The Game of Markets – Season 3 Opener – After the Meltdown..

After the brutal lessons of April, May will set the tone for a new market – lots of threats, but full of opportunity.

Blain’s Morning Porridge 3rd May 2022 – The Game of Markets – Season 3 Opener – After the Meltdown..

“There is only one god and his name is Death. And there is only one thing we say to Death: “Not today.”

This Morning: After the brutal lessons of April, May will set the tone for a new market – lots of threats, but full of opportunity.

First things first..

Over the weekend I was sharing a glass or three with a chum who commanded tanks. He sharded a brilliant new mess song – apologies to Mssrs Gilbert & Sullivan for this excellent take on the Major General’s song:

I am the very model of a Russian Major General
My standing on the battlefield is growing quite untenable
My forces, though equipped and given orders unequivocal
Did not expect the fight to be remotely this reciprocal

I used to have a tank brigade but now I have lost several
My fresh assaults are faltering with battle plans extemporal
I can’t recover vehicles but farmers in a tractor can
It’s all becoming rather reminiscent of Afghanistan

My ordnance is the best but only half my missiles make it there
I would have thought by now that we would be controllers of the air
But at the rate the snipers work my time here is ephemeral
I am the very model of a Russian Major General!

(If you don’t know the tune, you may know it from Tom Lehrer’s equally clever The Elements)

Back the story of the day – Game of Markets – Season 3

Last week I wrote how April 2022 was the month the market finally woke up the reality the game has changed. Over the weekend there were a spate of articles about how the next phase plays out in terms of recession, stagflation and growth opportunities. We seem set for considerable instability and excitement.

It set me thinking. What if we are really just living in some massive alternative reality computer programme….? What if The Global Financial Crisis 2007-2031 is just the storyline for a blockbuster series on Sky or Netflix – Game of Markets?

(If anyone in Hollywood is interested… I got the script all written…)

If so… then the Season 2 Finale was the spectacular immolation of a whole bunch of retail and institutional hopes in a Dragonfire conflagration of FAANG, disruptive tech, SPAC and meme-stocks. (Queue the dramatic music.. the withered heath and smoking bodies of Robinhood users…)

Season 3 opens on a new landscape, but the rules have not changed: Spot the inconsistencies and dump them. Look for the opportunities and buy them. You just need to work out how the underlying mood music has changed the script! (Clue: it’s not about future prospects anymore, it’s about deliverables today!)

Consider May 2022 to be the opener for Season 3 of Game of Markets:

Let’s set the scene; It’s a big week for our market heroes… the financial powers-that-be are trying to juggle flaming torches, chainsaws and vials of the latest Bird Flu. If they drop any of them… Messy. Never have the risks of policy mistakes appeared so high… Fear not! To maintain the dramatic tension you will probably not be disappointed. If there are mistakes to be made, then trying to do the right thing means Central Banks and Governments around the globe will probably make them.

Don’t blame them. Anticipate them! For instance.. this will likely get worse before it gets better. Don’t be in the least surprised if Central Banks hesitate and reinstate supportive monetary policy. Get ready to trade that bounce.

If this was a normal world, then the prospects for a 50 bp Fed Hike on Wednesday, followed by a strong payrolls number on Friday, would suggest a global economy in robust health and in need of some dampening to contain rising inflation stemming from vibrant consumer consumption would be a good thing. It could be a screaming buy-the-fact signal as corporates around the globe prepare themselves for future boom times..

But this is not a normal world – this is Game of Markets, season 3!

This is a world where chaos looks barely contained:

  • China has shut down on a renewed round of Covid thus again crushing supply chains,
  • Energy inflation and food inflation gives consumers and nations the choice of starving or freezing to death,
  • Corporate earnings are looking less and less sustainable just as we realise just how overpriced stock markets are, (that bubble has conclusively burst),
  • Quantitative Tightening and central bank balance sheet reductions are about to bite,
  • 59% of American Association of Individual Investors are bearish,
  • Recession and/or stagflation looks nailed on,
  • Europe is in a dither over where it’s going to get its oil and gas from,
  • The silly Brits have penalised the poor with regressive taxes thinking they can fight recession with austerity,
  • Everyone is panicking about the Ukraine War triggering World War 3,
  • Sri-Lanka is just the first EM domino looking likely to tumble.
  • Domestic politics are increasingly fraxious,
  • Geopolitical players are staring daggers at each other.

