From "Blain's Morning Porridge" by Bill Blain of Mint Partners
“You are about to embark on the great crusade toward which we have striven these many months.”
I find myself in something of a quandary this soggy morning. Wracked with nagging doubt. Why? Nothing to do with Theresa May effectively throwing the UK Election, that auto-loans are in serious trouble, or worries Qatar might escalate into something quite unpleasant (and I don't just mean for Barclays..).. These things are all noise, the daily fun and games.
Nope, I'm bothered because more and more folk agree with my fundamental market concerns: cheap money and over-inflated financial assets mean a massive correction is not only inevitable, but imminent on the back of stock markets hitting new highs. You can’t be a contrarian if everyone agrees with you…
What if we’re wrong?
Many commentators now think the only questions to be asking are when does the crash happen, what triggers it and how painful will it be? Maybe last week’s weaker than expected US numbers? Maybe the global economy isn’t is such great shape after all and can’t justify all the hype we’re seeing plugged in to stock price expectations? Or maybe it’s the UK election, or the looming Italian Job coming later this year.
Yet most folk also think a correction will be followed by a massive buying opportunity - which sounds more like folk who've missed the rally rather than seriously concerned financial watchers. So let’s think about fundamentals again.
The Winter is Coming and that it will be followed by a glorious summer approach to the distorted financial asset model is simple to grasp and makes blindingly obvious sense. Blindingly Obvious worries me. I’m beginning to wonder.. and thinking past the Trump America “MacGuffin”. (Clue: A McGuffin is a Hitchcockian plot device to keep us focused on all the wrong things as the real action is going on elsewhere…)
What if the blindingly obvious isn't the real issue? In fact there are a number of real things happening where we might not be fully cogent of the implications.
First, the charts point to something happening, but we don’t know what it’s likely to be. My uncertainty threshold has risen on the number of comments from leading stock chartists admitting they can’t read where the markets go from here. They typically say: lines on the charts show stocks are approaching a breakout or chaotic “moment”, but here’s the critical thing: do they break down or break up?
Yep, you read that correct. BREAK UP! Can it happen?
Let’s think what’s really still driving global markets, leading us the second point: While the Fed is talking about how to reduce the balance sheet, it's still reinvesting $30bln a month. Elsewhere the Bank of England, Bank of Japan and the ECB have somewhere North of $12 trillion (a seriously grown up amounts) of bonds – equivalent to about 15% of global stock market cap - on their balance sheets.
That money pumped into the global economy via QE has to go somewhere. And there is little point leaving it in bonds when rates remain the square root of nothing. That’s why we are seeing Global wealth managers still reallocating billions from bond markets into stocks. For the last few months and longer we’ve seen both equities and bonds in bull phase – unusual to say the least.
Stocks are supposed to be about expectations - but at present it’s the ongoing amount of surplus cash looking to generate returns that matter. Bond yields are so low they are literally forcing cash into stock markets! Crash or no crash – cheap money remains the key factor driving investment.
Any fundamental change will require the normalisation of interest rates - which isn't about to happen for all kinds of economic and political reasons. In fact, any analysis of the new reality has to figure out what low long term rates will actually mean – low rates, financial asset inflation and constrained growth into infinity?
The third thing we’re in danger of missing is Europe. I still giggle when I read about improving economic conditions - growth across Yoorp is up by a tad above Zero. But, unemployment across Europe is actually falling faster than even the most optimistic outlooks. With European rates so low, the ECB still on fire watch, and growth, the Euro is strengthening - which is why the market is going long undervalued European stocks. The papers and Bloomberg say buyers are longer Europe than they’ve been in years.
Most importantly, the debt threat to Europe is lessened - fiscal surpluses and low rates mean most EU countries are pretty much sustainable. Job creation and growth reduces the political tension, giving the EU time to reform. There will be ongoing speed bumps: I'm unconvinced Europe will complete a transition into a single unified political and monetary economic polity anytime soon, and the adjustment process will remain long and painful.
In short, everyone has been watching Trump and America for the lead, but what’s going on in Europe plus the continued QE distortion effects on global markets are the real issues. What’s my prediction – I still think we get a short, sharp correction (my guess is October) followed by buying opportunity – which I will remain particularly suspicious of!
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Meanwhile, maybe this is a warning on the current tech boom. The past is better than we remember. On Saturday I bought She-who-is-Mrs-Blain her big birthday present – a turntable, amp and speakers. We spent ages in the hi-fi shop making the right choice and then all day playing vinyl. Brilliant. The quality is bright, clear, unconstrained and musical. We then tried same albums in digital format – again fantastic, if a little more “disciplined”. But with vinyl, you get the anticipation of choosing the album from the shelf, taking it out the sleeve, placing on the spindle and putting down the arm. Sit back. Listen.
Appreciate.
Or you can press “Play” on Spotify.
We are both delighted with our new/old toy and we’ve moved back in time to the 1970s.. (and yes, first album we played was Dark Side of the Moon.)