Blain’s Morning Porridge – March 6th 2020
“Genesis want £500 for a seat at the back of the O2. I’ll put a disc on the record machine rather than face the hassle of going up there to watch some old men trying to jack up their pension pots. My wife shouts: “Turn it off again…”
Its messy out there. Hard hats on.
It’s Friday! Markets are up, down and shaking it all about. Traders are warning about double bottoms and dangerous tops.. It looks fragile, and you can tell just how concerned investors are by the number of comments now getting posted on the comment boards. When markets don’t understand what’s going on, traders suffer an urge to tell people just how much they don’t know!
I have no idea where we go next, but I have my suspicions… They are dark. Markets always over-react. Its financial law. But I am worried. There is lots of downside risk in terms of overpriced assets, but very little on the horizon that looks like upside. The risks are asymmetric.
But, let’s try to step back and figure out what, if anything, is really wrong with the Global economy? What does all the recent noise surrounding Coronavirus, failed central bank action, tumbles in stocks and lowest ever bond yields really mean for growth, business and rates? These are the key measures investors estimate when seeking to garner investment returns. What are the key issues influencing the negativity, and what might change for the positive?
Sorry to rain on everybody’s parade, but I reckon the effects of Coronavirus, market uncertainty, central bank credibility doubts, and ongoing political shenanigans means we’re going to get, AT BEST, a flatline market performance through the remainder of 2020. There is a serious risk we go much lower. Markets for financial assets – listed stocks and bonds – are going to remain very difficult, illiquid and volatile. Alternatives uncorrelated to market moves are going to be perform best. In market terms – it’s going to keep raining!
Of course, I might be wrong. Maybe the virus, politics and market distortion are just noise. Behind it, the global economy will rumble on and grow, and the 12-year bull stock market is just having a “moment”. I know at least a few big buyers who are quietly ignoring the current mayhem and panic, figuring out we remain in a long-term growth phase. But for every one of these is another market sage predicting the Coronavirus and Central Banks add up to a reset moment with stocks taking a massive hit.
Whatever.. Watch what happens next in USA.
Try to get through the next few months intact. Its going to get better. IT ALWAYS DOES!
My big call for is for something much more positive in 2021! You might be thinking it’s a bit early for a market prediction for next year – but there is a very good chance we could see a greatly improved Political Outlook in the USA priced in by Q3. If it happens we may see global growth back on trend and markets rally. Sure, there are serious risks – there always are – but hey-ho!
Most market commentators still think Trump will win in November. All he had to do is wait for a riven Democrat party to lose the November election.
That analysis misses the reality of the Big Democrat
Carve-Up Fix earlier this week. The Democrats have now put The Programme in motion which is likely to see Joe Biden – a most uninspiring leader but a great politician – clinch their nomination and seriously challenge Trump at the polls. Within a few weeks I predict we’ll be talking about the likelihood Trump loses the election. (As it happens; expect to deluged with fake news media posts about Biden’s mental health, his age, what happened in Ukraine, etc, as the Trumpists try to lie their way into a another 4 years.)
Under certain conditions a Biden win will be great for America and a trigger for global economic lift-off.
But first, lest we forget, lets remind ourselves of why current market sentiment is so fraxious:
Like it or lump it, we can’t change it till we know more. It’s an exogenous shocker. Efforts to contain the virus are having significant global economic effects. The critical questions are how much does it damage growth, and for how long?
Investors are increasingly aware the logic of markets is crumbling as a result of years of QE, monetary distortion, and declining faith in central banks and regulators. Ultra-low interest-rates indicating global slowdown, while equity markets are at all time high are the antithesis of each other. We are likely to see massive illiquidity in bond markets driving all kinds of contagion risks. It looks and feels unsustainable – which is why markets feel increasingly frayed and nervous, and concerned at the long-term consequences for the invisible hand.
The past 5 years of rampant populism has seen the global economic order repeatedly dislocated. Brexit in the UK, Trump challenging Global trade accommodations and an increasing illiberal right-wing shift against immigration in some parts of Europe, while increasing income inequality has driven left-leaning politics around the globe. Meanwhile, the dramatic rise of the Green Environmental movement – which has spawned tickbox ESG investments to appeal to the masses – influences vote seeking politicians. Increasingly dislocated and confrontational politics make markets nervous.
This is the one markets usually miss. Things don’t work well. As the world becomes increasing complex in terms of technology, climate change, and seems to work less and less well as tired infrastructures breakdown, the failure of bureaucracy – from the highest levels of government right down the management of SMEs – to respond effectively to changing conditions is becoming more and more apparent. A massive shift in how the world works is underway, and we just aren’t responding well. Trying to do anything from building a new railway, reforming health or simply getting a refund on a ticket becomes a bureaucratic impossibility.
