Blain’s Morning Porridge – Feb 25th 2019

Blain’s Morning Porridge  – 25th February  2019

“Just do the right thing – whatever it might be…”

In the headlines this morning:

I’ve attached a photo illustrating just what a fantastic weekend it was – but sailing under bright sunny skies wearing a summer jacket in February is freakishly weird. I suppose we should thank Donald Trump and the rest of the climate change deniers, but I dread how we will collectively pay any eventual bill for breaking the planet.

Meanwhile, “She-who-is-now-Mrs-Blain” is very Welsh (her first language), and was suffering something terrible on Sunday after Cymru whipped England. My support for Wales in our local pub might have “strained” some friendships – suggesting where the English can stick that proverbial chariot might have been a tad impolitic.

(Sadly, the joys of the weekend are put into perspective the misery of getting to work on a Monday morning. A frantic scrabble for seats on the train up from Southampton, a red-light delay getting into Waterloo, and then walking to the City because the queue for the Drain is miles long and the Jubilee line is worse.)

Back on Planet Market, the big news is Trump postponing his threatened March 1 tariff hike on Chinese goods. Trade war threats are not over yet – there is still plenty of aggravation on the Tech side and for Huawai in particular – but the Chinese market went stellar on the news. As yet, there is no trade agreement – just Trump being magnanimous! Yet markets are partying..

A number of clients have pointed out the increasing number of disconnects they see between the economic data and what they see in markets. While data continues to disappoint to the downside, the markets seem quite glib to accept more risk – the rise in stocks since the December bottom highlights we’re back into “Risk On” environment. Thus, we have stronger stocks but a worsening economic picture – which is somewhat illogical. Despite the uncertainty on growth and a rising number of negative estimates, markets seem happy to discount these fears. Bond markets are very strong, confirming an expectation of lower rates for longer!

In terms of volatility, all the fear indicators have retreated – VIX has straight-lined down from 35 to 14, strongly suggesting everyone is sleeping sounder at night. After a decent US earning seasons – spiced with enough downside surprises to make sure everyone remains just a little uncomfortable – US stocks have staged a pretty decent rally back from the Dec lows. Not quite record breaking, and perhaps a tad complacent, but demonstrating investors still have faith in… something? That ongoing cheap money will keep corporates in buy-back mode? Or that returns from stocks are still likely to outperform bonds in the era of free money? Or just a lack of imagination and FOMO (fear of missing out.)

I’m unconvinced the risk is out the market. Maybe the picture is just a little cloudy?

I’m wondering if markets are something like “shell-shocked” and beginning to ignore some of the realities? At the core is the uncertainty re global trade and growth. Naturally any investor will be concerned if the sudden imposition of trade tariffs is going to dramatically reduce global trade volumes. But we’ve now got experience of the Donald Trump approach to trade – it’s not a strategic approach, but a series of tactical small individual agreements before moving to the next “negotiation”. Last night was just another example..

Markets now perceive a clear pattern to Trump’s approach to Trade Negotiations: He threatens to take us to the wire but never actually pulls the trigger. That has two effects: 1) the damage to sentiment is inflicted by the initial threat (which tends to quickly show up in sentiment and order data), and 2) the threat isn’t carried out leaving upside potential. The result is markets are ignoring the early signals (ie pulled factory orders) and focusing on the likely non-tariff agreement upside which Trump then claims as his trade victory.

I’m trying to work out how this kind of herd behaviour translates to the widely articulated fears of global slowdown and imminent recession. If Trump’s bark is worse than his bite, are the 40% of strategists now discounting future growth overly scared of trade dislocation? And will a quick few positive noises, such as more cheap Trump declarations of victory, turn around market sentiment just as quickly? And what is the real damage in the real economy for companies planning their production schedules based on what they see the White House say and do? Real world vs financial world?

While the World Bank and IMF outlooks are still negative, and project Brexit Fear can generate any number of horror stories, maybe the reality is real growth in 2019 as a potential upside surprise. Is the noise of Trump, Brexit and the rest obscuring the likelihood of a longer sustained Global Boom?

Politics is fascinating at present. I won’t comment on Brexit, because I really don’t have the patience anymore, and can’t understand why we’ve got to wait for March 12 for the next vote to not happen. But, there is a classic Wolfgang Munchau article: “The future belongs to the left, not the right”, in this morning’s FT. It resonates very strongly with what I’ve seen and heard in recent months in Europe and the US. Donald Trump and his swing towards the Right is more an aberration than the norm. The Right has rallied on the back of inflamed immigration threats in the US and across Europe where right wing parties threaten large gains in coming elections.

The real debate in society; about income equality, opportunities, health and wellbeing, jobs and taxes, remains the agenda of the Left. It’s the likely rise of the left that poses greater challenges for mercantile economies. Bernie Sanders back on the stomp in the US. Corbyn still in charge despite so many missteps in the UK. The young firebrand congresswoman AOC in the states calling for a 70% tax rate on the wealthy – and naturally right wing say taxes will destroy any incentives for entrepreneurs to entrep!

The rise of the Left might be the real issue to focus on through the year!

Very late and time to get back to the day job….

Bill Blain

Shard Capital