Blain’s Morning Porridge – October 3rd 2019
“Fantastic or changes nothing?”
In the headlines this morning: https://morningporridge.com/stuff-im-watching
It’s going to be relatively short comment today – I just spent the last 1 ½ hours standing all the way from Southampton to the City. SouthWest Rail decided to reduce the busiest Up train of the day to 5 carriages. I suppose it’s just another symptom of our world gone daft….
Lots of stuff to think about today:
- It all feels very risk off following y’day’s string of weak industrial and jobs numbers, negative earning signals and rising trade tensions. They point to the slowing global economy which should be great for bonds and terrible for stocks. I therefore confidently predict a rally in equities – “felis mortus repente” ! – and rising bond prices: although only lunatics would buy at these levels, there is no shortage of them.
- I’m reliably informed Trump is in more serious trouble than ever before. There is a rising fear we haven’t seen the Peak Trump Twitter Tirade (PTTT) yet, and when it comes, it could be a major destabiliser.
- As China celebrates 70 years of the party by shooting Hong Kong students, Trump gives Xi a birthday present by opening a second front on the trade war against Yoorp. Putting 25% on Whisky is actually a good thing – it was ever a mistake to waste it on them. Not so sure how hiking Airbus prices helps the US economy – but Boeing need something to smile about.
- Boris’ compromise “this-is-not-a-backstop” proposals looks pretty bogus, but Brussels hasn’t told him to self-replicate – yet. Still a chance of a deal…? (fingers crossed behind my back!)
- What is really happening in Saudi Arabia?
- While markets look toppy, Global investors are left scratching their heads wondering how to beat returns in this final quarter of the year… I know.. I know…
Before explaining where I’ve been hiding last few days, I think I’ll claim some brownie points. At an investor lunch last week, I was asked to name my stock-pick with best immediate short-term potential to rally. I chose beat-up Metro Bank – which has since rallied from 166 to 238! Nice….
Meanwhile… Brexit and Idle-Capital…
I’ve spent the last few days with clients on “symposium” (for want of a better description), thinking about the future and all that it means. As a self-confessed “had-enough, let’s get Brexit done” supporter, I found myself trying to explain/defend Brexit – a particularly astute Australian asked a very simple question: “Please illustrate with any single example how it’s going to make anyone in the UK wealthier or better off”.
Simples I thought – but after lots of false starts, and racking my brain.. I really couldn’t nail anything specific. In effect I was forced to admit Brexit is all about hopes and expectations – and while many will undoubtedly work in favour of the UK, the soundest financial advice I’ve ever received is “Hope is not a strategy”. A long discussion on the reasons for political failure followed… the crux of that debate was referendums and representative democracies aren’t natural bedfellows – so how do the Swiss do it?
The consensus on Brexit remains: i) It’s going to happen and it’s going to hurt. ii) It won’t be as bad as the doomsters say. iii) There won’t be a knew-jerk upside for the UK, because everyone is so bored of it. iv) There are massive long-term UK opportunities, but it’s also likely to become less important as a global reserve asset source. v) The international investment focus will shift back swiftly to Eurozone threats and weaknesses, rather than vulnerabilities of UK economy.
Otherwise the big theme was the consequences, threats and opportunities for global markets of Idle Capital. When too much money chases too few assets you would expect inflation, but when assets are not attractive and money doesn’t follow, the result is deflation. Flows of money drive markets, prices and thus inflation/deflation of financial assets.
However, as Idle Capital pools and goes stagnant within the financial asset system – markets – are stalling. Sure, money still buys negative yielding bonds, but mainly for technical reasons or because investors still expect another leg up in terms of interest rate eases. Stocks remain in focus for reasons like yield-tourism, dividend yields, and buybacks rather than fundamental strength. The increasing allocations into “alternative and real-assets” highlight the issues of idle-money – finding real, solid sustainable returns, rather than chasing central bank mumble-swerve.
The world is currently awash in Idle Capital – it no longer believes in bonds, is convinced the disruptive tech Unicorn bubble has burst, and believes toppy stock markets look bubblicious. All that Idle Capital is sitting there waiting…
It’s a complex financial conundrum – idle money is both a consequence and driver of financial asset deflation. It’s also all a result of the inefficiencies and boundaries within the financial system: money that can’t be allocated to certain assets because of regulation, bureaucracy or culture, like ESG or green lobbies. Over the past few years we’ve seen financial assets distorted by monetary experimentation that they are awash in unapplied capital. The cure is probably something a brisk bout of inflation – but that’s going to create a political nightmare for pensioners!
The other big topic of the last few days is the collapse of politics, but that’s a story for next week.
Out of time, lots of stuff to catch up on..