Blain’s Morning Porridge, September 8th 2022 – Forget the dead cat bounce, its all about inflation and the Dollar!
“It’s either the devil or the deep blue sea?”
This morning– There is nothing like a dead cat bounce to cheer up the already doomed, but the real issues are inflation and dollar strength. Both can be addressed, and the treatment will hurt. Smile and get used to it.
So much to unpack about markets this morning – so apologies its late and it’s going to be short as lots of stuff going on!
There is nothing like a good old fashioned dead cat bounce – like yesterday’s green stock market! The shorts were squeezed, and half-a-dozen market talking heads declared – it’s time to buy again! It’s probably not… One swallow less does not an autumn make.
Even the ECB is on the shock and awe interest rate rising path – so the fight against inflation is very real. Unfortunately, there is the law of consequences – higher rates will go down like a kick in the head across struggling European economies, stirring up political unrest, getting populists elected and reopening the prospect of a full-blooded Euro-sovereign crisis – again. (Got some ideas on that – and it could be a great opportunity to be a contrarian!)
Interest rates are rising, yet the market is still – foolishly – taking the perspective global central banks are probably close to done. I would like a quarter of whatever they’ve been smoking – when inflation was last in double digits like today, during the 1970s, the Fed (under Arthur Burns) thought it could address inflation with gradual interest rate hikes – achieving nothing. It wasn’t till Paul Volker applied a dramatic series of big hikes – 1000 basis points in matter of months – that inflation got the message and finally abated.
Yesterday morning I had a cup of coffee with a political chum close to the Mother of Parliaments. She was trying to persuade me to give Liz Truss some slack, time to settle into her new job – and even give her some credit for the coming energy bailout package. My chum suggested its not sterling weakness, but dollar strength I should be blaming for the apparent unravel going on across all Western Economies. It’s not just sterling that’s crashing. Yen and the Euro are in a similar spot.
The “inflation problem” is this global inflation pandemic has not been triggered by money supply, wages outpacing supply, or any of the other monetarist reasons conventionally unpinning inflation. It was triggered by an exogenous energy shock and war.
The dollar problem is… different. Its strong on the back of the growing sense of global crisis and uncertainty. At some point the Fed will realise that’s not a good thing. (Dollar strength is contributing to the expectation interest rate rises will be muted, to keep dollar strength down.)
Although inflation was triggered by the war, the fact all the endogenous inflationary firewood to blevy into a price-stability conflagration was lying around ready to spontaneously ignite is important: the money printing done by central banks through the decade of monetary experimentation (via NIRP and QE) didn’t find its way into the real economy because it was immediately invested in financial assets (stocks and bonds.) Inflation is now apparent as more and more of that money in financial assets now seeps into the real economy via real assets like property.
That’s why this inflation pandemic still has damage to do – everyone is talking wages, social unrest and a housing shock in the west, but it’s not happened yet. We are still seeing buyers clambering onto the market, thinking houses are an inflation hedge, and rates wont go much higher. The same is true against depreciating assets like car and boat loans – boat dealers tell me order books are buoyant because folk believe these bad times will be short-lived.
Reality takes time to establish itself. How can we have a consumer cost-of-living crisis, yet consumers taking out more debt – unless they believe rates are set to revert lower? And that wont happen till inflation is licked, and energy prices stabilise. And currencies stabilise – a major source of imported inflation.
The crisis is Europe is made worse because of imported dollar strength driving inflation. It’s even more damaging for the UK as we’re no longer part of the single trading block – and sterling now looks the weakest link. UK Prices are going to remain more volatile – no matter what government tells us about UK energy security. On its own, sterling is vulnerable. Euro is stronger because it’s a pack economy.
The current market is all about inflation. The Fed has given enough clues about how much more its prepared to raise rates. The problem for the Fed is they need to aggressively hike rates to stem inflation, but that will only make the dollar stronger. The ECB and BOE have little choice to follow – if they don’t the currencies weaken further. If they do, their economies weaken further. My political chum accepted that is something of a conundrum.
The ever excellent John Authers on Bloomberg addresses the question of dollar strength this morning: Nothing Will Stop the Dollar from Getting Stronger.
Apples and Apples…
Among the many stocks to prosper yesterday was Apple – showing off a new iPhone 14 and new watch. Fantastic. Tremendous..
Not sure I need this years must-have Apple gimmick: a Satellite SOS System – already got a host of stuff that does that on the boat. Not sure I need information on whether I am ovulating at my age (and gender) either…
My Apple watch stopped working months ago, and Apple shrugged their shoulders and told me it was out of warranty. My iPhone 12 is working fine. I am trying to save some money to help my kids. I am being shouted at by Mrs Blain to switch off lights and save energy. I am not going to rush out and buy one – especially since they are priced at a sub-dollar parity in the UK – it costs more pounds than dollars: £1199 vs $1099! Why? Sounds like a FROAD to UK consumers.
Since my iWatch doesn’t work, I am looking for a health wearable to replace it. Any suggestions?
And that should terrify Apple executives.