There is nothing we can do on Coronavirus. At best we can hope for a V shaped recovery. The worst case is very negative indeed.
Sorting out markets looks extremely difficult – without central bank and government credability and support to keep up the delusion, markets will collapse. If they continue to do so, markets will eventually collapse. It’s just a matter of when the illusion breaks.
Bureaucracy is a long-term issue solved by positive disruption, keeping bureaucrats nervous, keeping markets and growth fresh, and constantly presenting entrepreneurs with new challenges and solutions to innovate. As soon as things get settled into the dull, boring and predictable it becomes almost impossible to force institutional change – which is why I’m a massive seller of business bureaucracies like HSBC. (Disrupting bureaucracy rather than politics is going to be the topic of my next book – when I get round to actually writing it.)
Politics is different
Politics is perhaps one area where change is genuinely possible. It’s too late to do anything about Brexit and the UK, for good or ill, has given Boris the keys to the toy cupboard. Europe is Europe, and barely democratic anymore – having sacrificed financial sovereignty to the ECB, and legislative sovereignty to Brussels.
The USA is different. As Biden’s elevation shows, we have a suddenly changed Political Landscape and an utterly changed growth outlook as result.
What happens if Trump wins the November election? It’s likely we have an even less constrained President. He’s behaving himself now because he has an election to win. From November, he doesn’t care anymore. Good behaviour will go out the window. He will do whateva he thinks, and as he’s surrounded himself with Yes-men who is going to tell him NO? Expect global trade to be more aggressive. Expect more pressure inflected on an economically damaged China. Expect the continued alienation of former allies, like Europe, as they try to solve issues like tech taxes, and dump on US agribusiness. In short, global trade will become even less stable, while Trump continues to surprise, befuddle, confused and peeve.
Ultimately, it’s America’s credibility that will pay the cost, hitting the dollar. Distrust of America will rise around the globe, triggering further protectionism and potentially handing a reordering global economy to China. I can just imagine how certain US readers are going to respond to these comments. I shall be trolled remorselessly. Bring it on.
Compare and contrast with the prospects for a moderate Joe Biden. He is business friendly – as are about 70% of Democrats. They want a strong, democratic and fair America, and they share the American dream. They don’t mind paying taxes, and don’t mind if the rich pay more. It’s the 30% of Democrats who will stand with socialist Bernie Sanders that scare the market.
( I have to admit I like a lot of what Bernie says – but I never voted for Corbyn either. My Uncle Jack, whom my son is named after, ran away from Glasgow to sea as a kid and ended up in Pennsylvania. He was successful, but remained a Wobbly – An International Worker of the World – all his life. Bernie terrifies the market – in much the same way Corbyn did in the UK.)
The ideal outcome at the November Elections will be a trade-off where the Trump threat is neutered – and I know many Republicans would prefer that rather than watch Trump embarrass and demean their country on the World Stage. Heck, they’d even vote for Biden if the Democrat shift to the left could be curtailed. That could effectively happen with a balance between a Democrat President and Congress, but the Senate remaining in control of the Republicans.
If the Democrats get a clean sweep and seize Congress and the Senate, then the risks of massive tax hikes damaging the economy and policies that drag down stocks will be perceived to rise.
The optimum Biden Goldilocks solution for the US and the Global Economy is one where Biden is forced to do deals with the Republican Senate Leadership and his own party in Congress. The upside could be a return to consensus politics and the possibility of agreement on critical infrastructure, health and tax spending. And that is where Biden will excel – doing deals with the rest of the Washington elites. It won’t appeal to Red-neck Trump voters, or Bernie’s Tree-huggers… but it would probably work.
There are risks. There are signs the Republicans could lose the Senate. Senate seats in Colorado, Arizona, and Maine are vulnerable, while others in Kansas, Iowa, Montana and Georgia could suffer from Trump kickback.
A Biden win in November and the Republican’s retaining the Senate could prove a Goldilocks scenario.. or will it simply push us back into political gridlock?
Five Things to Read Today
FT – Banks, transport stocks and small-caps enter Bear Market
FT – Coronavirus raises threat of China Developer defaults
BBerg – It’s Time to Really Worry, Says Manager Who Beat 98% of Peers
WSJ – Bond Yields Approach 0.8% as Bets on Interest-Rate Cuts Mount
ZH – “We Have Never Seen This Before” – The last tie the market did this, FDR confiscated all the gold..”
By way of something different to read this morning, might I suggest an article I recently wrote for the excellent Property Chronicle on Sailing– ALife on the Ocean Wave is Better than Going to Work!. Nothing to do with markets, but what is better than simply messing around on boats..
Out of time and back to the day job..
Strategist, Shard Capital