Blain’s Morning Porridge – September 1st 2020: Markets on Skunk…
“Ritalin is a class 2 addictive drug that helps hyperactive children become compliant. It works. At what cost?”
In a normal year, September 1st would mark the opening of the Autumn financial season. Summer would quickly become a distant memory as activity in financial markets steps up a couple of notches, marked by a deluge of new debt, a surge in IPOs, and a wave of M&A activity. It would be a three-month dash into December – the best time to make your bonus targets – before we all traditionally downed tools for a month of partying in December.
It’s different this year.
Whatever the Citigroup panic/euphoria model says about this being the longest bull-sentiment run this millennia, I can’t recall ever feeling this level of disbelief in prices. As we argued about getting kids back to school and wondered when we’re going to get back to the office, August 2020 proved to be the best month for markets in nearly 40 years.
· If you aren’t concerned by the mismatch between where how the pandemic is stifling economic activity and the surging levels of global stocks – then we need to talk.
· If the level of bubblicious markets, burgeoning company debt or the sustainability of economic recovery in the face of growing corporate insolvency doesn’t cause you pangs of worry – then I really need to know the name of your pharmaceutical supplier.
· If exploding government debt and the consequences of soon-to-end furloughs doesn’t jolt you, then you need to dig yourself out of whatever complacent hole you’re hiding in.
· If you believe governments in the UK, Europe and USA have the competency to see through the pandemic and sustained recovery – then please share what I’m missing.
Yet, I am not warning of imminent market meltdown or catastrophe – although all the numbers scream it should be happening. Unlimited liquidity means it’s not – apparently – an issue.
That said, a number of chartists are warning over signs and symbols the current consensus is vulnerable. When the five largest tech firms are 20% of the total market, and have a larger market cap than the whole EU, you have to wonder. Apple is worth more than the whole FTSE! When Tesla is up nearly 500% this year and 15% this week after stock split… I don’t need to say more.
The world has clearly changed.
There are positive stories out there; how the pandemic accelerated windfall adoption and profits for new services and firms like Zoom as demand for their video conferencing went through the roof. (Windfalls are sometimes just windfalls; when this is over how much business will Zoom retain?)
Change is not all positive – for every billion consumers spent on the internet, another High-street name went to the wall costing jobs, lease defaults and multiplier waves of pain. For every positive equity story out there, there are half-a-dozen other firms that are skating on thinner ice, less solvent, and causing their banks to hike their Non-Performing Loan Provisions.
The degree to which banks have already battened down their lending ahead of massive expected credit event losses is in direct contradiction to the investment banks telling us to buy high-yield junk debt.
For the next few months the economic news is likely to get bleaker and bleaker as more companies let furloughed staff go and scale back. Taxes are likely to rise – and unrest widen.
Forget the economy or the virus, but the US election looking likely to be a battle on Law and Order. Trump has gone all in –justifying an out of town vigilante killing two protestors as “defending himself”. (How would you feel if you kids were on a protest and got shot by an angry young proto-fascist who believes the US president just declared open-season on anyone objecting to bad law enforcement?)
None of the disconnect between market prices and the real world is new. Its been underway since 2008. We’ve been waiting for a correction for the last decade. Analysts and strategists like myself have repeatedly warning how frothy valuations have become, how mispriced risk is. Yes, we’ve predicted 10 of the last 2 market crashes – but we’re thankful to Central Banks saving us each time. We’ve underestimated just how happy markets are to take free money from the Central Bankers.
And today, it’s not just the professional market that’s taking central bank liquidity largesse in its stride. Some 6 million Americans are now actively trading through sites like RobinHood. There is a great article on BBerg this morning – Robinhood Rise Brings Setbacks… It just seems too obvious how it’s going to end – badly. It so obvious we’re oblivious to it.
Such is the way of blindingly obvious market corrections. They are just too big to see.
They key issue is the current overriding central banking imperative: avoiding further destabilisation, which is most likely in the wake of an over-heated market unravelling. After spending so much on rescuing the world after the 2008 Lehman moment and subsequent global financial crisis through long-term monetary experimentation specifically focused on maintaining the semblance of market stability, they will do anything to nip any new crisis at source.
The result is we are all now addicted to QE Infinity, the Umpty Candy of the modern financial age, the Ritalin for easily distracted traders.
How might it unravel?
First, I don’t expect a complete collapse. Not at all. There is much positive going on in terms of new energy, new tech and solid businesses. There is a pandemic crisis in some sectors – like tourism and aerospace. A correction which takes out a large degree of the over-saturation of excess liquidity into the market may be a good thing (except for the 4 million RobinHood users likely to be hosed.)
Recovery may be slower than we saw from March. The number of zombie insolvent companies on the verge of default is huge and a market shock combined with bank’s holding back lending due to the NPL threat, could trigger a credit-event shock. As always, a correction will throw up some great opportunities – I’ll be looking for cheap bank paper! I was very happy to pick up Tech in March and April. The question is when to sell?
What might trigger a correction? Something small and unnoticed – which maybe sets off a sell signal within a High Frequency Algorithm, triggering a cascade of HFT selling which traders and investors struggle to catchup with. The RobinHood platforms crash under the massive volumes and the noise across every market will be deafening as everyone tries to exit.
But… reading the papers this morning a couple of the investment banks say it’s all right – stocks are going higher… What would I know…?
Five Things Too Read This Morning
Finance Monthly – Why Is The Stock Market Up Amid A Shrinking Economy?
Out of time and back to the day job…