If Bill Blain, a self-confessed Apple-holic is about to shake his addiction to New Bright Shinny Things – then how many others are thinking the same? I will have mild Cold Turkey that my Air-pods aren’t the latest version, and my phone is 2 years and 1 day old. But my company provided home computer system is as good as my iMac, and my company laptop does everything my IMac Pro did.
I have sold my Apple position – months ago. It was my largest holding at one point. Big companies stay big – for a while, till the next thing comes along. It’s just a brand.
Meanwhile.. Trollbots
Sometimes you just have to giggle.
The response to yesterday’s Morning Porridge – “Things are never as bad as you fear”, was illuminating. I put forward the view Ukraine and Energy is outright economic war. Ultimately Russia will lose whatever happens in Ukraine, and that it’s important the West is seen to win. In response the Porridge website was deluged by Russian Troll-bots extolling their version of Russian Truth. I simply blocked 95% of them.
The article was picked up on Zero-hedge where nearly 300 comments described me in the most unflattering terms – which is kinda nice. (I bet if I met these people, the real ones would be absolutely charming.) What is interesting is just how suggestible the audience is. A significant number of “leading” posts made comments like how much Putin loves his country, is defending it from Biden’s and Deep State aggression, and why can’t we have a similar leader, spawning a host of MAGA Trump supportive threads.
That’s the success of the Russian Troll-bot offensive. It’s simple. Manufacture the right buttons and people can’t help but press them. It’s happening on a mass scale – Russia has sown the seeds, and is now fertilising fields of weeds across the West. It’s incredibly effective, and massively successful – whole swathes of the Right-Wing American’s now sincerely believing Russia is the victim.
It’s a bit like 1940 – when American Fascists and Isolationists determined to keep America out the war nearly closed the Arsenal of Democracy ahead of Pearl Harbour. (And I confidently expect a Russian Troll bot to attack me on that..)
Five Things to Read This Morning
FT – Yen hits new lows even after Japan steps up verbal intervention
BBerg – European Markets Face Fresh Reckoning Threatening Further Losses
Torygraph – iPhone launch: Apple hikes prices by £150 for UK customers
WSJ – Fed on Path for Another 75bp Rate Hike After Powell’s Inflation Pledge
Times – Kwarteng sets out to charm City
Out of time, back to the day job
Bill Blain
Strategist – Shard Capital
14 Comments
Comments are closed.
In Defense of Crazy Americans: Always lovely waking up to your rumination… glad for the 5 hour time difference here in sunny Florida so that I can read you while having my breakfast. BTW, I don’t like porridge… it’s an American deficiency.
My opinion on Russia and Ukraine (as an American nationalist) is that both governments deserve each other and most of their citizens are victims of the politics of their leaders. The US created the Ukrainian government, toppling the Russian friendly government via a CIA led green revolution. Too much kickback money at stake, let alone the continued entertainment value of Azov nazi harassment of the native Russian speaking population of its eastern provinces. Putin, on the other hand, yearns for the heady days of the old Soviet Union. What better way to show off his warrior chops than by invading their former territory their using WW II military doctrine. What could possibly go wrong sending columns of armor rolling into Ukraine without infantry and logistics support? Hey! It worked against Hitler, although the logistics part was covered by the United States back then. Oops.
The sad truth is that our Occidental leadership has the political finesse of a weed whacker. Whether through incompetence (90% chance) or conspiracy to push a radical change in our governance (Krause Schwab conspiracy), this war should and could have been avoided. The suffering and death are laid at both side’s feet. I am living and breathing the free air of Florida while watching the rest of my country’s descent into a Tiktok driven intellectual hell. I represent the vast majority of MAGA inspired people who see both sides of this issue. If a Zerohedge thread made you think that all Trump voters are mindlessly driven by Russian bots, you are wrong. As you know, the most radical tend to drive the narrative. Most of us are not so inclined. I love a good Russian created meme about Biden. Not because I am mindless, but because some memes, regardless of who created them, hit the mark. Besides, where else will I go for my confirmation bias? 95% of the legacy media is influenced by the same actors who create those same memes.
So, here we are, watching a world narrative crafted by competing groups. All using military grade psy-op technology in a world handcrafted to deliver their messages. Long live the iPhone and its 5G network. Cheers.
Inflation started with scarcity created by the fake pandemic. Energy followed soon after Biden started his oil is bad once in office, then the Russia Ukraine issue. All together they make a perfectly good calamity. Prices responded and then everyone kicks in with raisings prices because everyone else is. Labor says count is in plus no one wants to work. Pretty simple stuff. It’s the 1970s all over again.
The Russia and Ukraine thing has a 75 percent chance of WW3. Sorry, look at the last 24 hours. Russia is bombing infrastructure, that is new, that means the Russian war hawks are now calling the shots over Putin. If you think Putin is bad wait till you see the Neocons of Russia. They want nukes.
The dollar is higher, but it’s been on that path longer than the rise of interest. Why, because Europe is failing, badly, the greens are destroying it, zero rates have destroyed their bond markets. Cash is fleeing to the safe spot. The US and the dollar, the same reason the market is going up.
