Blain’s Morning Porridge – June 12 2020: Worst day till next one!

Blain’s Morning Porridge – June 12th 2020 – Worst day till the next one.. 

“When Black Friday comes, I’ll stand by the door, and catch the grey men when they dive from the fourteenth floor.”

“The worst day since March!”  The commentariat is full of stuff like “markets got creamed”, a “new sell off to new lows is coming”, and “market froth blown away”. Whatever. Yesterday’s 6% market stumble on the back of Fed Chair Powell’s comments about economic and jobs weakness, and signs of rising virus infections across the US, triggered the biggest market dip in weeks.

Is it a buy the dip or run for the hills moment?

Across the US, the Robin Hood Army of retail investors and day traders will be licking their wounds. Gosh… who knew bankrupt companies are worth diddly squat? You have to giggle at Hertz trying to raise equity on the back of its surprise rally: “Hertz looks at the market an sees there is a group of irrational traders who are buying the stock, and seek to sell stock to these people,” said a US law professor. Hertz and their advisors don’t seem to have figured the nature of the current high volume, shift it quick, get quick day-trading mentality.

Meanwhile, market strategists are high-fiving themselves for correctly calling the market slide – as they have diligently done every day since the market bottomed on March 23rd. (For the record – the market has still risen 35% since its March nadir.)

If only we were as clever and possessing such clear foresight as the beloved leader. Donald Trump tweeted to remind us:

The Federal Reserve is wrong so often. I see the numbers also, and do MUCH better than they do. We will have a very good Third Quarter, a great Fourth Quarter, and one of the best ever years in 2021. We will also soon have a Vaccine and Therapeutics/Cure. WATCH!.”

Powell’s foolish mistake was to caution markets the US is going to face “an extended period where it will be difficult for many people to find work.”The blithering fool. If only he’d said – “ these are not the droids you are looking for.. There is nothing to worry about, we promise to keep giving investors free money so they will believe the economy is in great shape”.

The reality? 

The real world news is unremittingly bad. It’s is going to get worse. No one is paying much attention because the world is fixated on pulling down statues, virtue signalling, while politicians earnestly gaslight each other into supporting the unsupportable… Those who forget the past are doomed to repeat it. 

Check this morning’s news flow on the real economy – some random selections for you:

Another 1.5 million Americans went looking for jobs last week according the initial unemployment claims data.

The UK economy shrunk by 20.4% in April! As Rishi Sunak might say: “thats a severe impact on our economy.”

The US economy is in such great shape, Steven Mnuchin is planning a second round of stimulus cheques.

Infections in India now exceed the UK. Nations like Yemen have seen their health services overwhelmed.

Despite an improvement in the outlook, the WSJ monthly survey predicts a 5.9% decline in US GDP this year. (Unemployment will fall to 9.6% – which is a much bigger number than January 2020 at 3.6%, and just less than the 10% peak seen in 2009.)

US Households saw their net worth decline 5.6% in Q1, the fastest rate of decline since 1950s, and it will fall further in Q2.

UK Banks are pulling back on mortgage offers – house prices are falling.

The FT says over 100,000 UK jobs are on the line immediately – over one million may be lost by year end. Centrica, Johnson Matthey, Nissan and Bombardier have cut over 5000 jobs this week.

Yet… markets will probably not crash. 

We have reached a curious limbo in markets. For the last 10 years markets have been hopelessly dislocated by Central Bank interventions, NIRP and ZIRP, QE Infinity and regulatory blunder. The result of unlimited liquidity and central bank puts, means all the dosh pumped into markets remains invested in financial assets. We have seen massive financial asset inflation as a result.

Let me make up an illustration of the effect. Compare bond yields pre QE – around 5%, and today at 1%. If you ignore everything else… that means a bond returns 20% of what it did 10-years ago. Call that financial asset inflation.

It’s equally true in stocks. Investors have been forced out of bonds into stocks in search of returns. A stock that once cost $1 to yield 10%, now costs $10 and yields 1% – yet it make the same profits each year. You get the drift? Its financial asset inflation.

To get the same return from investments you made 10 years ago, you have to invest 10 times as much.. which is why most of us will never ever be able to retire. Dang!

We are now stuck in what my chum Bill Dinning of Waverton calls The New Stagflation – a stagnant economy and inflated financial asset prices. There is now so much liquidity in financial assets – much of sitting waiting to be put to work – that any opportunity to buy stocks cheap is going to be seized..

The only alternative is to actually put money to work in the real world – but as that slew of bad news above shows… who would want to take that risk???

Today’s lesson? 

How about the financial asset universe of stocks and bonds is completely overpriced and makes zero rational sense. But because the outlook for the real economy is so dismal, there is so much money waiting to buy any meaningful dip, and global central banks are prepared to backstop everything via QE Infinity…. Buy Financial Assets!

Oh dear… I need a break…

Five things to read this morning

BBerg – Bond Issuers are Living in the Land of Milk and Honey

BBerg – Goldman Cuts Tesla and Makes GM a Buy on Better Sales Outlook

Torygraph – Why electric truck maker Nikola is worth $31 bln – more than Ford, despite never selling a vehicle

FT – Myths can make “smart money” act dumb

WSJ – A scramble for Gold is Redrawing the Map of the Market

Out of time, back to the day job, and have a great weekend…

Bill Blain 

Shard Capital