Blain’s Morning Porridge May 28^th 2024: Climate Change, PE Ratios and the Yawn Election

“There seems to be something wrong with our bloody ships today..”

The weekend weather and more rain on the way may be a precursor to real economic consequences approaching. The sustained rise in mean adjusted P/E ratios is likely a factor of distortion – will the market notice? And the UK election. Yawn… What will Rishi say next?

A bit of a mixed bag for Porridge Readers this morning as I recover from the long weekend and our friends wonderful barbeque last night.. While I thank Jennie and Tim for the marvellous hospitality, it’s possible that very bad-man Ian “the-old-man-of-the sea” led me astray causing me to break the primary directive about respecting “school nights”…. Ouch…

The UK’s 2 May “Bank” holidays are done and dusted… no more long weekends to sit and wait for it to stop raining till late August. We thought we had a good day in prospect on Saturday, but suddenly it clouded over and the wind turned Northerly – the temperature tumbled dramatically in moments, and then the rains came. I was genuinely worried for the folk who had been swimming, paddle-boarding and sailing on the river.

There is definitely something wrong with our weather – the succession of storms rolling in from the superheated Atlantic shows no sign of stopping. It’s fuelled by the warmer oceans – warm water contains more energy driving the wind and releasing more water vapour into the atmosphere. Sodden fields mean a potato famine is coming – Nooooooo! – food prices will rise. It’s happening around the globe.

Oceans are warming. For many the result will be drought and famine, for others it’s going to get wetter and stormier. If you don’t believe it, check out the damage “Kitty Cat” storms are doing to the US insurance sector. Unlike the super-catastrophic (super-cat) storms and natural (nat-cat) events like fire-storms and floods that get the media attention, Kitty-Cats are smaller, but no less devasting climate instability events, like a small, unexpected storm ripping up a town once thought to be outside “Tornado Alley”. These are a growing threat to insurance companies, and their customers who are seeing premiums rise dramatically. This is a link to Guardian article.

On to markets….

One of the best writers on markets is Robert Armstrong, US Financial Commentator for the FT. His daily unhedged note is always a rewarding read. This morning he points out Schiller’s cyclically adjusted PE ratio (the S&P 500’s price divided by its 10-year earnings) was mean-reverting at 15 from the 1880s to 1990s. Since 1995 it’s nearly doubled, to a new mean of 28 – the graph shows its steadily risen from 2009.

Armstrong suggests the reason for the change may be inflation – low inflation over the new mean era of 1995-2022 was generally low, but he accepts that doesn’t stand up to the inflation spike triggered since 2022. The rest of the article explores various theories.

I suspect the reason is three-fold:

1) the market is highly concentrated in the largest stocks,

2) stock buybacks and private equity have dramatically reduced the float of outstanding stock, and

3) the distortion caused during the QE era of dramatically low interest rates has pushed up the ratio.

The article is well worth a read – find it here. The question is… shall we revert back to the long term mean… (crashing minor chords..)

The Yawn Election

Meanwhile, the fact I’ve admitted I read the Guardian does not mean I am a screaming leftie – although I do admit the reason I read the Torygraph first every morning is because “it’s important to understand exactly what the enemy is thinking…” (I will admit I voted for Boris in 2019 – and it’s something I will remain profoundly sorry for till my dying day.)

Let me make a promise to readers: I will only write about the UK election once per week – unless, of course, anything really interesting happens… which looks highly unlikely. However, a couple of things have occurred to me while watching the less than scintillating UK general election.

This UK election is shaping up to be remembered as the one Rishi Sunak lost. No one really remembers how John Major lost the 1997 election – what we remember is Tony Blair’s charisma, his landslide and how “Things can only get better”. Any party that has been in power through 4 elections is bound to suffer at the polls – that’s actually a sign of a healthy democracy – the impetus for change and give someone else a turn.

Take any 10 random UK voters and 8 of them will say something like… “they are all as bad as each other..” People are sick of politics, but they blame both parties. There seem to be very few die-hard supporters of either Labour or the Tories.. which is remarkable. One of these two parties (and the polls suggest it will be Labour) is going to making critical decisions over the next few years that could change the lives of UK citizens for better, or for the worse…..

There is a fashionable theory in history that we should teach children about the lives of common people, and the big figures from history don’t matter as much as the broader trends – which is absolute bollchocks. It’s the big figures, what they say and how they lead that influence the course of history. The two party leaders, Sir Keir Starmer or Rishi Sunak matter. One has unified his party, made it dull, boring and predictable, and will likely win. The other is hanging on by the skin of his teeth – and may only have called a July election because of the number of no-confidence letters arriving at the 1922 committee.

Sunak’s increasingly desperate policy on the hoof – such as the nonsense announcement of a half-thought-out plan for national service, and this morning’s naked bribery of Pensioners – where the Tories already have a majority of the vote – is achieving nothing. Meanwhile a letter from a coalition of leading UK businessmen, entreprenuers and personalities pointing out the economy is “beset by instability, stagnation and a lack of long-term focus” might have the election watching media-blob all excited, but will do little to excite the proverbial chap on the Clapham omnibus..

Politics is about balance. It is also about self-interest. If you promise one thing to one group you have to take it away from another. Giving already rich pensioners the scarce money the young were hoping for… isn’t a vote winner. It’s a vote concentrator. The success of national conscription in Sweden and Norway, where selection is a prestigious ticket to future success, is certainly worth investigating and planning, but not dropping as an electoral bombshell – and pissing off the generals.

Sunak’s game plan seems to be to deluge us with more and more announcements.. free beer tomorrow .. in the hope we might suddenly think “oh, wow, that’s brilliant” and forget the last 14 years of underperformance and government by chaos. Starmer is obeying the famous Napoleonic dictum: “never interrupt your enemy when he is making a mistake.”

Let me make clear.. I know more Tory MPs than I know Labour ones. All of them are great, concerned, and good people. My own MP Paul Holmes (Tory) is a top bloke. But the reality is simple. Workers in the UK are poorer today than they were in 2008. That is not true elsewhere across the G20. The UK needs to figure how to restore growth and prosperity, and make the country work again.

Tories had their chance. We need… Change.

Out of time and back to the day job…

Bill Blain

Author of The Morning Porridge

Wind Shift Capital

www.windshift.capital