Blain’s Morning Porridge – October 4th 2023: Spidey Senses a’Tingle – does something wicked this way come?
“When Black Friday comes, I’ll stand down by the door. And catch the grey men when they dive from the fourteenth floor.”
Who are we trying to fool? Rising bond yields, higher for longer rates, recession fears, crashing consumption, yet stocks believing earnings could still push them higher? Are we at risk of a realisation moment and a repeat of 1987 or maybe something worse?
Nobody can stop the tides. We know with certainty they go from high to low every 6 hours and 12.5 minutes. They are absolutely predictable, driven by the gravitational pull of the moon. Not so markets. They are driven by the changing moods and sentiment created by the complexity of the affairs of men. But sometimes even markets become blindingly obvious.
This morning my spidey-senses are all a’tingle.
Watching the bond sell-off, confidence cracking, reading colleagues and clients’ lack of conviction on stock market momentum, and this morning’s excellent John Authers’ “1987 And All That” Points of Return comment, makes me wonder if October is on course to be a shocker? October is often a shocking month for prices.
This morning the mood feels bleak. Stocks are having an existential crisis – it might be momentary, or maybe not. Bond yields rising on the expectation of higher for longer. The markets is concerned about debt quantum, currency stability and politics. Graphs showing rising interest rates can spell trouble for stocks (No Sh*t Sherlock award to anyone that ever spotted that before.)
I can’t help but reminisce. We have been here before.
Authers’ article points out similarities to 1987 and cites the number of market commentators that have spotted the connection.
In October 1987, I was young and exceptionally foolish. I’d just left my first incredibly lucky and well-paid job in investment banking to try my hand (and follow my heart) as a financial journalist – taking a massive pay-cut for the privilege. In my first weeks learning the ropes of putting a weekly bond market magazine together (then called Euroweek), we were hit first by the Great Storm of the 15th October, 1987, followed the Black Monday 19th October Market Crash.
It was…. extraordinary.
We’d sort of seen it coming – but no one really put the pieces together in time for it to make sense or predict what the market runes were (with hindsight) telling us. Global markets were new back then. “Big Bang” the previous year had attracted a host of new overseas players into London’s market, which was experiencing an extraordinary take-off, thriving as centre of the expanding Eurobond markets and global stock trading on the back of it.
What we never grasped was how suddenly a butterfly flapping its’ wings in Hong Kong could trigger a financial storm in Europe – in the newly connected global marketplace.
When the bubble burst in New York on the Friday, Asia and Europe were swamped on the Monday. Someone shouted “FIRE” in a very small and packed theatre. There were a host of reasons why it happened – US stocks attracting loads of global demand on the basis they could only go higher, a steady rise in bond yields, global investors using dimly understood hedging, options and early programme trading concepts, and the usual fog of investment decision making.
Today’s markets are far less exciting – financial players and participants are much more sober and considered, while the bureaucracy and market infrastructure of risk managers, quants and analysts, investment committees and other functionaries consider each and every penny of decision making – thus making it far less likely firms will be caught the wrong-side of chaotic market moves.. (Ahem…. US Readers: Blindingly obvious sarcasm alert!)
This morning I’m thinking “should I just flatten stocks in my equity pot, and wait to buy them back cheap apres le-deluge?”, but I am hesitating because I know there is so much money in the system thinking about playing the same game.. To my mind markets may be overvalued and due a sell-off, but that’s balanced by the numbers who think September’s weakness means stocks are oversold and due a bounce, which will come on robust corporate earnings on the back of the US economy’s resilience.
Decisions, decisions….
Others are looking at the likelihood global financial authorities, the Central Banks, will step in with massive liquidity injections to “stabilize” markets in the event of crisis, conscious another run on bonds and stocks could trigger all kinds of weakness across banks, thus an element of 2008 banking panic. Many of the younger investors I speak to still seem to believe the tooth fairy and the Fed work for the same man. I can’t help but wonder what these folk are smoking.
I wonder if the current economic picture of a robust, resilient US economy (which other governments can only envy) isn’t a bit of a myth? The data suggests the bulk of US consumers have burnt through their pandemic savings, are struggling with credit card and auto-debt, face the burden of renewed student loan payments, and are increasingly in despair over the broken political system. That does not sound like an economy on the brink of another consumer led boom in corporate earnings. That sounds more like the lagging effects of the rise in rates and inflation is now being felt in consumption – and are likely to get worse!
Brace, brace, brace….
(As for the idea the AI revolution means we’ve got nothing to worry about because AI will create such a massive boost in earnings and margin improvements – NO IT WONT. (More on that later this week..))
The reality is a still very, very imperfect global economy with one part of it, the USofA, massively and extraordinarily positive while China and Europe are looking decidedly depressed. The problem is the US is still euphoric – and if that bubble in the affairs of men pops.. then all bets off.
That said, remember: things are never as bad as we fear, but seldom as good as we hope..
Five Things to Read This Morning
WSJ Bond Selloff Threatens Hopes for Economic Soft Landing
Project Syndicate Ending the UK’s Permanent Silly Season
BBerg Global Bond Rout Upending Markets Shows No Signs of Abating
FT Now what? Kevin McCarthy’s historic downfall stuns Washington
Guardian Congratulations Rishi: a party so dreadful Nigel Farage turned it down
Out of time, back to the day job and massively out of time..
Bill Blain
Strategist, Shard Capital
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[…] his latest Morning Porridge note (highly recommended, by the way), Blain […]
Welcome back Bill,
I too remember 1987, I was at a speaking at a conference in Silicon Valley, didn’t know the market had tanked till I called my broker. She was not panicky but wondering if her firm was still solvent, it was. The next day at breakfast with the masters of the universe the market had recovered somewhat and they were unfazed. As you know the market soon recovered without the monetary heroics that are common today.
Back to the present, here in the USofA only the Magnificent Seven have been unaffected by the actions of the Fed and our elected “leaders” in Washington. Come the deluge it’s likely the Magnificent Seven will become the Seven Dwarfs but the majority of the market will have already had its major trauma.
In my humble opinion it’s too late to sell equities, but luckily I am 80% in US Treasury Bill ladders.
What will be the tipping point? To paraphrase Bismarck: One day the great market reckoning will come out of some damned foolish thing in the Washington.”