Worry about consensus more than the inflation/deflation debate

Blain’s Morning Porridge 21st June 2021: Worry about consensus more than the inflation/deflation debate

“The right sort of people do not want apologies, and the wrong sort take a mean advantage of them.”

This morning: The inflation/deflation debate continues to roll thin summer markets, but the bigger issues are probably elsewhere. What’s happening to markets as they become increasingly consensus led, and focused more on compliance than sentiment?

We have another interesting week’s play here in markets coming up. Stocks are down, and last week the US 10-year benchmark hit 1.6%. This week its back down to 1.4% – rallying despite Fed Hed Jerome Powell clearly saying rates will eventually rise! What is going on? Stocks are correcting, but bonds are apparently taking the other side of that bet, figuring normalisation is still a long way in the future, and the inflationary outlook could well stall, prove overblown or even benign. There is a lot of Fed watching and consideration of rates to be done over the summer….

It all feels a bit hollow and confused… So will it be another week of fretting about inflation vs deflation, growth versus stagflation, or will we find something else to panic about? Aside from the inflation scurries, markets are thin. Today is Midsummer but the weather suggests is October already – the reality is, despite the rain, summer slowdown is here already.

As I will comment below, there is probably more to worry about in markets – in terms of diversification of what the noise all means… but first..

… In the absence of any real news, I’m wondering about all the headlines in the UK papers as very, very busy political writers cook up all kinds of stories about dissent in the top levels of government.. how Boris is firing off all kind of spending promises without asking Rishi how much is left in the piggy bank – the answer being much less than absolutely nothing. I loved the comment about Boris’ Royal Yacht looking like an overblown 1950’s fishing trawler… if it ever gets built I shall swim naked around it… (Please someone check there are no Japanese whaling fleets over the horizon in the unlikely event it ever happens….)

The bottom line is the UK government has issued loads of debt to pay for pandemic and recovery – and that is not a reason to panic. So has everyone else. Last week the US Fed served notice that rates will start to normalise, but slowly. The days of 5-point interest rate hikes are well gone. There are really only three things to worry about, which I will skip though with little regard to the deep angst they all create:

• Inflation – inflation is bad, its painful, it has consequences, but it can be lived with and even has positive effects like devaluing debt – making it easier to pay off.
• Interest rates – normalising rates will have painful consequences – for overlevered Zombie companies and heavily indebted individuals, but will also correct many of the negative behaviours artificially low rates had in terms of stifling economic activity, embedding dinosaur companies in the economic niches, focusing investment on unproductive aspects like buy-backs.. Normalised interest rates will boost real investment, real jobs and real growth – the last 10years of low rates has seen growth only in the value of notional financial assets!
• Debt – is the world poised on the edge of a sovereign debt crisis due to the pandemic spending? Nope. Everyone has been doing it. Nations with financial sovereignty can borrow as much as they wish. The issue in paying it back is confidence in their currency – if they can retain that, then debt is not an issue. Nations that don’t have financial sovereignty, that have borrowed in other currencies… they are a credit problem. What about Europe? Euro members have no financial sovereignty – the game there is simple – will the Euro hold together…

All the above points are fairly glib – but, to be honest, that’s all the market needs to know.. The Earth will not stop turning because of inflation, there will be opportunities, and while normalisation will be painful.. its necessary. As I read through the weekend press, the amount of End of the World Tosh was really quite extraordinary… get over it…

For today’s markets much more important is what’s happening out in the real world..

That includes geo-politics, where the headline in the FT says it all – Angela Merkel’s heir apparent, Armin Laschet has rejected Joe Biden’s pushback and is warning against a new Cold War with China. He’s not daft – he understands clearly Germany’s position in Europe, and Europe’s position as the 3^rd ranked player in a 2 player game of global trade domination. Laschet is quoted in the FT: “China is a competitor and a systemic rival, it has a different model of society, but its also a partner, particularly in things like fighting climate change.”

Meanwhile….  Things to really worry about….

Instead of worrying about China, if you would rather start this week angry, then let me suggest an article in the New York times on Amazon. Read it and wonder. “The Amazon that Customers Don’t See.”

It made me quite angry – I am thinking of dumping my Amazon stock is a fit of virtue-signalling pique…. But what good did that ever do? Instead… I’m highlighting the article here, and hope readers will do the same. I’m thinking about how Amazon has had dramatic consequences – for every job it’s created, how many has it stifled on highstreets? Perhaps it was inevitable – but did it have to be this way?

To question the validity of Amazon’s model – or the fact I hold stock in many other “tech” giants that are reinventing society without necessarily making society better, but have made the rich richer is forbidden. To do so would shake the fundamentals of our markets to the core… Fortunately, nothing is off limits here in the Morning Porridge. I think it’s high time I got back into saboteur mode – which apparently derives from chucking a wooden shoe into the machine to stop it working.

There was a very interesting comment in Oliver Shah’s Sunday Times column: “No room left for personalities in the sanitised modern City”. It focused on the departure of yet another outspoken superstar investment manager – David Cumming from Aviva earlier this month. Apparently, the final straw was his “uneasy” comments on HSBC kowtowing to China – perversely I agree it’s an “uncomfortable” development, but reckon it will be positive for the stock. “Cumming’s willingness to speak out ultimately counted against him”, says the article. It quoted the City’s over-reliance on compliance and regulation.

I am not anywhere close to the same league as guys like Cumming, or any of the other top investment managers who’ve quietly been shown the door by major investment firms keen to show diversity to highlight fewer pale, stale and male senior figures, and that they embrace whatever ESG/Wokery is apparently important this particular week. I’m fortunately to work for a firm, Shard Capital which embraces and values diversity in all its many forms, which includes the right to think outside the box, express contrary opinions, and follow lines of thought outside the crowd. As a result – we get things done.

Yet, the City is changing…

My generation of Grumpy Old Men are being replaced by a new cohort of younger, perhaps more sensible, financiers. It strikes me they aren’t as welcoming of counter-thought. I’ve noticed rising pushback – being told I’m too negative on the behaviour of firms like Boeing, or being told how wrong I am not to see the potential of firms like Deliveroo. My negative comments on crypto-currencies and non-fungible-tokens only demonstrated my lack of knowledge – so I was told.

My rejection of the received wisdom that lithium batteries and Tesla are the answer to global warming has peeved a number of young fund managers who sincerely believe the Blessed Cathie Wood of ARKK has established new fundamental market truths. According to 2 emails unsubscribing from the Porridge, the reason I’ve criticised ARK is because Cathie Wood is a successful woman. I refute that – I think ARK played a blinder on zeitgeist investments, and now that game is over. Simple as.

Groupthink is never a way towards successful investment. I worry about the remorseless rise of conformity across finance; where everyone is expected to ascribe to received common values and embrace double-plus-good-virtue-signalling on articles of faith such as renewable energy, electric vehicles or whatever else is on the evangelist’s list for this week.

Diversity is critical. Diversity is as much the way we think as what we look like.

Five Things to Read This Morning

Torygraph – Why the furlough scheme may be doing more harm than good.

Sunday Times – Forget economics and politics – the West’s real problem is a moral one

FT – Could a growth setback be the surprise scenario for US Markets?

BBerg – US 30 Year Yield Drops Below 2% for First Time Since Feb!

WSJ – Facebook, Alphabet Keep Rising; others fade

Out of time, and back to the day job..

(NB – Porridge will be out Thursday/Friday this week – big sailing regatta looks much more fun than markets!)

Bill Blain

Shard Capital