Blain’s Morning Porridge: 15 Dec 2020 – Bearishly Pragmatic

“The only thing worse than being in Europe is not.”

This is the last few days of this year’s charity appeal: She-who-is-Mrs-Blain and I have completed our third 20km hike in Walking With The Wounded, helping ex-military with mental health issues. We are Team Morning Porridge! Please read about the charity and consider making a donation. 

I was rather looking forward to a couple of days in London from tomorrow – catching up with some clients, a couple of “proper” lunches, and a pre-Christmas dinner with the kids. But London has been plunged into Tier 3 and all bets are off, so this afternoon I’m taking time out to drive up to the Smoke to drop off presents and have a socially distanced cuddle from my youngest. Like everyone else, she’s upset – wondering what the point in it all is… no Christmas, no parties and little prospect of family time. Her Grandmother in Scotland can’t see her, and its looking likely the easing of get-together restrictions over the feast days won’t happen.

Roll on a better 2021. It’s only a couple of weeks away.

At this time, its traditional to present outlooks for the coming new year. I know most investors and fund managers are traumatically shell-shocked by the sheer volume of predictive analysis they receive at this time.

Most of the turgid year-end stuff I’ve tried to read triggered immediate narcolepsy. Some was amusing, but most sticks to the theme of recovery as repressed consumer spending drives a swift, stronger-than-expected economic recovery, thus further driving the upside in stock markets. Sentiment and expectations will be further lifted by the improving vaccination news and a new more powerful upside narrative will be in place by the end of Q1.

Basically, the message is: to make returns next year, just join the never ending stock market upside. While rates will remain low in the long-term, money flowing into stocks will ensure they trade up on ever higher multiples. To generate returns I have to take increasing risk – that feels like a massive trap!

And that’s…. good? Basically, if you want to generate Alpha next year, risk more and hope to get lucky stagging IPOs, buy magic stocks and hope..  Really? Maybe. Maybe not.

Instead of guessing about the future, I’d like to try and understand what really happened this year before making future plans.

These are not normal times – and 2021 isn’t going to be sudden, remarkable snapback to something better. The pandemic might have been the 2020’s defining event, but it wasn’t the only malign force driving markets. Instead, Covid catalysed many of the underlying problems that will continue to haunt markets for years to come: ultra-low rates, QE and central banks unable to reset the system. There are always consequences – and Covid will spawn a host of its own.

Most of the investment bank 2021 outlooks focus on growth, consumption and valuation metrics. They analyse expected pick-up potential across sectors as a vaccinated global economy reopens,  and translate it into prices like tighter credit spreads as the economy “recovers”, or higher stocks on the basis of returning demand. They will look carefully at employment and rents, and factors such as accelerated adoption of new technologies, and conclude… things will likely get better.

It’s not about recovery – it’s about ongoing distortion.

My “bearishly pragmatic” assessment of next year starts with the realisation nothing really changed in 2020 – the underlying force driving markets wasn’t the Pandemic, but the continuation and even magnification of the same monetary distortions that have been driving markets since 2008. This year’s multi-trillion spendathon of emergency stimulus and government support measures to address the pandemic simply threw more petrol onto already burning hot markets.

The consequence of the Pandemic has been to deepen the existing distortions. The result has been the extraordinary apparent “resilience” of the stock and bond markets. It doesn’t feel remotely real:

· We can see it in the widening disconnect between the real economy of defaults, job losses, food banks and crashing educational achievement versus massively inflated financial asset values in stock and bonds.

· We can feel it in the way markets demand further stimulus and are being driven primarily by the massive amounts of money sloshing around financial markets (rather than the real economy).

· Our sense of financial reality feels battered. Investors act on the basis of ongoing distortions fuelling prices are permanent and irreversible. Fundamentals are out the door. Its spawned and reinforced the dangerous belief that this time is somehow different and prices will go up for ever.

· Markets are going up on retail and ill-informed bluster.

· The consequences multiply: while everyone talks about how the Pandemic is accelerating the adoption of new technologies, capitalism is failing to discipline failing unprofitable zombie companies which linger too long and block new niches.

· The consequences of an economy split between a very small number of haves and rising number of have nots, and rising inequality, has fuelled political populism – although Trump has come undone in the States he has massively destabilised the political consensus and rocked democracy for decades to come. Next year we have Germany and France, either of which could rock Europe.

The reality next year won’t suddenly change. Stocks will likely remain massively inflated. Bond yields will remain frighteningly low with $18 Trillion of debt now trading at negative yields. Sentiment and expectations will be lifted by the improving vaccination news – but the fundamentals of markets versus the economy are unlikely to be addressed.

My view is financial assets will remain fundamentally distorted and increasingly vulnerable to correction. I’m sticking with a  healthy weight of gold and looking for alternatives.


Thanks to all the readers who wrote to say how much they enjoyed yesterday’s piece on the America’s Cup. My decision to cover something other than finance, a parable about complexity and consequences, proved not to be universally popular though – one European reader unsubscribed on the basis my opinions are “frivolous” and “no longer worthy of consideration”. Bothered.

I am equally unconcerned by the latest trend I’m seeing from the Tesla fanboys – they are now taking to tweeting and posting old blog and research notes about how overpriced Tesla has been compared to its current fantastical levels. It gives them the opportunity to show how clever they are as they brag about how much they’ve made. Three years ago I said Tesla was overpriced at 10% of today’s level. Today, perhaps justifiably, I am decried as “dumb*ss know nothing”, for being so wrong.

The fact is Tesla is worth a multiple of what it was when I sold out – and I remain absolutely certain it remains multiple times mispriced. As we all know… the market can remain irrational longer than I can remain solvent.

Five Things to Read This Morning

BBerg – Marcus Ashworth: Some Bankers Deserve a Bonus This Year

BBerg – China Heads for Strong Growth as Recovery Gathers Pace

FT – El-Evia – The risks that investors should prepare for in 2021

WSJ – The US China Tech War Won’t End Under Biden

Garuniad – More than half of UK’s furloughed jobs at risk of automation

Out of time and back to the day job…

Bill Blain

Shard Capital