Blain’s Morning Porridge – Nov 16th 2020: Taking a punt

“We spend more on cows than on the poor.”

This morning: Gordon Brown, taking a punt on Brexit and vaccine stocks vs conviction trades, why stock markets will keep going higher, short-term narratives and the US election damage continues…. 

I can guarantee posting a photo of former UK premier Gordon Brown will infuriate at least half the Porridge readership. (Feel free to send an Angry of Tunbridge Wells email about how infuriated you are!) Aside from being grumpy with a wee bit of a temper – Gordon could have been a great premier if Tony Blair hadn’t already completely frittered away the nation’s trust. Instead, Gordon will forever be blamed for selling the UK’s gold at the bottom of the market (on the advice of civil service “experts”).

But… if you’d watched Gordon hold the UK together with a remarkably powerful pro-Union speech a few days before the last Scottish Independence Referendum, or listened to him talk with clarity, practical common sense and with a sound grasp of politics and financial policy on the Andrew Marr show on Sunday morning… you might have seen hints of the statesmanship the nation needs today. No blame, no frippery, just common sense about moving forward, the need for unity and addressing the issues. I’m thinking of printing it out his words and nailing them to the doors of Downing Street.

Taking A punt on Brexit

You can get betting odds on practically anything these days. Will Boris give up in the next 12 months (4/6). Is Trump going to finally concede the election this month (4/1 yes), or turn-up at Biden’s inauguration (4/9 no)? Or how about when Melania files for divorce (15/8 in 2021).

The odds on a Brexit agreement interest me: will the UK and Europe agree a deal? 5/2 says No, but 19/10 likely there will be an extension on the transition period.

After watching the market’s rollercoaster performance on the back of the vaccine news last week, is it worth having a punt on the FTSE and see if something similar happens in the wake of some positive Brexit news?  With Biden making clear his preference for a deal, the Mekon out of Downing Street, and Carrie running the show.. Why not…?

And if you don’t fancy the Brexit trade, why not take a punt on AstaZeneca on the basis their vaccine is similar to Pfizer’s – the firm says “results” are weeks away

In terms of markets, it’s not as if there are any other particularly high conviction trades out there at the moment.. Everyone is talking about the Great Rotation Trade – but why would you dump large very profitable tech stocks to buy Cruise ships, airlines and hotel chains crippled by fractured balance sheets? Such a shift would require more than just the growth boost of a vaccine on recovery stocks, but downward pressure on Tech from regulation (which might well happen).

If you have cash sitting in your portfolio… what would you do with it? Taking a punt on Brexit or the next vaccine seems as good an idea as any other..

Let me quickly sum up some other options:

Gold – with a clear end to the Pandemic in view, the US election done, and the long-term recovery from economic damage of Covid more clearly understood… the risk-off case for Gold looks less alluring. Absent another shock, it feels like gold is less favoured – for the time-being.

Sovereign Bonds – Treasuries flirted with a higher 1% yield in the wake of the vaccine news, but the last thing Central banks want is rising rates crushing any recovery, so expect “yield curve control” to keep rates low. But, why would already negative real yields go lower? Central banks have stopped talking about the need for negative rate policy. The case for ongoing positive returns from bonds is unappealing – the downside risks to bonds from recovery as vaccines take effect are multiplying… (And that’s before we even talk about the potential inflationary and credit risks of unlimited sovereign debt issuance on currencies and confidence.)

Corporate Bonds – Seriously? When lots of earnest bond traders are saying this is the time to buy corporate debt.. ask them why… Er.. “because rates will stay low and they yield more than government bonds…”If that’s the answer then it’s time to walk away before we see further credit deterioration, a slew of zombies requiring further bailouts and unlimited central bank buying via Corporate QE programmes. Rates will remain low, but returns will fall. The risks versus low returns in corporate bonds make little sense.

