Blain’s Morning Porridge 21st Nov 2022: World Cup, Flu and Where do markets go next?
“Cymru am byth!”
This afternoon: After some tumultuous weeks in global markets, where do we go from here in terms of the dollar, inflation, energy, China? It’s all terribly complex, but probably good news for some and bad for others. The UK is likely on the loser list.
Back in 1998, there was a gang of Scots in City who decided we had to go to every Scotland Match in the World Cup in France. I went to the opening game, Scotland vs Brazil, and even the France vs Brazil final – but the game that stands out was Scotland’s famous 1-1 victory vs Norway in Bordeaux. What a laugh! We couldn’t get commercial flights, so we hired a tiny wee prop-driven plane. I can’t remember much except getting home without a shirt and a Viking helmet on my head! These were the days!
Since Scotland didn’t qualify for this World Cup, I am going to be fanatically Welsh the next couple of weeks. Especially when they play England in Qatar next Tuesday. Sorry, but that’s just the way it is. She-who-is-Mrs Blain is Welsh… very WELSH!
I can’t say I’m particularly excited about the World Cup this time – but neither is anyone else. I guess we’re flummoxed it’s in the desert, and by the endemic whiff of corruption and banality that swirls around FIFA.
As regular readers will know, what I know about Football probably would not fill the back of a postage stamp. However, I am fascinated by Southampton’s new manager, Nathan Jones. Saints (Southampton) are my local side. (I sort of support them, but I by birth I am a Jambo (Heart of Midlothian) and a Gunner (Arsenal) by adoption… because… well just because…)
Southampton’s new boss, Jones, is apparently not your regular Football manager. I’m told he is data obsessed – using a battery of information gleaned in training and on the pitch to get the very best out his players. I would love to find out more and maybe do a whole Porridge on it. Saints seldom trouble the top echelon of the English Premier league, snatching defeat from victory on multiple occasions, but they have a reputation for taking unknown players and training them up into superstars. If Jones can make that even better by using data to keep players performing at their best he could on to a winner.
The future of all professional sports will become increasingly data driven. Wearables measuring things like sugar and endocrine markers to show how much players muscles are stressed, how they are performing and their work rates will become common place. If a player is running less hard than in training – questions will no doubt be asked to ensure that they improve on the pitch.
I can see it extending to the world of work. I’ve heard problems in one investment bank where HR were monitoring banker’s calls (which are all now recorded) via Apps on their work mobile phones to measure productivity. Given the number of us still spending a couple of days working from home, how long before we’re given a wearable smart-watch which checks where we are in relation to our computer, and the pace were punching keys?
This year’s flu jab is a b*st*rd.
I got mine (together with a Covid Booster and a pneumonia shot) on Saturday and within hours came down with massive pain at the jab sites in both arms, general aches over my whole body, a splitting headache and stomach “problems”. Random? I don’t think so.. Kind of wrecked the weekend – and I’m still hurting this morning.
Back to the real world
God and economist were arguing about who came first – Religion or Economics?
God make his killer point… “before me there was nothing but chaos!”.
The economist simply said: “I win.”
If you were to put 8 leading financial economists in a room and ask for a single consensus view on where markets are headed – I can guarantee at least 15 different outlooks. The reason for that is the global economy and the way markets behave is just so complex – and every time you think you’ve cracked it, something else you missed will suddenly rise to the surface that needs to be built into the model. The wider the Macro focus, the less clear the picture gets.
You can see just how diverse the range of outlooks the market can draw from the same data by looking at the likelihood of a US recession in the next 12 months. 2% of economists reckon its 100% nailed on, by 25% think its less than 50% – the average is a 75% chance of recession in the next 12 months.
Me? I reckon it all depends on what happens next… As facts change, change your view.
One of the big issues currently is the dollar. Is it set to continue its recent downward path, or could we see a further bought of strength. The market seems to be saying further declines are likely as the US Federal Reserve looks set to slow the pace of interest rises. (Although I would caution one good set of US inflation numbers is not a trend!) The conventional market wisdom response to a weakening dollar would be to sell US$ assets and buy Euros, Sterling or Yen… Maybe… Or maybe not. Maybe there are other places, more growth orientated, to put money into?
There are many ways to approach the problem of predicting economic and market outlooks. You can look at charts while ripping the entrails out of small animals to discern where the squiggly lines go next. You can weight support and resistance levels with magic numbers invented by an Italian poet from the 15th Century. Or you can look at everything, try to figure it all out, and feel your brain explode because there is just so much data.
At some point in the near future, it might just get easier. Quantum computers – coming soon – will be able to analyse and figure exactly what it all means – swiftly aligning multiple data on markets into simple commands. But computers are only as good as the algos that drive their programming. Even the smartest intelligences on the planet struggle to understand the complexity of economic connections, but maybe Artificial Intelligences will be less susceptible to the biases that so often make economists blind to the downright obvious..
