Blain’s Morning Porridge June 4^th 2024: The Way We Live Now is full of bluff and bluster undermining markets and economies.

“It was a part of the charm of all dealings with this great man that no ready money seemed ever to be necessary for anything.” 

The figures dominating the news and market flow are Nigel Farage, Donald Trump and Roaring Kitty? Where did it all go wrong? These “players” are overturning all the rules. Can markets survive when the fundamentals around them are undermined to such a dramatic extent?

I reckon the £500 I bet on Nigel Farage leading the Tories at the next election is looking better and better. To save the Conservatives Farage first has to destroy them…

Meanwhile, back on Planet Markets…

At the end of the summer (and it’s not entirely clear if we’re actually going to get one this year in the UK), one of the most annoying things is angry wasps. I know about wasps because they terrify me. Yet, they are among the most useful social animals. For most of their short-year they stay well away from humans, policing pests and playing an important role in pollination. But come September they start buzzing round picnics looking for anything to feed upon, and drunk on rotting fruit they sting and annoy with apparent abandon.

The reason for the sudden change in wasp behaviour is the breakdown of the nest (called a byke.) The queen will have died, and the rules by which wasps live and work go with her. In a few days the nest will be abandoned, the last larvae consumed by their hungry older sisters, and only the new young queens will survive by hiding somewhere safe to see out the winter and build a new byke society the next year.

There would seem to be some parallels between the collapse of a byke and the way humanity is headed… We live in a new era of bluff and bluster.

Wasps thrive because of their society’s rules – right up to the moment the rules break down and society collapses. In the last few years some very clever, manipulative politicians have learnt that breaking the conventions and flaunting the rules gets them the most media time – and that for populists there is no such thing as bad publicity. Trump and Farage are masters of the new shock politics – true disruptors that leave well-meaning, serious politicians flolloping ineffectually in their wake. We think that makes the convential player bad politicians – despite the fact they seek to remain honest.

Trump is a particular genius for disruption. He has a simple electoral strategy – double up the bristle on every threat.

• You lost the election? No I didn’t. I won, they cheated!
• You triggered an insurrection? No I didn’t, these were peaceful patriots!
• They were intent on killing your vice-president? No, they were Democrat agent provocateurs!
• You broke the law? No, I didn’t, I was the victim of a political inspired fake prosecution.
• You have multiple stronger cases still against you? No I do not, I am the victim and the other guys are all going to go to jail…

You cannot argue with an angry wasp. In the vacuum that American politics has become… no one can hear the individual scream… After a while we stop listening to the background whine.

Markets would seem to be headed the same way. Rules would seem to be becoming a very notional concept. Rules apply to some, but not to others. Just as politics are now changed utterly, there will inevitably be consequences. Both Farage and Trump come from business and are well aware of the financial markets. I wonder if it’s just possible they learned the confidence game by watching the great financial bluffers?

If I were to loudly announce a series of trades, ask for firm bids, but did not execute or told the market I did, in an attempt to deliberately mislead other investors – aka “The Market” – I would be in hauled into the courts, banned for multiple market manipulations and the key to my cell door would be thrown away.

Yet, when Keith Gill deliberately flashed a screen shot of his “positions” in stock and calls on a Reddit Board on Sunday evening, he triggered the desired reaction – a massive, almost doubling of the target stock Monday morning. No one is entirely sure Gill actually owned the stock or calls – his post is unverified.

Gill is better known as Roaring Kitty, (or DeepF******Value), and the stock is GameStop. The WSJ says E*Trade is about to ban him from its trading platform because he is undermining its credibility. He is simply the best known Meme-Stock influencer. Just like disruptive politicians they succeed by turning convention on its head. Yet, Gill is not the trading ingénue he pretends to be – he worked for Mass Mutual and knows how markets work.

GameStop, which trades video games, is an entirely no-hope stock utterly no-one fundamentally believes in, yet it has risen 150% since the beginning of May, despite its sales crashing 20%, a collapse in earnings, and a share-sale into the teeth of the against-the-logic meme-stock buyers. I doubt any meme-stock follower has bothered to learn much about the firm – their simple agenda is to go long whatever the professional market might go short.

Gill has made off like a bandit on the Kill-the-Shorts strategy. He presents himself as a financial insurgent – a financial populist if you will – attacking the evil hedge-fund financiers that have undone ‘Merica. I bet he will find it convenient to blame George Soros at some point. It is so appealing to his followers because they are the ones who feel the American dream and the wealth of the top 5% has utterly passed them by. It’s a get-rich scheme presented as financial revolution where the disposed and poor will take their share. It never ends that way – new king same as the old king.

Gill has reach. He has influence – one he deliberately and openly uses to undermine the very underminable confidence of financial markets. By amplifying his following on Reddit and other socials, he’s turned his strategy of investing in worthless stocks into 10s of millions of personal wealth, according to Mashable.

No so great if you are a short-seller. This morning Bloomberg highlights short interest is now at its lowest level in decades. Legendary short-seller, Jim Chandos, has shuttered his fund and become a family office. Yet is the Short-sellers who have first spotted the inconsistencies in the firms that fail on the back of unsustainable lies from Enron, Wirecard and many, many more. (There are also technical reasons shorting stocks is a more difficult market strategy.) Short-sellers play a critical role in markets exposing their flaws.

While you can predict the likelihood of a company’s success or default, you can’t predict the herd behaviour of crowds. It doesn’t help that Short-Sellers, because they are pessimists in the overwhelming optimistic stock-picker universe, are generally disliked by their fellows and regulators. It often happens – those who are smarter and cleverer are dished by their more foolish contemporaries.

Long term markets depend on confidence in buyers, sellers and belief in the facts presented by companies and firms. There have always been shysters who profit by exploiting and disregarding the niceties of such conventions – when they are caught (and one wonders how many are not) we all shake our head in shock, horror and disgust, forgetting how we enable it.

Perhaps the greatest literary financial villain of all time is Antony Trollope’s Augustus Melmotte in The Way We Live Now – he is as dodgy as they come, lies to all and sundry about his power and wealth, and bullies and cajoles those who follow the “rules” into facilitating and empowering his success. He arbitrages convention ruthlessly. He is a man who understands how to leverage his way to success through lies, mistruths and his contempt for others.

Melmotte has no compunction on defaulting on debts and loans, and regards public companies as his personal piggy bank. “He extracted management fees from companies he was involved with, while transferring his personal debts to companies he controlled..” Oops, sorry… my bad. The above quote was about Donald Trump as described by US journalist Matt Yglesias, who went on to add: “As the people of Atlantic City know better than anyone else… Donald Trump cannot get the job done for American Workers.”

Out of time and back to the day job…

Bill Blain

Author of The Morning Porridge

Wind Shift Capital

www.windshift.capital