Blain’s Morning Porridge – May 17th, 2023: The £5.40 Coffee in a paper cup spells the end of everything
“Sometimes it’s better to light a flamethrower than curse the darkness.”
This morning: What does £5.40 a coffee tell us about the economy? That inflation is sticky. Do we face a stagflationary bust or a reflationary boom? Either will mean Central Banks have failed. At the heart of today’s economy are a succession of issues to resolve – not least is the need for a reset on corporate behaviours to drive stable growth.
Apologies for the lack of Morning Porridge y’day. I was in London, and had IT problems when my laptop staged a hissy fit updating software. (I will put out the note I was working on later this week.)
My mood was not greatly improved when I was then economically mugged: £5.40 for a Flat White at Black Sheep.
That’s extraordinary, what was I thinking? I should have walked out. But I didn’t. We have state of the art coffee machines in our London office, but the coffee is so bland what’s the point? £5.40 seems a pretty well-made point to me… Poor coffee is marginally better than no coffee… If I ever pay £5.40 for a coffee again… shoot me. Please – before my wife decides to let loose withering sarcasm about the “economic genius” who pays £5.40 for a coffee! When she finds out…
The point about £5.40 for a paper cup of indifferent coffee is no economy can function when coffee costs £5.40. It’s the clearest signal yet of a looming inflationary crisis – prices exploding like a coffee flavoured supernova. Inflation has gone Chernobyl on us.
£5.40 coffee paints a bleak picture. The economy sinking into manic recession and inflation where we all starve, or the recent improvements in the economic sentiment numbers, growth forecasts and outlooks are growing daily more optimistic, meaning an increased likelihood of a reflationary boom with long-term sticky and unaddressed inflation – in which case we still all starve as wages stumble. In both cases, Central Banks will have failed.
Ach well… I could lose a few kilos. At least inflation will chip away at the impossible debt levels across every aspect of the economy. The £5.40 cup of coffee means inflation is here to stay, or that the coffee shop will be gone this time next month. Maybe both.
Looking at markets I have a strong sense of unease. There is little sense of real conviction. But, let’s face the truth… we’re guessing what comes next. It feels like everyone is bearish stocks, but unconvinced on bonds (except for short-term Treasuries playing the default game..) It all looks a little flatline out there – waiting for something. I detect a bear ascendency that bad news out will significantly outweigh any upside.
When everyone else is panicking, get ready to lace up your buying boots. Don’t be fooled – we might well have an upside breakout on improving economic numbers and outlook…. It just doesn’t feel like it. Yet.
It’s not just the rank stupidity of the potential US debt ceiling clusterf*th that’s roiling sentiment. Everything feels a tad distorted – a number of folk have pointed out the only thing keeping the market strong is mega tech stocks. Look at stocks on an unweighted basis, and the story is flat unconvinced prices, inferring recession, or at least limited growth.
Someone recently made the point Apple is about the same market cap as the entire FTSE, but only because it is so big it can only get bigger – apparently. Nothing lasts for ever. I walked past the Apple Store on Regent Strasse yesterday and thought to myself… “How average it looks”. 10-years ago the Apple Store was the impossibly exciting High Temple of the new, new thing bright shiny white stuff tech you just had to have. Yesterday, it looked like a boring, fairly empty shop. It didn’t help the scruffy disinterested security guards standing outside clearly didn’t appear to give a fourletterword about what they were notionally guarding….
The reason Apple is Apple is there isn’t really anything else like it. Warren Buffet has been a buyer because he reckons it survives.. which is one reason to buy I suppose. Safe investing? Maybe not. Many years ago a firm called Blackberry dominated the phone market. Does anyone else remember them or Ericson or Nokia? Who they?, asks our intern.
And then I saw a note predicting the major beneficiary of a US debt ceiling default will be the confirmation of ButtCon as a premier global safe-haven asset class! Really??? That’s just insane wishful thinking. Somewhere there is a demon having fun with crypto… “I just need to keep telling them Buttcon is real… say it often enough and it becomes fact.” No… it doesn’t. Nothing has changed about Buttcon. It remains inherently useless and essentially pointless. The point of it is solely to demonstrate bad ideas can still fool lots of the sheeple most of the time…
Bloomberg’s Market Live Pulse says BitCon, Gold and US Treasuries (yep, perverse isn’t it) will be the three assets likely to gain most from a US debt default crisis. Split the analysis down and it becomes apparent Professional investors will favour treasuries and gold, while its retail who are the marks being driven into the crypto con. They are welcome to it.
