Blain’s Morning Porridge, Feb 24 2021: Rising Policy Risk
Blain’s Morning Porridge – 20 April 2020 – Watching the sky for clues
“When beggars die, there are no comets seen; the heavens themselves blaze forth the death of princes….”
This morning: There is general sense “something wicked this way comes” towards current priced for perfection markets, but trying to define the exact N0-see-um likely to trigger a market correction or meltdown is a notoriously pointless game. However, there are plenty of ways to prepare for whatever comes next….
Lots of news across markets this morning. Football dominates the headlines on the BEEB, so we shall ignore the topic for today – although it’s going to be a developing story. As the teams’ stocks surge on the income boost the theft of football from the insultingly named “legacy fans” will provide, the divide been society and markets is frightening. If anyone has views on football, let me know – I might try to write something for Friday?
More significant is the current vaccine news-flow – and what it means for global reopening, trade and growth. The UK may have done a brilliant job on inoculations, but that won’t particularly help when the rest of the globe is still closed. What I also detect is a growing sense of how much longer markets can stay on this roll….
Predicting the unpredictable
It’s never events you predict or expect that roil markets – it’s the no-see-ums, the unexpected shocks and surprises that snowball and trigger corrections, meltdowns and crashes.
Predicting the exact nature of no-see-ums is like waiting for a meteor thats spent billions of years wandering the solar system to neatly land in your catchers glove – it just ain’t going to happen. Yet, It feels like everyone is watching the heavens for portents of the next/coming crisis… Does the Greensill scandal, or the Archegos conflabulation hint at further scandals rooted in greed set to floor markets?
They are probably wasting their time looking for detail in single stars or constellations. They would be better to pick a big patch of the sky and watch. Meteor showers, which occur as the earth passes through the tails of old comets can pretty much be predicted. It hints that can have an inkling of timing and direction from whatever bas things might be coming towards markets.
Markets are about sentiment – understanding its direction can give a good idea of what may happen. Sure, there are multiple sentiment indices to peruse and ponder, but I prefer asking folk I know about what is bothering them.
Talking to a number of fund managers yesterday, most agreed the market seems due some kind of correction – it is just too perfectly priced for perfection. As prices make lower highs and higher lows, there is a definite feel momentum is slowing. The coronavirus newsflow is anything but perfect – new variants, new nations being added to “no-travel” red-lists, and few real reasons to expect the global travel economy to open as fast as airline stocks are pricing.
Not everyone is panicking. Some think the market is priced for a period of flatline activity, taking a breather before ultra-low interest rates and the sheer volume of money pumping into financial assets triggers a resumption in the stock upside. Global trade is recovering. Supply chains are being re-established.
There are an increasing number of money managers hedging the current market by going back into bonds – extending duration to juice returns and beat inflation at the long-end – taking the view bonds will rally on the back of any equity correction. Others think the trick is to buy bonds ahead of the sell off, expecting central banks will intervene to stabilise markets if stocks slip, and then exit quickly to re-invest in the inevitable stock price recovery. That’s exactly what happened last March.
Other folk are keeping a weather eye on inflationary signals – a good reason to exit any concept of a bond hedge. But what would it mean for stocks? Without the oxygen of ultra-low rates will equities continue to rally? In an inflationary environment driven by growth – stocks are good. But if we see an over-hyped post-pandemic recovery slow into recession plus inflation; Stagflation – a distinct possibility if the recovery gloss wears thin – then where is all that money going to go?
More than a few fund managers believe the correlation between bonds and equities – where bond prices and equity prices rose together as a result of the QE/low rate distortion – is now breaking down. That makes sense as Central Banks look to normalise rates. When we see rates start to rise – it spells massive pain for over-indebted zombie junk, triggering all kinds of consequences for economic growth.
And, Central Banks may not be that concerned about inflation – a few years of modest inflation could inflate away significant amounts of their burgeoning national debt.
So – where to put money instead?
The traditional investment world – listed bonds and stocks – is looking jaded, tired and vulnerable. The consequences of years of distortion as a result of hasty post 2008 regulation, subsequent unnecessary tinkering with market mechanisms, and the pernicious consequences of addicting markets to low rates and flooding liquidity from QE, are becoming clear.
Much of the stock market today looks a lottery – which stocks will be quadruple baggers on the back of mispriced money driving exaggerated hopes? Its driven by FOMO, greed, inequality, and made markets less stable. When market rallies are driven by taxi-drivers and bored marketing executives bigging-up each other on Reddit sites about crypto-currencies and EV makers, we are in serious trouble trying to explain the logic of stock moves.
The answer is to ignore it. Forget about the mistakes others are making.
Fundamentals and logic is out the window. The trick is to ignore the noise. Focus on strategies instead:
- Prepare for inflation: what assets are less likely to suffer? Assets where their underlying income and returns move in line with inflation – which isn’t just inflation-linked bonds. Most “rents” will move in line with inflation – rents meaning anything from property, leases, contracted payments, and even supply chain financing!
- Prepare for liquidity crisis: famously there are 27 doors market “entry” in the New York Stock exchange. There is said to be only one marked “exit”. When the rush for the exits starts, don’t get caught in offered-only markets. Stick with liquidity – which in bond terms means US Bonds.
- Get Real: think about alternative assets that offer returns based on the performance and income garnered by real assets rather than notional financial moves. Asset backed, private debt and equity, and outright ownership.
- Understand the Zeitgeist and Fashions: some assets will remain deeply unpopular, from smoking to fossil fuels – but critical. Look at where you are sitting, what you are wearing and what you do through today: something will have been dug out the ground, transported around the planet or grown on a farm. We can’t do without them. You can’t make steel without metallurgical coal, you can’t make paints without oil, and won’t get a new fridge without global shipping. There are luxury/stupid anti-environment plays like coin-mining that will get wiped out, but other income streams will survive intact…. Or society wont…
In the meantime… lets standby to standby waiting to see where this market goes…
Five Things To Read This Morning
Out of time and back to the day job….