Blain’s Morning Porridge 5^th August 2024 – Markets on the edge of a cliff.. Next step?

“Curiously, the only thing that went through the mind of the bowl of petunias, as it fell, was, “Oh no, not again!” 

This is not just about recession or tech stock valuations – it’s a wider everything, including the kitchen-sink, confidence slough of market instability and uncertainty that’l hurt. Next few days might get interesting… Move along now… nothing to see here…

Bill’s Pub to Club Swim:

Let me remind readers my Bill Blain’s Pub to Club Swim on September 14^th Charity event is in support of Wessex Heartbeat, the cardiac care charity.. You don’t have to anything except click the link – here – and make a donation. Without Heartbeat, well, you would not be reading the Morning Porridge this morning.

“Houston… we have a problem…”

I got up early this morning to watch and listen. Tokyo has cratered as the rising yen swamped corporates, even as the reverberations of last week’s US market close hit hard. As I write the 10-year US Bond just broke below 3.8%. Markets are opening down as the sun rises on what looks likely to be an interesting week’s play in the Global Markets. Last week’s selloff continues. If time allows, I may post a second comment later today….

Many market participants think the selloff is due to rising fears of US recession – witness the decline in payrolls last week, or a rescaling of the AI upside triggered by Tech stock numbers and spending. Nope. I suspect there are more factors at work here than are dreamt of in our simplistic market philosophies. Already there are host of accusatory posting’s blaming the Fed for acting too late to soft-land the economy, claiming they’ve crashed the economy.

It is not the Fed you should worry about….

Warren Buffet’s Berkshire Hathaway sold down half its positions in Apple in Q2 and in Bank of America in July (after a near doubling in price)? What does that tell you? What did he buy instead? Nothing. Buffet is holding $275 bln cash because he doesn’t currently see anything priced cheap to its’ relative risk that will make a decent return. That is a fundamental possibility to consider: stocks are over-expensive, having been priced for perfection in a very imperfect market.

Me? Long gold.

This is not new. For the last decade plus the FOMO driven “stocks have risen because they are rising” mindset has been the biggest momentum driver in markets – an upside cattle-prod combining fervid speculation with the ongoing distortions of mispriced money, artificially low interest rates, QE and expensive govt bonds, the financialisation of businesses, in a market seduced by a stream of fantabulous new, new things and greater than normal unbounded greed.

Old bond dogs like me found ourselves increasingly lonely we warned market participants that low rates were not normal, and central banks weren’t there to bail out markets… If this is a crash, it will reinstall a modicum of common sense to markets…

Last week I wrote about the “Judder Moment” I, and many others, felt in tech stocks and global market confidence – sure enough there has just been a massive stock wobble. This morning’s lower opens will leave many market participants in fear the downside will deepen this coming week. (It must be serious because this morning dozens of market pundits are writing about what a wonderful buying opportunity a stock market correction would represents! Really…? If you think so – in thin, summer markets they may be right – in the short-term. Wait and see – but try to look beyond next week.)

Like the bowl of petunias from HHGTTG, I know well what crisis feels like – I’ve traded through a number of them. It feels like this one is still “incubating”, and may yet not hatch. But, if it does then it will probably feel like “the end of the world as we know it”.. Guess what… the survivors will be back at their desks the next morning: “Things are never as bad as you fear, but seldom as good as we hope.”

(My own guess is a mid-summer market correction or stock tumble won’t be deep enough to be a real crash; an event which refocuses the fundamental reality of markets – but it may prove a harbinger of rising instability into and thru September/October…)

There are host of factors that lead me to conclude there are crises ahead:

Sunday evening I got a phone call from a jubilant US Republican: telling me a massive stock market dump this week, ahead of the election, will confirm the damage Joe Biden and the Democrats have done to the US economy. Really? The US economy has been a top global performer and strong for the last 4 years – largely because what always drives growth is not interest rates, or the success of central banks driving down inflation, but the degree of confidence businesses, entrepreneurs and markets have in the economy and their businesses within it. (Sure, that confidence is also driven by the market environment – which includes rates (the price of money) and inflation (the cost of money), currency stability, and political competence.)

Confidence is the critical thing.

There is the growing sense the US economy is finally slowing. The rising unemployment rate of 4.3% confirms the trend has flipped from full employment towards a slowing economy – hardly a surprise given the pace of the Fed’s interest rate hikes since 2022. I’ve also written a number of times how central banks easing rates could be a sell trigger for markets. Essentially easing would confirm they has successfully calmed inflationary pressures by tipping economies into slowdown. Sure enough, this wobble took hold after the Bank of England pre-empted the Fed with a cut last week!

