Blain’s Morning Porridge – October 10th 2019
“If you are good at something, never do it for free….”
On the International Rugby field, Scotland has played Japan 4 times over the last 30 years. Scotland has won all four games, with an average points advantage of +46 points over Japan in each game. The closest Japan ever got was 5 years ago when a development squad of young Scots players beat the Brave Blossoms 42/17. Japan are now a more successful team, most recently beating a gobsmacked Ireland. If World Rugby refuses to reschedule or relocate Sunday’s game because it’s a wee bit windy, then the Japan vs Scotland match will be declared a draw and Scotland will go home. Rugby World argues it is fair – they would need to make similar arrangements for all the other cancelled games. What’s fair about the host nation progressing because of the weather at the expense of another team?
The Scots are furious. Our Nation’s Motto: Nemo Impune Lacessit.
Before addressing the markets, I went to see the extraordinary Joker last night. Joaquim Phoenix was incredible. Just a hint of the madness of Commodus from Gladiator, and then ratcheted up to 11. It is not a Superhero film. It’s possibly the most disturbing thing I’ve ever watched – and although its apparently set in 1980s New York, the parallels with today are clear. No wonder the authorities are scared it will trigger copy-cat protests. If you want to see Gotham today, then go visit San Francisco. The film should be required viewing for any bureaucrat or politician.
Back to markets… Who hi-jacked Justice?
Today’s markets are overly tactical. Stocks up on some momentary positive trade news, bonds up a bit on hints of further economic weakness. They aren’t really thinking about the earnings season just a few weeks away, or what increasing oil instability Middle East tensions could bring. They aren’t reading the headlines about rising tensions within the ECB about the new bond buying programmes, or figuring out what negative Greek yields might possibly mean for the long term. (Yes. Its happened!)
Is the global outlook so steady we don’t really have to worry about the fact global stocks are still close to all-time record P/Es, or the tightness of bond spreads. Just take a look at the political pages.
Writing about politics and markets after watching Joker is tough. Did Donald Trump really say its OK for American citizens to break the law and kill people if its an accident? Did he really just betray the most dangerous minority in the Middle East to the Turks – chucking the Kurds under the proverbial M60 Tank? The Turks record of genocidal ethnic cleansing is unmatched… Did Donald really try to extort China and Ukraine to frame political rivals?
Yes. He did all these thing. And he will do worse tomorrow.
However bad it looks, Trump is he is not the fool many dismiss him to be. He is calculating. He is a modern Commodus. Being tough on Trade aligns himself with the electorate against common enemies will win him elections. While markets continue to play the moment by moment moves in the China Trade War, Trump knows tough action wins votes as effectively as Bread and Circuses. If you want to trade “trade”, then role play Trump. When he “extricates” the US from “pointless” Middle East Wars he cares about next years election, not what an Iran dominated fertile crescent will lead to in 4 years time when it becomes a SEP (a Someone Else’s Problem). Don’t expect him to display empathy towards the bereaved family of the young lad killed by an America diplomat’s wife driving on the wrong side of the road. That’s our fault because how can you expect American’s to drive on the left. Trump is a lesson in populism.
In a few years time I look forward to watching Joaquim Phoenix play Trump on celluloid.. Dial it all the way up to 12 on the scale.
Equity Investment Strategy
A number have readers have asked about equity strategy – wondering if I am confused? They charge I seem to be advocating buying stocks while simultaneously warning of an equity meltdown.
I you understand anything I write, then I am miswriting…. is one possible response. But I do think we are coming up to a massive dislocation/switch moment in stocks. The last few years bull market has made index investment – following the market higher by buying indices – a favoured strategy. Asset managers have been spamming their retail clients with pages and pages about how indices beat the stock pickers every time and are a much cheaper way to address market upside.
And generally, they have been right – a rising tide in stocks (which, admittedly has been fuelled by stock buybacks on the back of low rates and yield tourism), has lifted all equities.
Forget it going forward. As the threats increase: a) recession triggering weaker earnings, b) rising liquidity and refinancing risk for highly levered firms, c) the unravelling of peak-private equity and d) and increasing move towards fiscal policies that will unravel the zerocost debt splurge – then index based investment is going to struggle. At 20 times earnings, current P/Es still look toppy.
But a correction in stocks – and that is all I really expect – will be a fantastic opportunity to move back to fundamental stock investment. While I was working for Bear Stearns back in the 1990s, my boss, Brett, was the grandson of the father of fundamental investment: Ben Graham. I suggest a quick re-read of “The Intelligent Investor” might pay significant dividends.
If we see a switch from index back to stock picking – well, that’s going to drive a whole new market dynamic. I’d even be tempted to buy Buffet at this point… but?
What are the stocks to pick? Readers – I invite your suggestions…
Out of time, and back to the day job…