Relax. Breathe deep. Season 3 is going to be a cracker….

I’ve quoted this before, but now is as good a time as any… Picture the scene… as the story teller enthuses the dispirited Watch…..

As the unstoppable German Army swept towards Paris in 1914 French Marshal Ferdinand Foch commented: “My centre is giving way, my right is retreating, situation excellent.” Yet, stop them he did, holding the line on the Marne and winning a most imaginative use of French Taxis award (requisitioning civilian vehicles to rush reinforcements to the front). (He also later sagely commented of the Treaty of Versailles: “this is not a peace treaty. It is just an armistice for twenty years..”)

Yet… At times like this – when things are looking so resolutely awful and you are thinking “I wish I’d put everything in cash earlier…” it’s probably a good time to check you buying boots are a good fit, put a new slather of Dubbin on them (it’s a very redolent leather waterproofing wax – reminds me of many long dismal hikes in driving rain up and down Scottish Mountains as a young man), and get ready to buy. When all around are loosing their heads…. You get the drift?

The bottom line is markets are in a tither. Big deal. It’s happened before and it will happen again. Yeah… and that’s our story line for Season Three..

So…. what to buy?

If you weren’t already in the obvious ones like utilities, oil and gas, energy and fundamentally profitable firms… then catch-up. I hope to write an episode about my old bête noire HSBC later this week – it’s in the news because Ping An wants to break them up. I’m not sure if Ping An are proposing to intern its corporate soul in 7 lead lined coffins, chained with unbreakable magic charms and sigils, before dropping it into the deepest depths of the ocean, but we can but hope… (disclaimer: I own HSBC stock…)

I’ve been thinking about defence stocks. What an opportunity! I have never met a General that didn’t want more, more, and more tanks, planes, guns and ships, nor a defence CEO not prepared to give him it! Defence spending is a massive force multiplier and economic multiplier – which is why there is a defence plant in every single US congressional district.. (well, probably…)

But.. what to spend the money on?

I am sure everyone will have seen the spoof press release about Raytheon’s new  environmentally friendly anti-aircraft missile last week. Chortle, chortle.. But it does make you think. Why buy tanks when a well-led volunteer force can use cheap throwaway tech to take them out whole divisions of Soviet Russian T-72s, or a fire-and-forget drone can take out a state-of-the-art fighter jet, or a sea-skimmer missile can sink the pride of the Russian Fleet? Maybe Cyberwar will be a more profitable investment?

Defence spending can be a bit hit or miss. I wrote my master’s dissertation on the Military Industrial Complex and Mismanaged Procurement Programmes – not much has changed in 40 years. The British Army has just spent £5.5 bln on the new Ajax fighting vehicle which is so awful its already effectively abandoned. 26 not-fit-for-use vehicles have been delivered 5 years late from a 589 order!

Or how to account for changing geopolitics? Despite the apparent unanimity around the Western Alliance against Putin’s Russia, there are significant fault lines. Western strategists and generals are increasingly concerned on their reliance on bright new shiny US weaponry in light of the next plot twist.

What will happen to their bright shinny new F-35 Lightnings if Trump is relected in the Season 3 finale set in 2024 and decides to effectively switch them off? How should they prepare for the US potentially pulling out of NATO. Europe is very happy to defend its immediate interests against Russia, but America’s great enemy is now China – and that’s less a European concern. Oh, shifty alliances – great for the plotlines!

In the Game of Markets today the well-trailered potential return of Donald Trump to the fray will have significant effects on how Europe deals with the current wildlings massing beyond the Baltic marches. If the US is likely to prove an unreliable friend – then how quickly can Europe innovate and design its own homegrown, latest generation defence? How will Trump react when he discovers the UK and Europe are already actively discussing the successor the the European Fighter Aircraft, the Typhoon, a next generation plane called the Tempest?

Which is why I’m think French, UK, Italian and German defence stocks are going to be worth a very close look. This Game of Markets is not over yet..

Five Things to Read This Morning

FT – BP post highest quarterly earnings in 10 years

BBerg – Nobody Knows Where the Red Line is for Cyberwarfare

Thunderer – The Bank of England Celebrates 25 years of independence

WSJ – Facing a Wheat Crisis, Countries Race to Remake an Entire Market on the Fly

NYT – Russian threats redraw the global energy map

Out of time and back to the day job…

Bill Blain

Strategist – Shard Capital

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