Blain’s Morning Porridge, May 31 2022 – Where go Markets? Up, Down or Shake them all about?
“You put your left leg in, your left leg out, and shake it all about…”
This morning: Dead Cat Bounce or a renewed upside trend? The range of opinions and views on where markets are headed is diverse and confused – will bonds and stocks recover, or will energy, food and inflation shocks further destabilise sentiment. These are dangerous times, but fools will always rush in.
Trying to write a market commentary the day after a US holiday, and when no seems to be actually working in the UK, would normally be a problem. Y’day my phone-calls were largely ignored, emails were left unanswered, and even the comments page was pretty empty as the UK takes advantage of the Long Jubilee weekend which runs through next Monday
In these markets, there is never a shortage of things to comment upon… I’ve seldom seen such a mixed bag and wide range of market expectations:
- There are the optimists arguing the markets have already bottomed, and this is a buying opportunity. With the US stock market briefly touching a 20% correction, now it’s into recovery phase. They point to the possibility/likelihood the current energy shocks will be resolved, inflation will quickly reverse, and China’s reopening (aside from a critical lack of shipping containers – the modern weak-link equivalent of a horseshoe nail), will trigger a bull market.
- And then there are the realists – arguing the correction has only just begun, and there is much more pain to come for bond markets in terms of widening corporate spreads as recession risks rise, and rising rates undermine zombie corporates and overextended consumers.
As always, the truth is out there, and probably lies somewhere on the above spectrum – If I knew what’s going to happen next.. well, I would not be here early each morning writing about it..
The current market – which I described y’day as dead-cat bounce – looks like a classic market bear trap to fool traders. It has that feel. Tying to trade ahead of volatile market sentiment is never a smart move, and as June morphs into July expect to see liquidity and volumes drop. Yet, there are clearly value propositions and stories out there that will prove brilliant trades – trying to spot them is always the problem.
The big question is where to be invested in a fraxious, uncertain market? It depends on your belief system. This is shaping up to be a really difficult year for asset managers – 10-years of double digit returns now look negative, and you are only as good as your last numbers. There are few portfolio heads who can show positive returns. It’s at times like these when it becomes tempting to play hunches – which is bit like going to the casino despite knowing the odds are stacked…
If you are an optimist and you believe stocks are going to resume their upward trajectory since 2010 – be my guest. If you think inflation is still transitory, and will fall as swiftly as its risen, then don’t worry about bonds or central banks. Perversely, I think sentiment will favour the narrative markets are in recovery – most financial professionals have never seen an inflated asset bubble burst before. You’ve got to be in at least your 40s to remember what real pain feels like.
If you are a realistic pessimist… bonds are going to get spanked further, stocks remain unsettled and potentially more to correct.. So where to invest? Gold pays no return, yet has hardly moved as a reflection of how unstable the world is. Property – rising rates, landlords feeling the pain from defaulters, and rising fears a property crash is around the corner makes it look unattractive.
How to play it?
UK – existential crisis
Meanwhile, back in Blighty, the Bank of America has been dishing the UK; analysts writing we face an “existential crisis” which puts the UK on course for something akin to an emerging markets destabilisation event. Problem is – they are right. The outlook for sterling is “grim”, as they describe it.
It was also completely avoidable. Political Common Sense in the UK seems to have left the rails, lurching from wobble to wobble. Not only is the relationship with Europe heading back into crisis, but communications from The Bank of England are “increasingly challenging” (says BOA), and it’s independence looks threatened. When the central bank loses credibility, time to check the proverbial lifeboats.
The Bank of America report gels with many of the fears I repeatedly hear from major UK investors – the UK has become a metaphor of Boris Johnson – bumbling from crisis to crisis, and never really solving any of them. Muddling-through has, once again, become the UK’s default mode. To be clear, I’ve met many MPs and most of them are ok, but collectively… they’ve lost the plot. The political headlines are always going to be about crisis, wrongdoing, and political failure – but there is diminishing confidence in whatever path they are supposedly leading the nation.
