Blain’s Morning Porridge, September 1st 2022 – The Stock Market Rout Has Only Just Begun.
“The thieves, they love a siege. Soon as the gates are sealed, they steal all the food. By the time it’s all over, they’re the richest men in town.”
This morning– Harry Hindsight is the greatest trader who ever lived. He saw the July/August rally was just a bear trap. But, he’s not revealing his thoughts on how much further the market has to correct. Some analysts see mean reversion all the way back to 2008 levels!
Apologies for very late, and short porridge. I had a medical appointment earlier today – and although they virtually emptied my body of blood, it was absolutely fascinating chatting to medical professionals, to the extent I’m going to use what I learnt for a piece tomorrow.
This morning – back the usual stuff: Wither the stock market?
Yesterday myself and some colleagues were recording the latest Shard Podcast, talking about the market outlook for the rest of this tumultuous year. We weighed the risks of recession, price to earnings ratios, declining profits, inflation eating into consumer discretionary cash, and global trade, plus a host of other stuff. We concluded there is still significant downside risk to equities, and more pain to come for longer in bond markets.
As soon as the podcast is out, I will flag it.
I’m pretty sure I mentioned “mean reversion” risk at one point… the basic rule of everything that all things revert back to normal, which in the case of the stock market is going to be “painful” at best.
Yesterday we also had market legend Jeremy Grantham on BBerg warning the current stock market super bubble has “yet to pop”. He said what many of us believed about the July/August rally – it was a bear trap: a bear market rally after an initial sharp decline. Grantham cited “a dangerous mix of overvalued stocks, bonds and housing, combined with a commodity shock and hawkishness from the Fed” as further reasons to be fearful.
The reality of mean reversion takes us right back to when the stock market was last normal – which was sometime back in the late 1990s, early 2000s before Central Banks decided their price stability mandate included market stability as a precondition to stability.
Oh, ye Mighty, look upon my works and despair… is the lesson they have now learnt. Mess with markets, and they will mess you back.
Central Bank monetary experiement has proved a clusterf*ck of monumental proportions. Its resulted in the most distorting period of market manipulation ever. From 2010-2021 central banks piled on Quantitative Easing and Zero Interest Rate Policy to notionally boost economic growth (which they did not) and then Governments made massive fiscal injections into the economy to combat Covid. Sweet Jesus – what a mess they made…
The result is all that cash – trillions up gazillions of dollars – ended up not in the real economy, but in financial assets. The value of bonds and stocks went stratospheric, chasing each other higher, even though the real economy did little more than chug along. We pretended the world was changing as tech – basically someone delivering take-away food to your front door, electric batteries, or using a phone to order a taxi by app instead of an actual call – was technological miracle advancement. Doh!
We did not see any great industrial revolution improving productivity – what we saw was the creation of millions of low paid, zero-hours type jobs and a massive imbalance in wealth equality as the rich got insanely richer on stock market gains, and inflated C-suite rewards, while everyone else got progressively poorer.
We are now into the end stage of the game:
- Central Banks are not longer playing ball. They actively want markets to correct to remove the inflationary impulse from falling financial markets adding to real world inflation. The Fed “Put” has become the Fed “Call”.
- Financial asset sanity is reasserting itself – folk have woken up to fundamental truths like: cash is a better place to store wealth than negative yielding bonds, stocks with no income have no value, and emperor’s new clothes swindles like Crypto and NFTs are zero-value, zero-utility Ponzi games that rely on a greater fool to keep buying and push them up.
- Savers have no discretionary income left to save – and little incentive to invest in financial asset markets, which are now revealed as so clearly mispriced.
So where does this take us?
Clearly… after a very boozy market party there are going to be hangovers a plenty. They are going to hurt. How much?
I would refer you to great chum of mine, David Murrin, who has done fantastic work on reading the Code of Markets. Check out his website www.DavidMurrin.co.uk – he may even give you a free trial if you mention the Morning Porridge.
David does a lot of stuff – and has an opinion on just about everything – but his chart work is absolutely on the ball. As central banks continue to aggressively hike interest rates (and everyone now expects 75 bp from the ECB), David is predicting: “the Western Economies that have been based on cheap money at ultra-low interest rates will quite literally fall apart, and the stock market will collapse.”