China – lots of folk are suggesting the low returns and economic risks to growth in the west justifies a pivot to China. Cosmetically it makes sense: China is growing and its relatively underinvested (14% of global market cap but 3% of global investments). However, the known unknows about China are large: human rights, crackdown in Hong Kong, the scale of shadow banking crisis, the honesty of data, and the likelihood of government taking down successful entrepreneurs who upset them – just some of things meaning none of us are China experts…

I could go on…. But Stocks Remain the Favoured Market

Perhaps the most important factor to add to this equation is wall of cash waiting to play the market… All of it will be looking for returns. On a relative and real basis that means Stock Markets – equites will remain the favoured game.

Over the weekend I was reading a hilarious article about the legions of RobinHood day traders who’ve played the market while in Lockdown – it was full of anecdotes about the basic mistakes they were making, knowing little about markets, risk assessment or analysis. Despite that, they’ve made out like bandits, making massive gains on correctly “reading” the market’s one-way-up direction… Retail punters now account for 20% of volume.

Of course… we are market professionals and know the laws of financial gravity must ultimately apply… The value of investments will go down as well as up…

Except for the fact that maybe this time it is different. At present rising stock markets are nothing to do with government policy, the future outlook, the prospects for future growth, or company profitability. Instead, rising stock markets are all about the distorting effects of ultra-low inter-rates causing massive equity Stagflation: stock prices going stratospheric in a deflating global economy. How long can it continue? As long as financial asset inflation is not addressed via rising/normalising real rates.

Amateur day traders are having a great year because – for the time being – they are unlikely to lose. They are likely to win bigger – as the pandemic effects ease and growth is restored the relative value of stocks to other financial assets (which are equally distorted) will continue to favour higher returning equities. Money will pile into stocks from other asset classes no matter how unreal PE valuations look or how damaged corporate balance sheets appear! (A number of bank stock analysts disagree with this assessment, taking the view stocks are fully priced, and it’s time to sell into equity rallies..)

So… where does that leave us for the week ahead?

This Week’s Competing Narratives

It’s unusual to have some many different narratives running though the market at one time. The short-term noises-off will continue to bump against each other in coming weeks – but underlying the market’s direction are the realities of the relative value, wall of money and ongoing distortions I outlined above. The short-term market-shocking themes include:

1) Coronavirus – the speed at which infections are rising. Hospitals are filling up and deals, though still highly concentrated on the elderly, are rising. One day the market rallies on the back of positive vaccine news, and tumbles the next on rising Covid numbers. It could be the Spring before the new vaccines have any significant effect on the risks.

2) Lockdown recession – double dip W-shaped look inevitable as the winter bites and some sectors suffer disproportionality – hospitality and travel. However, other parts of the western economy are demonstrating surprising resilience, rising to the challenges of the pandemic.  It’s not as bad as we feared, but worse than we hoped.

3) Political uncertainty – Boris’ hoped for “reset” and Trump’s refusal to acknowledge defeat get the headlines. The market is now utterly unbothered about the new Biden Presidency. The underlying weakness in economies where politics has become the story rather than solutions is the real issue – how will these be addressed?

And finally… The US Elections.. yawn..

The Democrats must be the stupidest political party on the planet. They organised the most successful and invisible ballot-stuffing exercise of all time to ensure Biden was elected president, yet, despite their electoral rigging expertise they didn’t do the same to ensure they won senate and congress seats? (US Readers – unsubtle sarcasm alert.)

As the US election drags on – waiting from Trump to concede – global confidence in the dollar and US is waning, and the myth of American “exceptionalism” is looking increasingly shabby. Expectations of a fraxious gridlocked new presidency and internal tensions are increasing. No one is surprised by Trump’s actions – he is what he is… But, the senior politicians of the Republican party… they are ones the world is really shocked at. When is enough enough?

Five Things to Read This Morning

BBerg – The Winners and Losers in Eight Months that Ravaged UK Economy

WSJ – Big Gains From Small Stocks Power Russel 2000 Surge

WSJ – California, Love It and Leave It

FT – Italy bond rally forces key measure of risk to lowest since 2018

BBerg – Morgan Stanley Says Go Risk-On and “Trust the Recovery” in 2021

Out of time, and back to the day job..

Bill Blain

Shard Capital