Omens and Signs – what lies ahead?

Blain’s Morning Porridge – Jan 6th 2022: Omens and Signs – what lies ahead?

“Show me the way to the next whisky bar…”

This morning: Lots of small signals, rising rates, a tech wobble, Covid vs freedom, China’s Covid crisis and the anniversary of the Capitol riot make for a rich stew of confusion in today’s markets!

Strange days indeed.

I have a host of dimly and distantly connected snippets of news this morning that collectively suggest rising instability and opportunity….  These range from yesterday’s sell off in tech, indications the Fed will tighten faster than expected, a rising sense of energy instability, real inflation threats, the virus and outright war on anti-vaxxers in Europe, the problems reopening the Chinese economy, and…. today is the 1^st anniversary of the unpleasantness in Washington. What does it all mean?

Bearing in mind my key mantra: “things are never as bad as you fear, but seldom as good as you hope”, they probably just mean the world remains a confusing space. Work through the scares and figure out the upside..

The market news is tech stocks tumbling in a knee-jerk reaction to the Fed minutes from December – hinting earlier and faster rate hikes. The Fed is betting the virus is contained, inflation is transitory, and the market is robust enough to deal with lower liquidity. The market, unsurprisingly, doesn’t like such bets – but a buy-the-dip opportunity is an opportunity!

Yet, the 3% sell off on the Tech heavy Nasdaq may be more than just a repeat of the thought it was rising rates in 2000 that triggered the Dot.com crash. A reassessment and rotation of value in the Tech space is underway – a clearer dispersion between the likely long-term winners and losers ad fundamental analysis of valuations. Many smart managers may be thinking it’s time to divest before they are the last “greater fools” left holding overly optimistic stocks.

Surprisingly EV’s didn’t take a thumping. There is a trope going around that power shortages mean California is telling EV drivers not to charge vehicles. What a brilliant and significant story that would be if it were true – but I checked and apparently it’s just more fake news. There was a voluntary “ask” to EV owner to power up at non-peak times during a period of extreme summer heat. When it does happen – I will be sure to let you know (after I’ve dumped my remaining Tesla shares..)

Meanwhile, market analysts rank the Coronavirus a declining threat anticipating economic upside as economies reopen.

Yet, governments around the globe continue to threaten lockdown. There has been an almost comic opera disenfranchisement of citizens in France (where Macron wants to “peeese off” anti-vaxxers (good on him)), and Italy which is making vaccines mandatory for anyone over 50. Howls of outrage from the Libertarians.

At least some European nations are keeping the streets busy. No one is quite sure what’s happening in UK – politicians are screaming at Boris for not doing enough, his own party demanding he scale back planned tax-rises, doctors warning their wards might fill up (which happens every January because of flu), while key workers are sitting at home with positive test results and minor sniffles.

I am wondering if we missed the point where the Virus was beaten in the West, but any good news is likely to buried in soaring inflation numbers are we roll through Q1. Headlines range from soaring food prices, energy bills to triple, manufacturers putting up prices, etc, etc. These stories make Central Banks promises of “transitory” inflation look more and more testing.

The Covid story in China is taking a very different path. I spotted a headline about China rushing to develop its own mRNA vaccine. China’s draconian lockdown strategies of absolute lockdown looked brilliantly suspicious last year, but are now proving a massive handicap. They’ve haven’t achieved the kind of immunity/resistance from vaccines and virus spread that is now imperfectly protecting the west. Sinovac’s vaccine is apparently proving less effective against Omicron, meaning China’s health infrastructure is more vulnerable to reopening – with the inference the economy will reopen more slowly than originally expected.

On the back of the energy crisis already apparent in China, are we likely a massive wave of Covid hit the economy? Worth keeping an eye on – especially in terms of extending supply chain instability.

And, of course today is the one year anniversary of the storming of the US Capitol by insurrectionists/patriots depending which side of perceived sanity you stand on.

As a event I wonder if it may sit alongside “Harpers Ferry” in 1859 in terms of historical significance. Harpers Ferry became an overture to the Civil war when abolitionist fruit-loop John Brown got himself hanged after trying to seize a Federal Arsenal raising fears he would arm a slave army to ravage the South. However, within a few years, John Brown’s body had become the marching anthem for the Union armies.

As that connection shows, I probably read too much history. But what’s happened over the past year in the US doesn’t look good for the long-term stability of the union. If you expect the bastion of US democracy to remain the key pivot point for markets – you may be in for a shock.

As always there are two sides to any story, but it’s the Republicans making all the running:

• Effectively they’ve neutralised the Democrats in a text book manner: picking off right-wingers like Manchin to block any effective legislative programme, undermining the President (the four most dangerous words in politics: “doesn’t he look ill”), and exploiting the left’s failings and divisions via social media and distraction. Good Politics. Not so good for the economy as critical rebuilds are blocked.

What’s different is how four-square the Republicans have fallen into line behind the Old Pretender, Trump. After the election was lost, my Republican chums assured me Trump was finished, he was consigned to the dustbin, and a new morally stable and legitimate Republican party would emerge. The exact opposite has happened, and these same liberal GOP members are now silent.

• Trump has tightened his grip on the party while his planners have put in place critical election infrastructure, regulation and personnel across the heartlands to avoid the mistakes of the 2020 vote – ie the unpalatable travesty that more people voted against Trump than voted for him.

It’s a scary picture… We will find out just how frightening later this year in the mid-terms when I suspect the Biden presidency will be completely isolated after the GOP take both houses. How smoothly that happens will be critical.

Five Things to Read This Morning

FT: How to avert another US Capitol Siege

The Atlantic: Trump’s Next Coup Has Already Begun

FT: China’s Covid Policy will be a wild card for markets in 2022

WSJ: Fed Minutes Point to a Possible Rate Increase in March

Bberg: Biggest Tech Selling in a Decade as Rate Rout Spooks Hedge Funds

Out of time and back to the day job

Bill Blain

Strategist – Shard Capital