Blain’s Morning Porridge, June 7 2022: Self-delusion – don’t underestimate its effect on markets
“Corrections are good, they keep us humble. The strongest bull markets are built on walls of worry.”
This morning: Boris in his bunker is a great example of delusion. Eventually those who do not know themselves get sniffed out. Its happening in markets – speculation is dead. Common sense is back.
Let’s start in Blighty. If this was cricket, then 211 vs 148 was not a win. It was a death sentence.
Deep in the Fuhrer-Bunker beneath Downing Street Boris is desperately marshalling policies that don’t exist, berating his discredited advisors and wavering supporters to stay in power. Surrounded by toadying yes-men, he’ll be spouting dire revenge on Remainers, Wets and anyone else he perceives to have betrayed him. 40% of his own party told him to reproduce far, far away. The rest? Some of them will have been promised ministerial rank, while others will be true believers in whatever it is Boris believes in… (Boris believes in one thing and one thing only; Boris.)
The smarter ones will be looking for their opportunity to emerge from this political Gotterdammerung not smelling of the sewer. In the next few hours or days… party bigwigs will crack. William Hague, (yep, the same William Hague that suddenly gave up the safest Tory seat in the land to give political newbie Rishi Sunak a route into parliament – but I’m not suggesting anything…), is telling him to do the honourable thing…
No one is running the country. Politics in the UK has become a bizarre Squid Game… If Boris were to step out his bunker and listen to what is being said on the streets… but he’s so stone deaf he’d miss the message.
Fear not… hope is on the horizon…
Her Majesty’s loyal opposition is at this very moment preparing the grand reveal of a fully worked and costed plan which will not tax-cripple the economy to revitalise the UK, bringing back domestic smart production to solve supply chain vulnerabilities, a fully considered Energy Security Transition strategy to enable carbon neutrality by 2040, putting in place new technical schools to train the high paid tech and engineering jobs we will need, a full reform package to decentralise the NHS and ensure waiting times are cut to minutes, while the Beveridge 2 Social justice and equality report will create a cradle to grave welfare state that will be the envy of all….. They will set up Supermarine Avro, a new State Aviation company, to launch the new 300 seat Lisabeth airliner which will run on hydrogen and fairy farts..
Oh… they’re not.. They’re sitting on the bench wondering how to avoid offending anyone who might or might not have a male member, be something else.
Blighty shall muddle through somehow.. We usually do..
Markets rallied on the hope Boris would go and we’ll get adults back in the room. He’ll be gone soon enough and we can be beastly to someone else. Funnily enough, my FTSE position is the only index positive this year!
What if markets aren’t quite as dire as we think? Would it matter?
The Macro-Panic Consensus is we’re doomed by looming interest rate hikes to combat unstoppable inflation, even as Russian and Chinese tank armies roll through the global economy like the proverbial hot knives and butter, cutting off the west from critical supplies of plastic ducks and paper party hats. Stock markets will tumble, bond yields will spike higher…
- Recent numbers suggest inflation will remain high, but will moderate from the recent spikes.
- Global supply chains are calming and adapting.
- The costs of transport in terms of shipping and domestic logistics are beginning to moderate.
- Jobs are still in short-supply as industries stumble with pandemic reopening.
- The energy price spike has already triggered alternative supply development and new infrastructure.
- Russia and China are just as vulnerable to economic consequences as the West..
I could go, listing more reasons why the Great Crash of 2022 is unlikely to trigger a massive down spike – but will more likely become a long-term mean reversion trend. Its turning into a period of reassessment – and the most likely chart outcome remains a downslope to the right. The current market ructions and shocks have crystalised a trend that’s been developing for years: an overly speculative bubble market, fuelled by easy money. Everything has changed.
While Cathie Wood is again on the wires claiming the recent inflows into ARKK are a sign from God its going back higher, the mood is generally more sanguine. Markets and the global economy are already adapting to a new reality. It’s a demonstration of my Market Mantra No 2: “Things are never as bad as you fear, but seldom as good as you hope..”
The big issue for markets isn’t the imminent collapse of the West or economic meltdown – neither will happen – but understanding value in this new post-pandemic “apocalyptic” landscape. What will the new base value line be?
This is where things do get more difficult. Over the next few months its likely to become clearer just how much the micro landscape has changed as individual corporates struggle to adapt. It might be spotting what knock-on effects the current collapse in car demand triggers – more thieving cars for spare parts, and a complete crash in diesel demand because of fuel spikes – does to the whole economy and the supply chain industries associated with it. Or what happens to the massive spike in demand for Electric Vehicles when the price of lithium goes through the roof?
Do the same analysis over ever sector, and it’s a massive job to understand just how the global economy is changing at the micro level and what that means in terms of opportunities and value.
Forget the narrative about market disruption. Go figure what companies can and can’t preserve earnings, which have defensible market niches, and which are just bunkum. It’s the speculative element of markets that will suffer most – which its why the big promises and underdelivery of the Tech sector, and meme stocks have been punished most.
There are going to be bargains out there – but bargains are not cheap just because the stock price is half what it was a few months ago. If the value of a market niche is ultimately zero, then a company that’s trading down 50% is still massively overpriced. As a trader you can play these games, but as an investor, don’t be fooled into bear traps.
So where is this market going? Who can tell… but I doubt its higher.
Five Things To Read This Morning
Forecourt Trader – May new car market declines as EV uptake increases 17.7%
FT – “Liquidity is terrible”: poor trading conditions fuel Wall Street tumult
BBerg – ECB Will Herald New Policy Era With Rate Path to Fight Inflation
WSJ – Highflying Tiger Global Humbled by Unravelling of Giant Tech Bet
Spectator – Can Boris bounce back? “He’s toast”, says a former minister
Out of time, and back to the day job
Strategist – Shard Capital
I recently heard about “The Great Rotation”. Basically the rotation from investing in tech, which dominated the previous decade(s), to investing in commodities/metals/minerals/materials/energy etc. over the next decade(s).
Do you have an opinion on this & what probability would you assign that it plays out?
The great rotation is pretty much what’s underway. It is a rotation away from speculative investments into tried and tested investments. So exit ARKK and into Energy, defence, food and other defensive stocks.
At time like this common sense tends to come to the surface. Speculative bubbles burst.
In my part of northern Mexico, not only have materials prices gone through the roof, but also property values. Hardly changing for many years, prices have gone up over 300% in under a year.
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