Blain’s Morning Porridge Aug 8 2023: The Global Financial Crisis 2007-2033: the next phase is coming.
“No more worries for a week or two…”
I’m polishing up my buying boots in anticipation of a fantastic buying window in the near future. All I need is the current everything bubble to burst under the deadweight of FOMO and unsustainable valuations! And things really ain’t looking so bad!
We set sail at 7 am tomorrow to catch the tide. The Blains will be navi-guessing our little sailing-boat westwards (basically like caravanning, but wetter, colder, more bumpy and much less stable.) But, as I leave dry-land my market spidey-senses are all a’ tingle. I’ve taken the precaution of polishing-up my proverbial buying boots ready to put to work sometime after I get back.
So rather than do a deep dive into current news on Aramco, rising US corporate debt concerns, or the collapse of the UK high street this morning, I thought I’d leave you (for about 2 weeks) with some thoughts on why financial destruction is not only inevitable but necessary…. And is nothing to panic about!
Why so negative and contradictory you wonder? “Buying boots on” ready sounds almost bullish? Au contraire… We love Bear Markets because they open up Bull Opportunities!
The basic rule of investing is simple: buy when assets are cheap and returns are high. Simple as. At the moment asset prices are too high relative to the current risks and market distortions. Again.. Simple as.
My base case is the last 15 years of market distortions – since the end of the first phase of the Global Finance Crisis (GFC) in 2007-2008 – remain unresolved. Many times I’ve jokingly written about the GFC 2007-2033. I reckon that throw-away comment about ongoing financial turmoil might rank among my most astute predictions.
The key element of the period up to 2021 was quantitative easing: keeping interest rates artificially low and pumping money into the system – initially to shore up the damaged post 2008 economy. Yet the money didn’t end up flowing into the new productive capacity creating plant and jobs, but largely into financial assets, fuelling massive valuation gains (financial asset inflation) and speculation as cheap money inflated the value of everything, triggering risk-blindness across tech stocks and speculation in crypto, meme-stocks, SPACS, NFTs, you name it.
Today, I come across investors and analysts blithely unaware of just how distorted financial asset prices became. They think it the base state of the market. The problem is not just about how distorted valuations became, but also how it warped market behaviours. It’s Pavlovian: if you train market participants to expect rewards like govt bailouts during crises… then that’s what they come to expect. Hence, large parts of the market are risk-blind. Oh, they know all about risk-management and the maths of hedging, but do they understand real markets?
Let’s just take a quick snap-shot of the economy this morning:
- Crashing trade numbers from China
- Tumbling house prices in the UK
- Retail Sales collapsing and food price rising due to dismal summer
- Rising political crises in UK and US raises the risk of policy mistakes
- Escalating crisis in consumer debt and discretionary spending.
- Energy Price bounce back threat
- US Corporate debt repayments spike at around $1 trillion per annum from 2024-28 – creating a long-lasting refinancing risk threat.
- Global property financing under massive strain.
- Etc, etc, etc…
Yet, I was told yesterday the market is going up. My view is risks are rising; inflation is set to rocket higher if/when energy prices rise again. (Guess what.. the fact oil is cheap today doesn’t mean its cheap tomorrow.)
It doesn’t matter how many times someone yells Bubble. In Euphoric Markets no one can hear you scream. Markets ignore the headlines and remain pretty much risk on. That’s what happen when investors are in the late stage of a bubble – FOMO and hopes its going higher keep people invested into the narrative for longer than they should be. Every major market tipping point occurs when unsustainable prices suddenly become shockingly apparent. 1929, 1987, 2000, 2007.
All bubbles burst.
I’ve given up warning about how distorted the current market is. In the face of the ongoing stream of negative sentiment, dismal news, conflicting charts, and increasingly desperate attempts to talk up the markets, I can’t help but conclude that sometime in the near future (which, to be fair, is any length of time I determine it to be), the moment of realisation will come – and I intend to benefit from it..
Bring it on. Cry Havoc and let loose the Markets.. There is going to be an almighty buying window in the wake of the coming shock, tipping point, crash..… call it what you like. And I shall be ready to bottom fish that market because I reckon a corrective crash will lead to a better and more rational market in its wake. (But post crash – the market will be about returns, not stock appreciation.)
It will be the kind of buying window that always occurs when everyone “properly” panics and dumps. For the last few market cycles, we haven’t seen a “proper” correction. Even the 22% stock market correction last year (now corrected) wasn’t a proper tumble – there was always money on the sidelines waiting to come in….
What I’m waiting for is a proper reappraisal and the inevitable panic that follows. In 2008 – as the global financial crisis ripped the bottom out of sentiment everyone was dumping bank stocks. (We were buyers.) In 2012 everyone was selling European sovereign bonds and Mario Draghi was quietly doing whatever it took to avoid a meltdown. (We were buyers.) And now… what happens as this bubble bursts?
What to buy is the trillion-dollar question. I have lots of ideas….
Why the bubble will pop is a fascinating, but frankly much less valuable answer. That’s because bubbles always pop. They just do because even stupid people can’t stay stupid forever.
However, the current everything bubble has to pop to complete the mid-term economic cycle that began in the wake of the 2007-2008 phase of the GFC. Markets have to learn distortion is a bad thing. 2008 and Covid were aberrations, they should not become the norm.
Let me be clear:
- I don’t fear for the sustainability of Western economies – though there may be wobbles. There is absolute tosh being written about the dangers of debt burdens in the US, UK and European government bond markets – but fear not. Government bond markets will prove resilient – and persistent inflation will, curiously, diminish the debt threats. Disinformation, fake news and downright dishonesty is talking down the system.
- I don’t think the ongoing declines in housing markets – while damaging to sentiment – spell the end of Western democracy. They need to be seriously addressed through wiser policy choices than current governments have the ability to construct.
- I do think we under-estimating the damage done to discretionary consumer spending – we seem blinded by income inequality meaning we pay far more attention to what luxury goods are being bought by the 0.1% rather than how the 99% are struggling with the daily shop.
- 1I don’t fear the default and collapse of the whole global corporate sector. Unwise, badly managed companies should fail. Strong ones will thrive – it’s called Darwinian Capitalism, and it will be a cleansing event for capitalist economies; getting rid of zombie firms that have been blocking market niches..
To be honest, pretty much the only thing that really does scare me is US politics – just how destabilising in terms of geopolitics, trade and jobs would be a vengeful President Trump Mk II be? But that’s something I can think about if I get caught in a wind-hole mid-channel over the next 2 weeks.
The Porridge will be intermittent over the next two weeks. Don’t hestitate to email any questions.
Out of time, and back to the day job.. .
Bill Blain, Strategist – Shard Capital