An outbreak of market common sense? Weighing up uncertainty, growth, recession and why do we believe in conspiracy?

Blain’s Morning Porridge Feb 13th: An outbreak of market common sense? Weighing up uncertainty, growth, recession and why do we believe in conspiracy?

“If only fools are kind, then I guess it’s wise to be cruel.”

This morning: It’s a big week for inflation data, but markets have caught a dose of common sense as the reality of higher for longer interest rates settles in. The question of why the market believes overly frothy narratives is fascinating – understanding why is critical to bet against them.

Apologies for very intermittent Morning Porridge last week – I was travelling on business. Fortunately, weeks of shuttling has been well worth it – we’ve received the critical support we’ve been waiting for on a major development project. As soon as the docs are inked and we’re ready, I will be writing about it. Meanwhile, another great weekend for Scotland. Native Welsh speaker She-Who-is-Mrs-Blain was somewhat miffed after a 35-7 drubbing at the 6 Nations Rugby.

There were a host of stories last week, like the Google vs Bing AI Chatbot market ructions, and the massive volatile price moves we’re seeing on the back of comparatively minor news, that have important market lessons about liquidity and sentiment. I’m going to have to spend a few days catching up, and try to figure it all out again – but that’s broadly what I do most mornings: “What does it all mean.. I should be happy. Scotland is winning, the sun will rise, and my little dog loves me… So why am I worried?”.

The goods news… Markets are beginning to make some sense. The bear market rally that took off in Jan stumbled – investors appear to have concluded the outlook is too uncertain to justify the market’s frothy optimism. NSS! (No sh*t Sherlock.) The most likely reason for Jan’s stellar performance was little more than just what an awful year 2022 was for bonds and stocks.

Two factors will eventually assert themselves on markets:

• This week’s data on inflation will likely confirm prices rise trends are slowing, but also how inflation expectations are now embedded in economies in terms of wage demands, supply chains working through to consumers, and falling discretionary consumption. Issues like declining corporate earnings (down nearly 5% in the current US earnings season), will increasingly weigh on financial asset prices. It takes time for wage demands to hit the bottom line.
• Central Banks are in no rush to “pivot” and boost markets by slashing interest rates – they want to see a return to normalised positive “real” interest rates, understanding the economic damage done by overly low rates. Again, it’s about expectations management and changing market behaviours. The new reality will inevitably be higher real interest rates for longer – which has profound implications for markets struggling with their addiction to the Fentanyl of monetary experimentation! (Zero Interest Rate Policy and QE.)

The market insists on seeing the current risks in terms of stemming inflation vs recession risks – can a “soft-landing” to avoid recession or stagflation be achieved? There are two camps; the pessimists who believe soft-landings inevitably end in disaster and messy explosions, while the optimists see all kinds of growth indicators. The reality is some nations will do well. Others are going to struggle.

The positives are certainly there – the ongoing resilience of the US labour market (although I do question how high value these “post-covid” roles are), the reopening of China providing a global boost, and the potential boost the global economy will receive from green, climate change, and defence spending in the next few years.

Spending in a rising rate market, convinced debt is about to crush us all, rather depends on how deftly governments can manage debt-constrained budgets to make new cash available. Very few nations have the Monetary Sovereignty to continue raising debt without crippling the currency. The US still has it. The UK pretty much p*ss*d it away last summer. A lesson all aspiring politicians should learn.

Then there are the many uncertainties out there the market is struggling to address, including:

• Just how sticky real inflation will prove to be – how long the adjustment process will take.
• How economies react to renewed energy threats.
• The geopolitical threats and uncertainties – no one ever wants a world war, but they happen.
• And a host of others…

It’s how much these “others” scare and unbalance sentiment that’s going to set the tone for markets..

Understanding markets is largely about understanding psychology, the behaviour of crowds, and why belief systems exist. I oft find myself bemused by the crowd reaching extraordinary conclusions about the path of markets, the value of assets and the likely future outcomes of business ventures based on what it can guess about the future from what it knows today.

That gets even more difficult when we can’t even agree what the current facts are!

I am sure I am not the only person to have noted how some otherwise bright and personable chums have become, well.. “strange” over the past few years. Its worrying when good mates start spouting extreme theories and beliefs that just don’t make any sense – like how the Covid Vaccinations were designed and engineered to wipe out populations. Really? I’m still here..

The rising prevalence of conspiracy theories, and distrust in facts (dismissed as “so-called”), is a concern. Facts and probability (critical elements of common sense) are rendered irrelevant to deniers who will only accept their own perspectives. It makes consensus more and more difficult to achieve. It isn’t just national parliaments that have become polarised – I’ve seen near battles erupt in pubs about climate change.

The wave of conspiracy belief has spread across society. It doesn’t help when MPs and national leaders are advocating for extraordinary bunkum. The right to militantly believe in one’s own truth reinforces the woke police who rejoice in their ability to de-platform those who disagree with “their particular truths’. It’s there in the nastiness of gender politics.

It’s definitely spread to markets – where to question assumptions made about some firms is treated as heresy. I’ve been trolled many times for my views on some of Mr Musk’s business ventures.

There is a fascinating article in New Scientist this week that I would recommend: The evolutionary origin of paranoia and why it is becoming more common.

It suggests our levels of paranoia rose during Covid, and this is part of the reason for the explosion in the number of folk believing in conspiracy theories. Paranoia is much more widespread than we think – up to 1 in 6 of the population will, at some stage, believe everyone else is out to get them. Covid made it worse, and because people naturally seek validation of their beliefs, as soon as two people believe an irrational conspiracy it can quickly gather momentum.

Conspiracy theories are not really a problem for rational market players – except when they distort outcomes to the extent: “the market can remain irrational for longer than you can remain solvent.” I shall continue to try to remain rational, while betting on the irrationality of others…

Full Porridge service will resume this week..

Five Things To Read This Morning

FT                    UK Fund Manager Osmosis wins $4.5 bln green transition mandate

BBerg              UK Banks’ Fortunes Hinge on Economic Pressuere, Savings Rates

WSJ                 Investors are Exiting US Stock Funds During 2023 Rally

Guardian         “Bank of Mum and Dad” stoking Britain’s rising inequality, warns report

New Scientist  How high-tech spy balloons became so popular for aerial surveillance

Out of time, and back to the day job..

Bill Blain

Strategist, Shard Capital