Or, there is the Blain way… look at the market, work out the general trend, make some woolly assumptions about what is likely in terms of upside and downside limits, stir the mix with some educated guesses factoring in the stupidity and gullibility of markets, and spice with factors most likely to change the mix. It’s an art form – it’s not science, although it probably should be. I suspect such seat-of-the-pants market intuition is on its way out… which means I really should have taken that coding course many years ago.
The factors to consider when trying to predict what happens next are correlated, co-dependent and tend to have all kinds of unintended consequences. These include:
- The high-level overlay of just how solid national economies are: the virtuous Sovereign trinity of Competent Politics, Stable Currency and Sustainable Bond Markets. How firmly these are in place will influence just how firm growth and recovery will be. Rank your choices accordingly.
- Then there is national resilience – how strongly can a national economy react to the exogenous shocks of recession, a collapse in consumer discretionary spending, an energy shock, a political decision to plunge into austerity politics, a political choice made to withdraw from its largest external market – like Brexit in the UK, or maybe the collapse of a key tier of an economy, like property markets in Asia or the Middle East. (Yep… what might that uncover…)
- Then we get into the business environment; the likelihood of a global recession, the outlook for inflation, how central banks will respond with interest rates hikes, and when they might pivot, the ongoing distortion effects of the strong dollar, energy prices, China reopening, and anything else in the macro sphere – including the effects of corruption on markets.
- And then you get into the details – like how the markets works, and factors such as tax, business and industrial strategies designed to create national advantage, and trade and law used to ensure others don’t get a head start, plus where we can and can’t do business. (A good example this morning – a factor I recently highlighted in the Porridge is the effect of Biden’s Inflation Reduction Act – whereby new US green subsidies are attracting European battery makers to move the businesses to the US! See “European industry pivots to US as Biden subsidy sends “dangerous signal”.)
- And finally, using that overlay (or a variation thereof) you can get into the nitty-gritty and start picking winners and losers in the investment universe, being careful not to get sucked into double-plus-bad-groupthink about the unimpeachable merits of hyped sectors like disruptive tech, but to focus on fundamentals like liquidity, profits, leverage and repayment prospects.
At that stage you can listen to the stories, the underlying narrative and go start constructing a portfolio. The above 5 bullet points basically define what it is we all do in the Financial world… Putting them all together is the hard part!
Try it, and you might just stumble into a perspective on what economies and thus markets are likely to do in coming months/years.
There are reasons to be cheerful about Global Growth: A weaker dollar, the fact COP27 was able to agree a watered-down statement (much to the satisfaction of the new axis of evil (Russia and Saudi), China’s reengagement and post covid-reopening (although some say this will remain seriously constrained by ongoing Covid), and the prospects lower energy costs will limit global inflation. On the other hand, there is no end to the Ukraine war in sight, Europe feels wired into a recession, and geopolitical tensions will remain high.
If you follow the logic, then I’m going to posit the following compare and contrast scenario:
USA: Recession will be very thin in the US where the economy is more resilient to energy prices (which are internalised), growth will be stimulated by a lower dollar, future resilience will be improved by subsidies to green energy abating effects of fossil decline, interest rates set to peak before imposing massive pain on corporates, and consumers buoyed by jobs market and moderating inflation. US stocks and corporate bonds look stronger.
UK: In contrast the UK will enter a period of stagflation followed by a deep lengthy recession as austerity bites, energy costs remain high, inflation remains stubbornly high despite consumer discretionary income plummeting, all subject to sterling weakness. National resilience will be battered as UK drops out of G10. Strikes and wage demands further batter economic confidence.
Play it accordingly!
Five Things To Read This Morning
BBerg China Stocks Slide as Covid Flareups Dent Optimism
FT UK Business leaders urge Sunak to seek better EU relations
FT Dollar tumbles from 20-year high as US inflation eases
WSJ US – Europe Trade Boom as Old Allies Draw Closer
Torygraph Chancellor to lose £40 bln as falling stocks and house prices hammer tax take
Out of time, and back to the day job!
Nice light stuff.
If you think the best of the best have been running countries for a few hundred years now. They have entirely failed monumentally. The future is very bleak for most. I stand back and will continue to watch the circus.
And the EU / Eurozone?
Probably less bleak than the UK. It faces substantial risks from energy and domestic political issues re debt, but collectively, they have the potential to grow – which is not a view shared by the entire market.
In the interest of encouraging everyone to get their jabs, I didn’t have a problem when I got my bivalent booster, nor did my partner. We both got our flu jab a few weeks prior,
Your issue may have been getting yours together with a Covid Booster and a pneumonia shot. That’s a lot to hit the body with all at once.
I suspect you had no choice given the issues with the NHS but I wanted to calm your queasy American readers.
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