Money is on the move. Europe is the loser.
Mr. Blain. This is in reference to the Russian troll bots. Are there such a thing? Yes. Now listen to my story. I was a US soldier. A sergeant. I fought in South America. I was also stationed in Germany. I go to the Veteran Administration Hospital. I get to see and talk to a lot of fellow crippled soldiers. We are tired of the wars. We are tired of the killing. The US probably killed 1 million people in Iraq. Over weapons of mass destruction that never existed. The Yemen killing fields. Syria. Still drone striking people everywhere and shaking off “collateral damage”. Which is innocent women and children killed. Do I trust Putin? No. Do I trust my government? Even less.
Thanks – that is the real story of the current (perhaps outgoing) world order.
Correct – there are no Russian trolls or troll bots, all the ones I see are middle-aged or older men writing overlong paragraphs in fluent but error ridden English like me.
(or maybe that is how my comment yesterday jumped the hurdle)
It is of course the first thing that the US/US troll bots accuse them of – first deny anyone who contradicts before you begin your own propaganda.
“1000 basis points in matter of months”
Should have happened months ago.
On inflation and Apple – the real issue is does my central bank (BoE) care about the few thousand quid I have left near the end of my career; will it offer me a real rate of return so that I can buy an annuity? Because if it won’t, I might as well go out and buy that Apple Phone that I never dared buy before. Hey I might even get drunk in a pub.
45 years ago I learnt the Fisher equation MV=PT at school.
I can tell you now that if rates stay 8% my V is going to rise rapidly and P is likely to grow with it (while T in many sectors is falling).
Buy Apple??
At times like these in the markets I must agree with the following sage advice:
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance.” – Chuck Prince former chairman and chief executive of Citigroup -2007 –
As for my countrymen and their infatuation with Trump and Putin:
“All people [are] shaken to their inner-most core by an irresistible desire to submit to a strong man and, at the same time, to hold sway over the defenseless. They are ready to kiss the shoes of any new master as long as they too are given someone to trample on.” – Benito Mussolini –
“She was trying to persuade me to give Liz Truss some slack”
I think you should. She has quickly bought the UK some time and taken responsibility for the energy costs set to cause so much strife. Hopefully the Government can now negotiate lower fixed term gas prices with Norway to provide some sort of price stability for a decent period of time. Perhaps removing the ban on Shale will also provide some welcome additional supply. The mere fact that we now seem to have a plan should hopefully stem the slide in Sterling, which will provide some comfort to those that are thinking about taking advantage of the more attractive Gilt yields.
Good afternoon (here in US Central Daylight Time). I thoroughly enjoy your market commentary, but I’m responding here regarding your search for a decent watch. I’m enjoying my Garmin Venu SQ, which not only has all the health bits but also communicates well with my Garmin bicycling computer and the Garmin ConnectIQ phone app. As far as I know it does not, alas, talk with my Garmin chartplotter or VHF marine radio, although I’m not sure what the topics of conversation would be.
Thank you very much for your insights on the current movements and market conditions.
As for a replacement smart watch, I am a fan of the Garmin watches. I’ve had my Fenix 6 pro solar for a while now and it’s been great (gym workouts, hiking, kayaking, golfing an so on). It’s not as integrated as the apple offerings but they work great at capturing whichever activity you’re engaged in. Not sure if this carries over to some of the other models garmin offers but the Fenix 6 has a fully functional global GPS map built-in with detailed water/terrain/elevation maps, golf courses and road maps (no phone or data connection required to use). Also, depending on what your doing the battery usually lasts me between 10-23 days per charge (60 hours in GPS mode).
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I must disagree with you regarding the cause of inflation. In the US, inflation was running rampant as early as the summer of 2021. The Fed insisted it was “transitory”. We have an abundance of energy, food, etc. in the US yet our inflation is high. Why? Too much money chasing too few goods. Remember, inflation is always a monetary issue. In Europe, inflation is most likely caused by energy but that will soon be, if not already, energy AND food. Note: Property prices have also skyrocketed as well as automobiles, both new and used, the result of too much money. So I do not think the war was the catalyst although it certainly amplified the inflation across the pond.
I also respectfully disagree with your conclusions on inflation. It is defined not by rising prices but simply as created money, The spending of vast sums by western governments, especially since the 2008 crisis has not been supported by government income ie taxes, It was printed or more precisely, created, Property price increases were first to appear. Now consumer essentials are soaring. The piper must be paid.
Hi Bill;
A lot of folks have bet against AAPL ever since I bought at $XX and several splits. As you said, it’s an addictive luxury good, and with the M architecture it even has a technology advantage. I think you gave up too soon.
Regards, and thanks for your Porridge. It may not taste so good these days, but the ingredients are still mostly good fare.
Bruce
Get a Rolex…….my wife gave me one in 1978 when I earned my CA……still as accurate as ever to this day. If you want to get your blood pressure tested, go to a drug store!
With all respect you have the wrong spelling for Paul Volcker.