Blain’s Morning Porridge – Nov 25th 2019

Blain’s Morning Porridge  – November 25th 2019

“It needs a bit of improvement… ”

Lots of stuff to look forward to this week!

Here in Blighty, the election continues apace.  Yay!  The party manifestos have been released, and perhaps now we’ll get some real feedback into which particular vision of tax and spending hell the UK plebiscite is headed.  Labour’s policy document outlines massive borrowing, sweeping nationalisation and grandiose spending plans, while the Tories’ document doesn’t say much, but promises to keep taxes steady. I suspect all the earlier Tory promises of massive spending were designed to deliberately goad Labour into going big and trying to outspend them.  It’s worked!  It’s all pure political theatre and means diddley-squat in real terms.  The bottom line is any UK govt can borrow as much as it requires or desires – as long as it does so with its credibility intact.

The UK polls point to a Tory Majority – even the left-wing Gruniad says the Tories have a 19% lead over Labour.  Three-quarters of Brexit leave voters are likely to vote for Boris, despite the fact he is distrusted by many.  Does that mean it’s time to load up on Sterling and UK assets?  Well, perhaps… but it’s still 17 days till the election, and Boris certainly has the ability to trip himself up multiple times before then.

In the US I’ve practically given up trying to follow the impeachment thang. Who are all these people and which ones are the ones who have done what… ?  I suspect most American Voters have also lost the plot – polls show most have not changed their already polarised view on Trump; which means it’s been a wasteful distraction for the Democrats.  They will be looking forward to Thanksgiving on Thursday which means it will be a quiet week before the quiet month of December.

Donald must be delighted to have a new distraction on the Democrat side. Way back in 1990 I was lucky enough to land a job at Bloomberg – and now Mike Bloomberg has announced a campaign for the Democrat nomination in the US.  A couple of hundred million dollars for a shot at the White House is nothing for a man worth $50+ billion.  He can outspend Trump a multiple number of times.  But will Democrat votes coalesce around him in time for him to win?  Or will he just be yet another distraction?  He’s got track record as mayor of New York, and is a centrist, but he’s 77 years old.  I will wait to hear what my US chums reckon.

Back in the markets, we’ve got a slew of recent data, and more due that sends mixed signals about global growth. Industrial production has been dropping, the US, Asia and Europe all look lethargic.  Yet, the market continues to hit new highs and exhibit surprising strength.

According to the Wall Street Journal – S&P 500 companies are spending less on investment, and slowing their future spending plans.  Capital spending is down 3%, on everything from buildings to Its spending.  Investment across the US has slowed – coinciding with business sentiment survey showing the nascent trade war, and uncertainty re US politics are causing companies to pull investment plans.  Rather than trade tariffs causing US companies to build further domestic capacity – they’ve slowed construction plans. Most companies are actually cutting spending – the number is skewed higher only because of a few big-spenders like Amazon and Apple. The cuts are most obvious in industrials, but also in finance where it looks like IT programmes stalled.

What’s really happening out there? The biggest influence on markets remains hopes of a China US trade deal – but hopes of a solution are just a glamour, which to those of us a Celtic persuasion means a fairy spell cast upon something ugly to make it appear more beautiful than it is.  Any deal – which is now a low probability – will simply be a sticking plaster over the long-term issue of China vs US power. Consult your history books for a reminder on the Thucydides Trap, Rome vs Carthage, France vs Everyone, the Dreadnought Race, etc for how that one is likely to play out long term.

Yet, as previously noted, markets remain positive. How? In the face of such uncertainty you would expect at least something of a wobble?

Many investors are concerned – that’s why the press headlines any story about bears, for instance Bridgewater going massively short get front page headlines, even though Ray Dalio said it wasn’t the case!  The market upside is apparently based on three assumptions: i) A trade war can be resolved, ii) There is nothing wrong with the global economy, and iii) Central banks will remain accommodative.

Collectively these are not irreconcilable, but at some point someone is going to figure out the reason the markets are so strong is simply due to the volume of cash sloshing around Financial Assets… Doh, it’s the money that is keeping markets so strong!

I’ve been pointing it out for years!  QE, low rates and central bank monetary mistakes have simply created massive financial asset inflation.  The market seems not in least bothered.  Why should investors care – all that lovely free money is making their existing money worth more as it pushed stock and bond prices higher and higher.  Precious little finds its way into the real economy. A great investment trick is “follow the money” and if it’s all being invested in already inflated financial assets, then go with it. (I am adding Follow The Money to my list of market mantras…)

FTM explains why I’ve been so wrong about markets.  I try to employ logic to my market view… but that’s not how it works. Every year I predict the inflation of financial assets can’t continue any longer, but I’m invariably wrong. The supposedly irrational market is being very rational – it is following the money. And since the money is going into financial assets, that explains why corporates are not investing in real assets.  They are holding back from the real economy, and playing financial assets, buying back their own shares to manipulate their stock price higher. Financial Assets are real, and real assets aren’t? I suppose.

And it doesn’t actually matter…. At some point in the not so distant future all the current political uncertainty will be resolved. Donald Trump will be a fading memory. We will be forgetting how Boris flubbed the election through his horrible gaff on Dec 9th at the Queen’s Christmas drinks. We will be fondly remembering the joys of Prime Minister Corbyn’s regime. And global growth will have recovered… stock prices (which never fell, because central banks kept bailing out markets), will look reasonably valued as global growth accelerates…

Yeah… dream on…

Five things to read today:

FT – Paris promises unique trade deal if UK plays fair

FT – Is Germany’s economy over the worst?

BBerg – Hong Kong’s Pro-Democracy Forces Bolstered by Huge Election Win

Barrons – Mike Bloomberg is the Stock Markets favourite Democrat for President

WSJ – “Food is the Ultimate Power”; Parched Countries tap the Nile River through Farms

Out of time, and back to the day job…

Bill Blain