His read on the charts is the current down leg takes global stock markets down 50% from the highs – to the kind of levels we were back in 2015-17, before a bounce before a second down-leg takes us the full mean reversion back to levels (adjusted for inflation) last seen pre-2008.
With that warning of significant downside to come… please enjoy the rest of your day…
Five Things to Read This Morning
FT – Sterling posts worst monthly fall since wake of 2016 Brexit referendum
FT – Truss and Tories fall prey to disastrous betrayal myths
BBerg – Lufthansa to Scrap Most Flights at Major German Hubs Amid Strike
BBerg – The Market is Underestimating Fed Risk Even After Rout, BOA says
WSJ – Netflix Seeking Top Dollar for Brands to Advertise on Its Service
Out of time, back to day job, full service tomorrow!
Bill Blain
Strategist – Shard Capital
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“takes global stock markets down … to levels (adjusted for inflation) last seen pre-2008.”
Another analysis is available at –
https://realinvestmentadvice.com/liquidity-and-valuations-the-cornerstones-of-investing
Which suggests that the S&P500 could fall to 1585; a fall of approximately 67% from its recent high. Although it does also show that an “average” fall would take it down to 2647; a fall of approximately 45%.
We should hope that these warnings are wrong, while preparing for the possibility that further falls may (or almost certainly will) happen.
Sadly, these are not average times so expecting an average fall is unrealistic. We have been through “extraordinary” market manipulation and distortion, so average needs to be reset.
Ouch.
BB
Please accept this edit, how could I forget Blockchain et al. The opiate of the masses.
At the risk of being trite please let me say, this time will be different.
In America Joe Sixpack is all in on meme stonks, Crypto, Non-Fungible Tokens, McMansions, land galleons, guns and MAGA. In the very near future Joe and his well armed brethren will realize that millions of his people have been sold a dream at odds with what reality can deliver. Their response will be outrage and violence that can only tear the country apart.
Just yesterday our President opined:
“For those brave right-wing Americans who say it’s all about keeping America independent and safe, if you want to fight against the country, you need an F-15. You need something more than a gun,”
The battles lines are being drawn and while the outcome is unknown, it will not be pleasant. As I write this US markets are opening and my screens are once again all red. When the Wall Street carnage fully impacts Main Street it will be awash in red as well.
My advice to my countrymen, stay liquid and stay mobile. Only cash in the form of physical precious metals and Treasury Bills will be safe as houses. Houses can and will burn down, in value and physically.
Remember Blains Mantra No 3: “THings are never as bad as you fear, but never as good as you hope.”
Meanwhile in Canada, Conservatives next month look set to embrace a career politician who has promised to fire the central bank governor and promoted bitcoin as an inflation hedge to become its fourth leader since 2020. Having lost three consecutive elections to Liberal Justin Trudeau since 2015, the Conservative Party is keen for a leader like Pierre Poilievre, who is a skilled communicator and unabashedly right leaning, said one strategist who expects him to cruise to victory.
“The math just simply doesn’t really work for any other candidate,” said Garry Keller, a former senior Conservative staffer who is now vice president at public affairs consultancy Strategy Corp.
Figures lie and liars figure…
This reminds me of the 1973/4 when the stock market lost 75% of its value. The summer of 1973 the decline was slow but it rapidly gathered steam when the miners called a strike later in that year. The same feelings of hopeless and despair permeated the public mood whilst the lunatics running the asylum wrecked everything and solved nothing. It was not until 1977 a semblance of reality and good sense returned to public affairs – until Healy threw it all away in a give-away budget in the Spring of 1978.
“We are now into the end stage of the game”
Maybe.
Jay Powell can certainly talk the talk.
Yet, at -5% real rates, he remains the most dovish chairman in history.
He has a long way to go to match Arthur Burns, let alone Paul Volker.
And doing so would bankrupt the government.
Great article.
One remark. Do not take the the lowest point as the ‘right’ point when the markets are corrected. In good times, markets overshoot upward, in bad times they overshoot downward. A Dow of 25000 could be that lever, not a short term fall to a 15000 low-peak or so.
Apologies for my English, not a native speaker.