Blain’s Morning Porridge, May 3^rd 2024: A Brave New World of Higher Rates, Consequences and Iran.

“The evil that men do lives after them; the good is oft interred with their bones..”

It’s become clear this week the market outlook has changed utterly – higher rates are now the new normal, and that will have consequences on demand at a time when supply remains in flux. Meanwhile, global instability is rising. Markets and populations need to understand reality – while campuses tear themselves appart it is Iran driving the horror in the Middle East, but good luck explaining it to your Keffiyeh wearing kids.

Earlier this week I published my pitch on The Economic Consequences of The QE Era. The response has been overall favourable – most folk agreeing (which is worrying) and others adding factors I missed. The idea was to start a debate around the topic, and knock on the head the concept that ultra-low rates are good for the economy – they are good for financial asset prices, which is not the same thing as a strong sustainable economy! Please, please forward the article round your organisations, businesses, institutions, companies, and contact lists.

Meanwhile… back on planet real world… Time for a real hard look at the reality of the current market and figure out likely consequences:

• Rates are set to remain high – this is the new normal!

The Fed has said it. Other central banks get it. The market is beginning to understand – inflation is sticky, and supply and wage issues mean price-pressures are not going to go back into 2% hibernation mode any time soon. Economies remain… not quite robust, but not in free fall around current rates – but that is a balancing act on a very thin hi-wire in a gathering storm. Rates will remain normalised at current levels for the medium-term. Navigating markets is going to get more difficult.

• Higher rates will impact expectations: How will economies and markets react to the fact there is no lower-rate relief in sight?

Consumers have been holding off major spending decisions on the expectation lower rates will shortly reduce mortgage costs, drop the costs of servicing consumer debt and lower auto rates. These aren’t going to happen – and could thus further slow consumption. That’s bound to mean trouble in housing as more homeowners realise they are over-levered and can’t sell into a market where mortgages are long-term less affordable, or it might lead to more spending on existing home improvements. A house price correction could become inevitable. (In some nations that’s an unpalatable political disaster – which the Tories may cleverly/luckily dump on Labour here in the UK!)

Although home prices may fall, rentals should remain high because of housing shortages and unaffordability across the west. If that is a thesis you buy – I’m currently working on a deal via a Luxembourg Fund investing in a diversified portfolio of US rental properties, unlevered (!) producing dull, boring, predictable 8% plus returns – email me for details.

Corporates face a variation of related issues – they are likely to be battered on three fronts; the cost of debt servicing after decades leveraging up, constrained consumer spending hitting orders (demand) and critically, and supply issues (witness the hit global freight companies are taking from the Houthis in the Red Sea) as indications a new commodities super cycle will push resource prices higher, even as increasingly strong adverse weather effects are likely to hike agricultural commodities this year.

• Corporate Results – Buy Backs are not a sign of strength

Last night’s results from Apple were “interesting” and a sign of what may be coming in terms of strong vs weak companies. Apple’s strength may not be its products, but it’s cash pile.

The key thing is how much Apple will be spending on stock-buybacks – $120 bln and increasing its dividend by 4%, even as sales crashed (in China where, no surprise, the locals are buying local.)  There are stories Apple is set to raid Google to hire some AI visionaries and talent to work out how Apple should innovate AI into its product offering. However, the core reality is Apple is seeking to make itself look attractive by reducing the number of shares in circulation and keeping the stock price high, but can’t think of anything new or imaginative to invent and innovate with its enormous cash-pile to re-invigorate its tired middle-aged brand.

At 27 times earnings is Apple worth what it costs? Should be the question to ask of all stocks.

• The World is becoming an increasingly unstable place

Unstable is a bad thing for markets. Distraction is the name of the game.

Here in the UK all eyes will be on Premier Rishi Sunak Monday Morning after the full scale of last night’s local council election debacle are digested by Tory MPs – who look very likely to be on their way to the jobs centre within the next 8 months. Unless…. Unless.. hey, maybe if we give someone else a go.. the electorate will see how clever we are and keep us… When Penny Mordant says she doesn’t want to be a caretaker prime minister… who else is thinking her next line is “but for the party and nation I just happen to have this rather splendid dress ready to go see the King.”

 Of course… the problems of the UK, the fact Labour will inherit a basket-case economy, or Donald Trump going Mafiosi on jurors on his trial, reminding them to “be nice”, would be almost comic – if they did not so immediately affect our lives.

Far more significant for the future of Western Economies than hapless politicians will be the deep social divisions, fault lines and conflict being manufactured across the West by the machinations of Russia and Iraq – the deliberate destabilisation of the West to allow these bad-actor nations freedom of action while the World is conflicted and distracted.  China needs to consider carefully where it sits.

The conflict seen on US University Campus and the increasing hostility towards Jews show how Iran is winning it’s asymmetric warf – creating internal strife and division that 40 years of CIA undermining of the Ayatollahs failed to acheive.

Iran manufactured the destruction of Gaza, and choose their moment and opportunity well. They saw how vulnerable Netanyahu was to his own failings and his coalition partners, the perfect fall guy for their plans. They furnished and supplied Hamas, and encouraged the deliberate outrage, murder, rape and kidnapping of Israelis with the deliberate aim of inflaming a massive over-reaction by the Netanyahu government, and that Israeli’s would have little choice but to support it. They care not a jot for the hundreds of thousands of Palestinians they knew would suffer. The one thing they knew with absolute certainty was Israel would bomb Gaza flat. Israel has played right into the plan. And that the US would support Israel – a perfect opportunity to create internal disent through the medium of Palestinian suffering.

As college and university campuses across the West turn into mini-battlefields the Ayatollahs will be delighted. The deliberate human suffering Iran has inflicted on the peoples of the Middle East is what is truly abhorrent.  Iran’s war aim is simple: keep the Middle East fractured and hostile to maintain Iran’s influence – which would have been severely diminished if Saudi and Israel signed a peace treaty to bring prosperity and peace to the region. Had that happened a fair and just solution for a new Palestine state would have become inevitable.

The scenes of open conflict across many US universities, which are happening elsewhere across the West, demonstrate the fundamental weakness of free societies. We have the freedom to support the causes we believe in – even when wrong. It’s a strength the enemies of the West have ruthless exploited to create dissent and fracture already polarised societies.  Iran is delighted – America, the Great Satan, is tearing itself apart arguing over a War Iran deliberately created. Iran does not care about Palestine – they are Arabs (they are not) to be exploited.

When entitled American progressive students demand their universities slash contact with Israel, their anger should more properly be directed at Iran, a nation that has murdered young women for the heinous crime of wearing a headscarf incorrectly, hung protestors publically from cranes, and is run as a religious kleptocracy. But what the protestors in the West see, and are quite rightly moved by, is the horror in Gaza. Iran has successful deflected the truth of its internal division to build a narrative there is someone worse than them.. the Jews, the easy target for absolutists and Nazis for millennia.

The fact is the West remains a decent society, the fact that young people care so much about people they have so little in common with (for instance Queers for Palestine, protesting in the US this week, would find Hamas particularly unwelcoming of their support), is wonderfully positive, but their anger is misdirected. Yes, Israel should stop, but it can only do so when Hamas is removed as a threat.

It’s all a bit depressing. It’s the Long May-Day bank holiday weekend here in Blightly, and the forecast is rain…

Out of time.. and thinking about a Palestinian friend who once made the marvelous guesture of giving me a Koran. I pray to our common god for him, his family and people.

Bill Blain

Author of the Morning Porridge

Wind Shift Capital

www.windshift.capital