Blain’s Morning Porridge – Jan 8^th 2024: More of the same, and to the confoundation of EasyJet.

“Upside, downside, who cares as long as breakfast is on the table tomorrow!”

Let the games begin. 2024 is going to be… interesting. Whether its consumer debt, corporate default rates, banking worries or sovereign bonds there is plenty to be pessimistic about. The optimists think it’s going to be Goldilocks – what do they know I don’t?

Good morning and a Happy New Year! I trust your holidays were merry and bright and you have come back rested and enthusiastic about 2024 markets.

Bah, Humbug! I come back with that Monday Morning (x52) Bowl of Petunias “Oh no, not again” feeling. (If you don’t know that quote…. Press here.)

As I deliberately avoided everything except snow reports last week, this morning’s comment is really just a short note to say Normal Morning Porridge resumed the moment I stepped off the plane last night. I was hoping to be launching the new Morning Porridge Website this week, but Covid struck my developer over the break so we will be delaying a few days. (I was off skiing – excellent snow and we did the smart thing of skiing down through the trees rather than blindly freezing in the clouds and blizzards up top. It was rather magical – this morning’s photo is a wife-shaped hole in the snow.)

It’s been a fascinating start to the 2024. Who is fooling who I ask? These are the questions I will seek to answer through the coming year!

If there is one big issue to think about – I would say it’s Sovereign Debt. It’s a topic I will be writing about more. Any nation will succeed if it can maintain its “virtuous sovereign trinity” of a stable currency, political competency and a sustainable bond market. Although rates seem to have peaked, how do nations ensure their access to bond market funding when bond quantums are being questioned in the face of government spending requirements?

Aviation has already seen two spectacular 2024 events – the fact it proved possible to evacuate a burning A-350 after a runway crash at Haneda demonstrated the safety of new construction, but an Alaska Air Boeing 737 Max losing an (unused) door could have been a disaster if it had happened at higher altitude. We don’t know the facts yet, but many of my contacts in aviation manufacturing remain deeply sceptical of Boeing’s build quality and labour relations – a factor that could reinforce public aversion to the troubled Max programme. Watch this space for more.

I found myself on the radio over the Christmas break talking about the dramatic rise in shipping costs and global choke points. Bab-El-Mandeb is the one we worry about today, but don’t forget over 35% of global trade goes through the South China Seas and the Malacca Straights – should things get confrontational after the Taiwan elections. The ongoing ructions will continue to impede global supply chains – and remain an inflationary and recessionary driver. Add that to the ongoing China slowdown as a prime reason Global Trade may continue to dive.

Saudi may be contemplating increased oil production and price cuts – but energy prices will remain volatile and a key factor in this year’s markets. Things often look better just before they get worse.

Markets have started the year with the expectation the Goldilocks Bond-Stock rally will continue. Despite the risks of global conflict, uncertainty and tension, and the potential of a world-wide recession, markets continue to believe the numbers will continue to go their way. They seem to believe inflation is just right, employment is just right, growth is just right. The ongoing upside is driven by the expectation economies will avoid recession, thus confidence will rise and global corporates will thrive. Bonds and stocks move remorselessly higher…

Who knows. Markets may be right. But, there is a difference between what markets do and what they should. Smart traders know to make profits they need to dismiss fact and common sense, and trade in line with what the market collectively thinks – not the facts they know to be true! Markets believe things are going to get better – and until the mood changes, that is the current vibe to trade.

When we got back home last night, some chums brought round dinner. They brought me up to speed on one aspect of the UK economy which may be illustrative: Despite the fact real UK wages are lower than ever as a result of hidden tax rises, rising bills and costs, plus inflation and the depressingly low serious economic forecasts, UK new car showrooms are packed out with buyers. Its apparently going to be a record month. There are precious few second hand cars for sale either.

What is driving the confidence of consumers to lever themselves up and consume more when the serious economic commentators all say the outlook is so bleak? I assume consumers are buying now on the rising expectations rates are about to fall, triggering a boom, thus they better get in early. Or maybe they fear car prices can only go higher on renewed inflation or renewed global chip shortages as a result of ongoing supply chain disruptions. If we knew how consumers thought – we’d all be billionaires.

If there really is a spending boom underway (and the Christmas retail numbers suggest there was not), then it looks a simple triumph of hope over reality. Such a spending bloom could overturn my gut feel that some kind of recession is inevitable as crashing consumer discretionary spending and corporate indebtedness combine to limit activity. Historically, that’s the way booms (and the inevitable follow busts) occur – expectations drive consumer spending. However, unless corporates respond by investing in productivity gains or new products and plant, the result of a spending boom is bound to be inflationary… Doh!

It all boils down to the interplay between inflation are rates, and how these drive sentiment. At present the markets buy the soft-landing or no-landing scenarios and are dully ecstatic. I think that edifice could crumble in coming weeks as the sheer weight of economic gloom becomes more apparent. Let’s wait and see.

My own view is markets are fooling themselves over imminent rate cuts – the factor driving the lock-step gains in the Santa-Rally. Recent inflation numbers have surprised to the negative. Central banks are in no rush to cut and will seek to keep real interest rates positive – meaning higher-rates for longer. Rates will remain high not just to keep inflation contained, but because central banks are keen to seen normalisation. They realise the price of money is critical for the economy: make it too cheap (as it was under QE) and the result is speculation. Make it too expensive and it kills the economy. The trick is to price money to force people and companies to work for it – the basics of capitalism are at stake.

Meanwhile, I am adding SleazyJet to my list of companies I curse to fail in 2024:

We flew EasyJet to and from Geneva with our gear and ski-boots, having been careful to book extra baggage weight allowance and two hold bags each. No problem on the way out, but arriving later than planned for our flight from Geneva yesterday, the ground staff refused to take our boots because they were “specialist equipment” rather than “baggage” and demanded an additional €120 to put them on board. We argued. Their bonuses require them to rip-off customers with “Drip-Charges”. We took our boots to the gate as handluggage – to which the ground staff wanted to charge us an additional €140 extra baggage. Because we were running late, we than had to rush to gate where I played sweet with the gate-crew – getting out my Ski-boots out and telling them I’d be wearing them on the plane. The helpful non-SleazyJet gate staff checked our booking, agreed we had paid for two bags each, smiled and told me not to bother, letting us carry the boots onto the half-full flight.

SleazyJet are down as one of this year’s prime acquisition targets. If I was thinking of buying them I’d be questioning the morality of their policies.

Five things to read this morning

FT                    Largest US Banks set to log sharp rise in bad loans

BBerg              The UK’s Economic Outlook is Riding on Election Politics

Businessweek Eight Tech Products That Could Define 2024

WSJ                 Wall Street Doubles Down on Bonds

Times              Bet365 boss Denise Coates pockets £279mm

Out of time…. Full service resumes tomorrow.

Bill Blain

Market Strategist – Author of the Morning Porridge