Blain’s Morning Porridge – June 10th 2020 – A wicked game..
“It’s strange what desire will make foolish people do..”
Where do financial markets go from here? Yesterday headlines were screaming US stocks are now positive for the year! Today it’s “Momentum stalls” as markets pause to consider just how high they’ve risen in the face of the US officially being in recession. The speed at which the 40% March crash has been reversed is “unprecedented”.
It’s not real.
We all know the rally and this market do not reflect any meaningful reality. Get used to it. This rally is not about value. It’s about day traders, get-rich-quick scams, FOMO, and, ultimately, who will be left holding the ticking parcel when it goes off…
There are new rules. Learn them. The problem is… the rules will keep changing. And the foundations of the market are also shifting. The solid bedrock of the dollar upon which markets have been founded these last 60 years could even be crumbling as a distracted America’s global leadership credentials are questioned… (I was going to write “Trumped”, but too subtle I thought.)
If the US and the dollar are being rotated out, then everything you think about markets could be about to judder. (Judder – a critical but little understood market concept: it’s the moment when tiny imperceptible shifts become amplified to the stage where they can be felt shaking markets, and folk start to wake up… )
There are multiple ways in which current markets are consciously blind to the new reality. They don’t reflect the rising coronavirus crisis now unfolding in less wealthy nations, how these could impact commodities, and stir up resource issues (including geopolitical tensions as China seeks to secure external supply lines). The market doesn’t reflect the reality of furloughed workers with limited prospects and their future consumption. It does not reflect the instability of rising debt across sovereign and corporate balance sheets, or the earnings shocks we’re going to see next month.
We know all that. So.. they don’t matter?
The markets certainly don’t reflect the needs of investors. They need their money to work and generate returns. Bonds yield nothing. Companies aren’t earning much and most aren’t paying dividends. The only returns are notional – from rising financial asset prices. Yet financial assets have become so inflated, they are in danger of becoming notionally worthless. If financial assets stop rising… what have you got? Trillion dollar bills to buy a shopping bag?
Markets have become a game – a wicked game that bears little connection to the pain out there. Loaded wicked games attract the vulnerable and desperate to play.
In recent days we’ve seen retail investors pile into US stocks seeking Chapter 11 bankruptcy protection. My social media sites are being deluged with fractional stock ownership opportunities, and offers to lever my trading account. Data from US retail investment site, Robinhood, shows over 96,000 new investors piled into Hertz since it filed. Hertz Pauses after three-say rally sees stock surge 577%!
It’s the same story with other busted stocks – they’ve seen massive spikes in trading volumes. What’s going on? When companies file, its stock holders that get sunk. It’s a gambling Vegas mindset – the same get-rich quick imperative that fuels cryptocurrencies.
It’s not rational investment. It’s a game. There is a quote on Bberg: “Bankruptcies have become the flavour of the day. At what point will Jay Powell and his colleagues at the Federal Reserve realise they have broken the market’s pricing mechanism?”
Some, who should know better, are feeding the fantasy. I’m reading nonsense about the stock market collapse in March being a mere 7-day bear phase in the unbreakable bull market that’s being running since 2009. “A Panic Attack” said one BBerg talking head. Others say the global economy faces “the shortest recession of all time”. Really… ?
But, they might be right about the continuation of the 11 year bull markets. Because that’s not been real either. There are all kinds of reasons being given for the rally – but I’ll go with the simple one. Back in February – just as Stock Markets hit record highs even as the Coronavirus triggered Lockdown in Italy, I asked a very simple question on one of my Porridge Lite-bite videos: “Can Global Central Banks afford a market crash at the same time as a long/short virus recession?”
My answer was that they could not. “Global Global markets will not be allowed to go into Meltdown. Too much has been invested since 2008. Central banks will enact a Global “Draghi Moment” and do whatever it takes to help recovery and avoid a simultaneous market meltdown and recession.”
That is exactly what happened. That’s why we didn’t have meltdown – despite the global economy facing the most profound shock in history – the Coronavirus. Central bank market distortion is now the dominant force – it has been since 2009. The new buzz is all about Yield Curve Control – which just means keeping yields low and further destroying any real value in bond markets. Zero returns are not going to pay my pension. Some day… some small boy is going to shout something about the emperor being naked…
Yesterday, veteran market commentator, a chap who makes me look young, Antony Peters, was kind enough to say it in his morning analysis: “A couple of months back when everything was falling to pieces I had a long chat on the phone with my fellow Teenage Scribbler Bill Blain. Bill’s view was that markets would rebound sharply given all the central bank stimulus. The corporates on the receiving end of central bank largesse, he wagered, would take the free cash and, not believing in a significant improvement in the business environment, pump it straight into financial assets. I, on the other hand, saw dividends and bond returns crash landing and investors being forced to sell assets in order to meet liabilities.
Both of us were right. Financial Assets have rallied on the back of stimulus, but they pay zero in terms of returns or yield.
Bill Dinning, CIO of investment manager Waverton, describes it even better: Financial Asset Stagflation. The prices of bonds and stocks are massively inflated but returns have stagnated as returns have become largely meaningless. It well worth taking 10 minutes to watch him explain on video.
Dinning discussed how QE Infinity and bailouts has seen G4 Central Bank balance sheets rise from 35% to 47% of GDP. The Fed has doubled its balance sheet to 33% of US GDP. Meanwhile, the economic numbers to back up recover are lagging – there are few signals of recovery (which is why he is very focused on weekly data releases which will show recovery soonest.) Retail sales from the US Johnson Redbook still lag 6% (down 10% at one stage), while US rail traffic is down 23% and shows limited pickup.
And there is still much worse news to come. The interesting issue will be how bankruptcies and insolvencies develop – these are clearly lagging indicators, but May was a record in the US. For all the government bailout schemes around the globe, how many businesses that have furloughed staff, seen orders vanish and face cash crunches will ever fully reopen?
What’s the right strategy? I’m sticking to the plan – stocks I believe are fundamentally strong and growing as the global economy evolves to this crisis, gold, cash and Gilts. And Wait.
Meanwhile…
Things go from bad to worse for HSBC. Yesterday it was Aviva, HSBC’s 12th largest institutional shareholder, expressing “deep concern” about its abject surrender and state capture by China. The bank’s future looks hopeless; caught between the revulsion of its western shareholders, and further threats from China. If the UK decides to exclude Huawei from 5G expect China to make good on threats that HSBC and Standard Chartered could be “replaced by banks from China overnight.” Which puts Boris in the position of being the man likely to deliver their quietus.
Five Things to Read This Morning
Capital – China pauses debt repayments for 77 nations
FT – English Property Market rebounds on pent-up demand
WSJ – Rally in Europe’s Riskiest Corporate Bonds Masks Lagging Sales
WSJ – Coronavirus Obliterated the Best African-American Job Market on Record
BBerg – Grundlach Warns Rising Rates May Lead Fed to Yield Curve Control
And a special welcome back to my mate Russell Taylor after 5 weeks in hospital with Covid. A great chap, and we all hope he fully recovers soon. He is perhaps the most important chap in markets – the author of the Alex Cartoon in the Torygraph!
Out of time and back to the day job…
Bill Blain
Shard Capital