And, there are very valid concerns about the real value multiplier AI brings to the global economy. I have absolutely no doubt AI will change the world – the question is when and at what cost. Let’s be honest about AI – it is basically next generation data-processing rather than real intelligence. While data and how to process it is absolutely the road to riches… it is not intelligence. (I must cite my chum Lucette Yvernault of Fidelity who reminded me over the weekend: Everyone wants AI. Remember how we all carried the tremendously sophisticated HP12c Scientific Calculators as young bankers – but most people never used more than the plus or minus buttons! AI is likely much the same…)

The massive amounts of cash being frittered away/invested wisely by the MegaTechs on chips, data-centres and other “stuff”, will remain rounding corrections on their decades of profitability. However, if suddenly their spending spiggots are shut down – that can have catastrophic consequences on the corporate-life cycle of their suppliers and acquisition targets.

The Venture Capital/Private Equity ecosystem has stalled. Normally, VCs invest in lots of companies expecting 8% will succeed and make money as they are sold or IPO. The financial current that propels firms from startup to sale was slowed by higher interest rates hitting M&A and IPO appetite. Suddenly, real interest rates imposed real costs on start-ups who previously thought money was free. It isn’t, and when it suddenly charges more, the result is illiquidity as the circulation of start-up cash has stalled. It needs confidence to restart. It’s also a problem in private credit – direct lenders may be secured on the most wonderful new data-centres or other real assets, but these are lumpy and illiquid, and impossible to shift if they were to tumble out of favour.

Illiquidity and high leverage is never a good look…

Meanwhile, changing Domestic and Geopolitical Dynamics – which are closely linked to the strength of the economy – are under pressure.

For decades the degree of confidence in US stocks, tech and the economy has been extraordinary –  you would frankly have been daft to invest elsewhere. Investors were confident in the success of American capitalism, the strength of American firms – despite their many wobbles and foolishnesses -with a strong sense Pax-Americana, as the global hegemon and world-policeman, would continue to guide and impose stability on the global economy.

However, instability is now rife. There is serious chat about de-dollarisation and the credit-quality of Treasury bonds. The way in which politics has degenerated into factionalism, populism and polarisation has clearly weakened the West. The Capitol insurrection and two old men squabbling for the White House keys not only diminished the confidence of most US voters in their own system, but motivated the enemies of the west to start pushing the buttons to further destabilise the West further via the global economy – confident of America’s decline.

Domestic politics is one issue. Just a few weeks ago the question serious analysts and the common folk were asking: “Are Biden and Trump really the only choices.” Now we know they are not. There are rumours Trump realises it – and that he may even stand down himself before Nov 4th, declaring he’s already won by forcing Biden to step aside. Personally I doubt it… the man may be lucky and/or a political genius, but it’s not in his character (and stepping down means he won’t get a chance to pardon himself.)

Before Trump supporters tell me, yet again, how wonderful he is… ask yourself the most dangerous question in politics: “Doesn’t he look tired?”

Now we are shaping up for a very, very close election which still leaves many Americans facing a devil or the deep blue sea choice. There are Never Trump Republicans, but equally Democrat liberals who fear a Kamala Harris victory will only widen the divisions and polarisation of the US – and will lead then further down a path towards a woke, high-spending nanny/socialist state of the kind that has beggared Europe. The possibility a close election will trigger election-result denial and raise the spectre of civil unrest is very real.

Meanwhile, as Isreal prepares to go outward bound again, Geopolitical Uncertainty has a sniff of “deliberate” about it. Iran’s machinations in the Middle East threaten another energy shock and rift, while Russia, funded and supplied by China threatens Europe. But we’ve known all that for a long-time. What is it we’re missing…. ?

Markets seldom crash on the known unknowns.. it’s the No-See-Ums that sink them. The moment I spot it… I’ll let you know.. I am watching the asset/investment management sector…. (menacing music filters through the glade….)

As a result of an unstable market, uncertain politics, misaligned geo-politics through a period of hegemonic shift, all combine to nurture a growing sense of market unease.. which is why this is going to be….. an interesting week. Hard hats to the ready.

Bill Blain

CEO and Founder,

Wind Shift Capital

www.windshift.capital

Blain’s Pub to Club Swim.