Covid, Partygate and leadership challenges are distractions – but they now set the sterling and UK market narrative. The real crisis is a distracted government failing to come up with clear, effective or considered strategies on any of the critical challenges facing the UK:
- How to take advantage of the Brexit opportunity to launch a new economy – too late, that boat has sailed.. (Boris has come up with a new wizard wheeze of a European commonwealth with less rules than the UK.. yawn…)
- How to refine industrial policy in the wake of covid supply chain breakdowns.
- How to address new logistical challenges blockages in the wake of deglobalisation,
- Energy transition strategies and planning long-term strategic energy security remains an absolute mystery.
And there is much to add to that list; like the NHS, Railways… etc, etc…
Five Things to Read This Morning
FT – Peak inflation (We hope!)
Torygraph – Pound faces “existential crisis”, Bank of America warns
WSJ – Market Slide Forces Rookie Traders to Grow Up Fast
BBerg – French Inflation Hits Another Record, Feeding Rate Debate
Guardian – EU Leaders agree to partial embargo of Russian Oil
Out of time and back to the day job..
Bill Blain
Shard Capital
Bill, yes indeed, how is the market valued?
My metric is an easy one: garbage.
As in a well run company out of Houston, Texas, called Waste Management, Inc. “It offers collection services, including picking up and transferring waste and recyclable materials from where it was generated to a transfer station …”
One might ask, what’s a good P-E ratio for a company of garbage and recycling trucks? Well, earlier this year, it was @ 40. Now it is down to 35.
In the immortal words of a Minneapolis garage band that played surf-punk, The Trashmen. Here’s the question from ‘Surfin’ Bird’: “Well-a don’t you know, about the bird?”
No, I sure as hell don’t know the answer, but a trash collection company trades at 35 to 1 P-E ratio and a forward yield of 1.61% at this time on the NYSE.
We have similar problems in the United States with similar “progress”. To me it appears that when one party became willfully ignorant, the other party, instead of becoming more competent and able, dumbed down to one notch above the competition. Basically an “Idiocracy” with speeded up evolution. It is almost as if it is survival of the unfittest. I guess that we only have ourselves (the voters) to blame.
interesting article about taiwan/china & moneyquotes
https://clsbluesky.law.columbia.edu/2022/05/26/katten-muchin-discusses-shareholder-litigation-risk-in-an-unstable-geopolitical-environment/
>We analyze the potential effects of an escalation of the conflict between the PRC[People’s Republic of China] and Taiwan on raw materials, semiconductors, communications, and shipping.
>The Department of Defense has also determined that the PRC intends to possess the ability to seize Taiwan no later than 2027.
>The first key feature to note is that issuers should not expect a prolonged build-up of forces. Taiwan possesses long-range weapons capable of striking targets in the PRC. Taiwan is actively seeking to bolster its standoff strike capability, and the U.S. and other nations have provided assistance. It is therefore highly unlikely that PRC leadership will endorse any operational plans that give Taiwan a lengthy period of advanced notice. Issuers should instead anticipate that a crisis in the Taiwan Strait could develop very quickly, and may not offer much time to respond.
>Because both states possess significant quantities of long-range anti-ship missiles, a PRC invasion of Taiwan could result in a termination of all commercial shipping within 1,500 nautical miles of Taiwan. Issuers would not only lose access to the PRC, but also to ports and markets in Japan, the ROK, Vietnam, Thailand, and Indonesia. It is also highly unlikely that insurers would underwrite any coverage for vessels transiting the Pacific, given the distinct possibility that either Taiwan or the PRC would misidentify a merchant vessel as a combatant. The same is likely true for air freight[auch flugverbotszonen] passing within missile range of the PRC or Taiwan borders.
>A final feature of a PRC-Taiwan conflict is the likely nationalization of PRC natural resources and manufacturing facilities owned by western companies, or controlled by U.S.-PRC joint ventures. The same is true for manufacturing facilities used by U.S. issuers to source production from private PRC entities. In the event of an invasion of Taiwan, the PRC is likely to seize these facilities, and issuers are unlikely to have any viable means to recover resulting losses.