Blain’s Morning Porridge: August 17 2020 – Unreal Summer Markets?

Blain’s Morning Porridge – August 17th 2020 – Unreal Summer Markets?

“The appearance of things changes according to our emotions…”

It feels very unusual and strange for US market’s to be hitting record highs in the middle of the summer – as happened last week. Typically, nothing much happens in August – certainly not markets capping the strongest market recovery rally in 87 years – despite the looming threat of the deepest recession in recorded history. Yet equity markets remain very much “Risk-On” and looking poised for further upside.

Something feels… very unreal about current market levels.

Today’s zero-return markets make for a curiously appealing upside argument to buy stocks – bonds can’t go any higher, gold produces no return, therefore stocks are the asset-class with most upside! More money will pile into stocks on the basis they can still rise! Its two forces at work: financial asset stagflation inflated further by rising bubble conditions. Although I’ve warned before that “This Time It’s Different” are the most dangerous 4 words in the market lexicon – for the moment it is, because central banks have said it is.

The record levels in stocks came on the back of Big Tech, (which kind of makes sense as I discussed last week in The Era of Debstolation), but also some gargantuan gains from “story” stocks – which largely make no sense at all. What’s more interesting is how last week’s wobble in Risk-Off assets: gold prices seem to have plateaued, and a minor rise in bond yields – has set a number of analysts claiming these are signals of “normalisaton”, and its time to pile yet more cash into stocks – basically trying to justify why stocks aren’t a bubble, but a considered market opportunity.

Take such advice with a pinch of salt. This is not over. There is much more Pandemic driven grief and pain to come. Yet, central banks simply can’t afford for the sentiment crisis a major stock market crash would create. They have no choice but to continue the illusion – keeping returns repressed and inflating financial assets to unsustainable levels.

Unsustainable means just that – but Central Banks can’t afford markets to pop now..

Therefore, I’d stick with an investment strategy that plays both to the promises of Central Bank “whatever it takes” market support, alongside building a clear Risk-Off base. (Basically – the strategy is to arbitrage Central Banks juicing markets while preparing your bunker for the market equivalent of nuclear winter…)

In the meantime… what happens next.

In terms of recession – does anyone really still think a V-shape is possible? There is plenty of economic data out there suggesting the recession outlook is not so bleak. Maybe jobs aren’t being lost as fast as feared, and maybe activity in the economy is picking up.. but in a very different global context.

Glancing through the weekend papers they were full of doom and gloom as more retail names give-up, chains collapse, and more jobs are lost. China may have recovered – but it seems to be stabilising at less than 90% of pre-Covid activity – perhaps reflecting labour issues and snapped supply/demand chains.

The stickiness of recovery in China is likely to be repeated elsewhere. Economies can’t regain full potential if a large number of working women are forced to remain at home because Bolshevik teachers refuse to work, and trains won’t carry full passenger loads. (I’m intending to come up to London some time in September – I confidently expect it will give me great material for an angry porridge rant.)

I suspect the concept of a “sticky” recovery – how the global economy recovers to some 90-95% capacity fairly quickly, but then struggles to get back the last 5% – is going to dominate discussion in coming months. I reckon its already happening in terms of redundant workers being permanently removed from the workforce.


There is an increasing ballyhoo about the US Election developing. The polls say Nice-But-Boring Joe is going to beat Trump, but the polls are reported by Trump hating Media. Biden isn’t attracting any strong views, but we know the 40% of American’s who do support Trump will happily follow him through the gates of the hot place.

Now we are hearing much muttering about the risks of Kayne West’s presidential campaign costing Biden enough votes to lose in the all important electoral college. And Trump’s electoral plan is to ramp up tension with China – which is really not market positive. Other horror stories examine the risks of a losing Trump refusing to leave the White House because he claims electoral fraud.

It’s noise – but it’s important noise as its likely to dominate the next 78 days…

More Meanwhile – back in The Shire.. 

Here in England, the mood feels like it is turning worse. It’s the middle of the summer holidays, and the weather is going to be absolutely pants (a succession of rain, gales, and more rain,) which means loads and loads of unhappy families who can’t go abroad because of quarantine volatility need someone to blame.

The net effect of England’s washout summer is rising deflection. On the back of the Pandemic missteps, the exam result farrago, and now summer holidays –blaming Boris and his band of incompetents is just too easy… harsh, very unfair, but that’s the way it works.

Compare and contrast to the Scots… who wisely send their kids go back to school in August. They are much happier – and not just because the English are unhappy. Two consecutive sunny days in Edinburgh when it was warm enough for the ice floes off North Berwick to melt is enough to make the whole Nation feel they’ve been blessed with a record summer…

No matter what the English government does.. the perception in Scotland is the Sassenach are getting it wrong. It’s been so bad everyone thinks Nicola Sturgeon is a relative political genius.  Long-term, it bodes very ill for the United Kingdom..

If you think the UK’s Brexit pains are the end of the story – think again. Relations with Europe will remain a pustulating sore, while trade deals remain tough, and a Scottish neverendum beckons.

Five Things Too Read This Morning

Garuniad – Who’s in the bigger hole when an ethical investor divests from BHP?

FT – US streaks ahead of Europe in Stock Market Recovery

BBerg – Japan Has Always Scraped By. Covid Will Make That Harder

BBerg – UK Economic Scars Could Be Deeper Than Bank of England Thinks

WSJ – Traders Brace for Haywire Markets Around Presidential Election

Out of time and back to the day job!

Bill Blain

Shard Capital