Blain’s Morning Porridge – October 19th 2018

Blain’s Morning Porridge – 18th October 2018

“They are dangerous. They are not all accounted for, the lost Seeing-stones. We do not know who else may be watching.”

In the Headlights this morning – see for some of the stories I’m watching

China – as predicted, at 6.5% the official Chinese growth numbers have fallen well short of 6.6%, expectations and below the 7% level benchmarked as the number government targets to maintain its co-prosperity pact with the population. (ie: The Party delivers jobs, wealth, and homes, and the masses don’t complain.) Hardened China watchers believe the real number is even lower, but is being “massaged” to calm fears of debt and stock market meltdowns. Government talking about “abnormal conditions” and “stable” conditions, but will it restore domestic confidence? How much damage are tariffs doing to numbers and sentiment? Although there appears to be little dialog between US and China on the trade spat – I’m told there is much going on below the radar…

On the other hand, even 5.5% growth in China is a massive gain to the economy over time, and more than enough to propel the Middle Kingdom into the global driving seat – but its no secret its not there yet, and faces a potential cascade of issues that could go wrong. BUT! Long term – China has to figure high in any investment strategy!

Italy – apparently 56% of Italians want a Italexit. Based on the new budget… Brussels might do well to encourage them… They wont.

Markets – Ouch. Wednesday’s stock market gains reversed in a heart bear Thursday. The corrective phase continues. All kinds of stories about global growth, Saudi, China, Oil etc confirm a bearish tone and markets reacted accordingly. Geopolitics remains the major driver at present. I’m told I should pay more attention to US Midterm elections – more on that next week.

Where Next?

We seem to be in a peculiar place at the moment:

On one hand we’ve got very strong earnings and positive noise from some parts of the global economy. We’re hearing great news about US competitiveness (back to No 1 on global table.) Loathe him or loathe him, Trump has delivered far more to the US economy than his detractors will admit – even though the Mid-terms prob won’t help. There are a slew of new tech companies queuing up to IPO as massive valuations.

On the other, we’ve got markets that feel frankly exhausted. Stocks can’t seem to maintain gains and look more vulnerable to the downside. We’ve got bond markets that don’t know if recent rate hikes make them look fair value, or there is further widening to come. Global geopolitics is messy at best – and when folk can’t decide whats happening in markets, they allow the political stories to lead them into fear territory.

As one fund manager put it yesterday: “we don’t like bonds and we don’t like stocks, but where do I put cash to work? It has to be used.”

However, when markets are fearful, that’s when they potentially lock up. If anyone was to start selling bond portfolios they will quickly run into one-sided ill-liquidity. Its like a Doors album – there is no way out. At least you can get out of stocks – but in these markets, prices are quick on the downside.

And just to throw some petrol onto the fire, another portfolio chief I was talking to yesterday is far more concerned about finding solid inflation protection. Lock tight and wait for Stagflation he says.. That’s a worry. I’ve a couple of ideas in terms in long-hold portfolio strategies and layering on inflation protection via the property market – give me a shout if you are interested.

Tech IPOs

When folk get excitable about stuff they don’t really understand, I worry. I can’t be the only person nervous about the slew of big Silicon Valley and other Tech Companies like Uber, Planatir, Airbnd, Pininterest and even some China names that look likely to do massive IPOs next year.

Let’t think this through – i) the entrepreneurial owners are looking to max their returns and sell at the top, ii) many of these companies are still at the “spend a lot of money to make a little money” stage, and iii) nearly 20 years after the bubble burst, the number of clever minds in the financial sector who can remember the irrationality that drove it are far fewer in number… I’m still smarting I didn’t sell my business before the market tanked…

(Re my comments earlier this week on Netflix: I said they were spending Billions to make Millions – and got taken to task by some readers who say my maths is wrong.. “You don’t need 7 million new subscribers paying $1000 per quarter to afford $7 billion in new production spend… that’s what the existing subscribers fund.” Please – do the math. If Netflix had 250 million subscribers, then maybe it works… but it doesn’t. )

If my memory serves me right, a Planatir was a glowing orb that connected direct to the Dark Lord in Mordor, and when the hobbit Pippin picked it up, he then literally dropped the ball..

I have a sneaky suspicion next year’s Tech deals might struggle more than we expect..

Something for the weekend sir?

Passing through North Greenwich Station last night on our way to the ELO show, we spotted the attached superb and very clever notice board, renaming London’s stations after food. Whoever came up with it is a genius.

As a keen player of the World’s most marvellous game of strategy, I will be suggesting the International Player Association we adopt a new set of rules to play these names n Mornington Croissant. I would suggest we play non-crossing, but reverse loops allowed in the new version. Anyone unfamiliar with the rules will find them laid out clearly on the web.

Have a great weekend..

Bill Blain