity has been missed, but our government is too tender to accept that Brexit compromises now have to be made – internally and with Europe. That realisation is slowing dawning as the new, stronger, more manageable Labour party formulates a new Brexit approach.

I’ve told my Tory chums to get out as soon as possible; let Labour in now – and they will take more the blame as the economic darkness deepens! Not the way politicians think – apparently.

Despite the ongoing political failure, which I am assured will be surely be undone and replaced by a new brand of political failure soon enough at the polls, even the UK economy is showing some signals it’s a more resilient critter than we give it credit for:

• This morning the UK posted a surprise positive growth number for November. 0.1% growth vs expectations of a 0.2% contraction doesn’t actually mean anything particularly tangible – except the optics are improving! It means we may cosmetically avoid recession – but probably not.
• Apparently, November growth was due to the bars being full for the World Cup! (But growth is growth!) The full effect of train strikes and industrial action won’t be felt till the next set of numbers – which will also fully reflect holiday spending, which looks stronger than expected from recent supermarket numbers.
• Yesterday the Bank of England was able to announce it actually turned a 20% profit on the Gilts it bought back from the market during the Trustercluck LDI gilts crash. That’s massively positive in terms of how the market now accepts the Adults-are-back-in-the-room managing the UK economy. (Have to credit Rishi Sunak for being just what the country needs at moment: dull, boring and predictable.)
• Despite the chaotic China coronavirus reopening, global supply chains of key goods like semiconductors are not showing any real crisis – which should avoid another shock to struggling UK manufacturing sector.

Critically, a solution to Brexit is apparent:

• Labour leader Sir Kier Starmer has offered to support Premier Sunak by voting alongside him to solve the Northern Ireland EU border crisis. (Of course, this may be a political trap to further alienate Sunak from the Brexit Mad-Dogs of the ERG!) It will be the right thing for the country that matters.
• Last night the Mayor of London, Sadiq Khan told the City the consequences of Brexit “can’t be airbrushed out of history, or the consequences wished away.” Khan is not greatly respected in the financial world (one step up from Jeremy Corbyn in most financiers eyes), but his view that a new accommodation with Europe must be found is now prevalent across commerce, finance and industry, and among most sensible politicians. A new start with Europe will follow the next election.

On the other side of the equation, the UK economy still faces enormous problems. We may have avoided a recession, but the economy is still haemorrhaging strength. Although there are positive developments underway, there is no clear way for the economy to overcome the ongoing energy crisis, the collapse in voter confidence in the state (infrastructure, transport, NHS, Services, etc), the national mood will remain depressed.

• The cost of living crisis is simple – consumers have dramatically lower real incomes, discretionary spending is set to collapse.
• House prices may be declining but repayments have now risen to 39% of income for first-time buyers – which is unsustainable in the face of current inflation and low incomes.
• There isn’t a recovery plan in place. Liz Truss talked vaguely about growth and productivity gains – but never said how? Austerity and war with the unions is not a route forward, yet for the current government to do anything positive would raise the risks of further fratricide within the government.

Meaning, I suppose we just have to go with the flow and see what happens next.

Out of time, and no time for Five Things..

Have a great weekend.

Bill Blain

Strategist – Shard Capital