I have a new mantra to add to my list: “Bitcoin is a tax on credulous stupidity.”
Another issue to be concerned about are the many other multiple signs we’re on the road to nowhere. Be concerned when whenever the market commentariat gives lots of column inches to contrarians – like the chap who predicted the Global Financial Crisis in 2007 going long Alibaba – it’s a sure sign the market is struggling with direction. He is also going long US Banks – which is a clear TBF play. And not one I personally disagree with – its just I think they could get even cheaper! (At some point… US banks will be a screaming buy… just not yet.)
As I said… standby to standby as we all wait for the next surge to emerge.. what event, no-see-um or surprise will trigger the next big move? What will provide the impetus?
If there is one big problem… its that markets are no longer logical or even particularly free-market minded these days. One of my peeves is the way that 13 years of QE absolutely distorted the way markets think – when interest rates are too low it fundamentally changed market thinking and behaviours. Much of the current analyst-intelligencia who were still at school in 2008 sincerely believe the normal way stocks should behave is to rise 5 times faster than the underlying economy – it’s called financial asset inflation, and its fundamentally unsustainable.
The reality is ultra-low interest rates did not create a wave of borrowing to finance capital investments to build new plant, or building new factories to host high quality jobs, or even to improve business efficiency through consolidation. The clue is in the fact productivity gains since 2010 have been effectively zero.
Instead, low interest rates triggered 15 years of corporate greed and a massive reverse Robin-Hood moment as the rich got richer at the expense of the poor. The FT covered this rather well y’day: Record buyback spree attracts shareholder complaints.
The world’s largest public companies now spend as much on stock buybacks as they do on investor dividends. Sure, it pushes the stock price higher – in theory – but the main beneficiaries are senior executives who see their bonuses boosted by short-term focused stock option performance, rather than policies that would add long-term value to the firm. 1200 companies spent $1.3 trillion buying their own stock back in 2022. That money is potentially gone in a market crash, and wasn’t spent buying market share, cutting costs, or innovating the next, new, new product.
The classic example is Boeing – my least favourite company. 20 years ago it was the best aviation firm on the planet. In the past Boeing took risks and spent money to introduce new aircraft types – notably the Jumbo Jet, and then the ground-breaking B-787 Dreamliner – which really did revolutionise the flying experience. It spent $30 bln to develop the plane. It then decided to utilise all its profits from aircraft sales, and from raising bond market finance, by spending some $51 bln on stock buybacks. That’s money it did not spend on developing a replacement plane in the same league as the Dreamliner to replace the venerable B-737 regional jet.
We know what happened next. Boeing executives made out like bandits as the stock price rose, and they cut costs. They stuck bigger “greener”, supposedly more-efficient engines on the B-737 and called it the Max. It flew like a constipated pig and needed new software to control it, which Boeing hid from pilots who had been assured it was just like the old 737’s they already flew in order to make the price look cheaper (saving airlines the high costs of training crew for what was in effect a completely different plane.) 2 crashes, 346 deaths later, and Boeing is still trying to dodge the blame.
The company is now a pariah. It doesn’t have the money to develop a successor plane. It’s the most obvious example of corporate dishonesty and failed corporate governance as management acted in nobody’s interest but their own. It was rank dishonesty, but Boeing is a key part of the Military Industrial Complex, has done a deal and will probably get away with it.
And that is the fundamental crisis at the heart of capitalism – making it work again to create good jobs, pay decent wages, and enhance all our lives. Its function should not be to enable management greed.
To finish this morning I want to share some wisdom from the great Terry Pratchett: The Sam Vines “Boots” theory of socio-economic unfairness:
The reason that the rich were so rich, Vimes reasoned, was because they managed to spend less money.
Take boots, for example. He earned thirty-eight dollars a month plus allowances. A really good pair of leather boots cost fifty dollars. But an affordable pair of boots, which were sort of okay for a season or two and then leaked like hell when the cardboard gave out, cost about ten dollars. But the thing was that good boots lasted for years and years. A man who could afford fifty dollars had a pair of boots that’d still be keeping his feet dry in ten years’ time, while a poor man who could only afford cheap boots would have spent a hundred dollars on boots in the same time and would still have wet feet.”
Five Things to Read Today:
Out of time, off to catch a train, and back to the day job…
Strategist, Shard Capital