Blain’s Morning Porridge – 27rd March 2023: The Week ahead will be Full of Noise – Buckle-up and Enjoy It!
“Team by team, reporters baffled, trumped, tethered, cropped, look at that low plane…”
This Morning: The Media love financial crisis – it sells. The reality is the need to understand, plan, prepare, and don’t expect anything you expected to happen, happen. Enjoy. Sun comes up tomorrow.
What can you do but laugh….?
There is nothing the market loves more than to be absolutely terrified. I think it’s a psychological thing… in times of stress, we try to scare each other in order to share and reinforce that stress. Apparently, that global sense of imminent catastrophe is so embedded, Hollywood is putting all its cash into producing new horror films for release this year!
This is going to be an “interesting” week….
I’m pretty sure “Deutsche Bank” and “banking crisis” will figure in the headlines. It’s going to be a slightly different story to the Credit Suisse quietus last weekend. Germany has already compressed its many historically incompetent banks down into one: DB. It’s difficult to see where the DB story goes – clearly Germany will not let its’ banking “champion” (nearly choked writing that) go to the wall, but confidence is not high in the name. Don’t rule out some form of bailout/guarantee – which will create all kinds of wobble elsewhere.
The Q1 investment quarter ends Friday, and it’s going to leave many investment firms hurt and dented, setting the mood and outlook for the rest of the year. Markets may become more defensive, meaning a deeper focus on the downside risks rather than upside. Marvellous – when all around are fearful, be greedy!
Inflation is going to be the macro focus this week. Just how sticky inflation is may well surprise and shock markets, especially for expectations central banks are set to pivot back to lower rates (which would make little sense when real rates remain negative.) It will also be the prime focus of organised labour and could renew industrial strife.
Rising social tension is very much on the agenda. Everyone is watching Paris (next year’s Olympics will be fun) but I doubt the umpteenth French revolution will last much long longer: the mobs have burnt enough cars, forced the cancelation of King Charles’ visit, and humiliated Macron. However, across Europe and elsewhere the consequences of long-term inflation on consumption, industrial strife, and key crisis points – like the dysfunctional London Rental market impacting labour supply – will increasingly impact sentiment. I’m wondering about the implications and potential impact of a summer of discontent and riots as the cost impacts of inflation/wages/rents hit’s across London and other cities.
(I will be writing more about how to solve the rental supply gap and London rents this week – I got some superb and much more useful and balanced solutions than the public execution of Rackman Landlords I’d proposed as a solution on Friday – anyone with ideas on solving the housing shortage in London, please feel encouraged to write in!)
What next we wonder…..
Over the weekend it was End of the World all over again across the financial headlines. There is nothing but doom, gloom, uncertainty, and the imminent collapse of everything scrolled across the market media. You name it and someone is predicting it… from a collapse in high yield bonds, further runs on banks, a slowdown in China.
Yes, I am guilty as anyone else. Over the last 14 days I’ve revelled in:
- A coming liquidity crisis across private assets including alternatives, private debt and equity, and increasingly in listed corporate bonds.
- How the CoCo/AT1 failures revealed by Credit Suisse have effectively made bank crises more rather than less likely.
- How long-term confidence problems in banks can make their path to demise inevitable. Note my new Mantra: All good banks are alike, but each bad bank is bad in its own way.
- Identified stagflation as the biggest threat to economies – and it’s increasingly likely if Central Banks allow the current banking wobble to distract them from normalising rates, addressing inflation, and steering towards a soft landing.
- Reminded everyone inflation is sticky, and real rates remain profoundly negative – making the bond market a treacherous place at the long-end particularly.
- Warned how rising social tensions will be exacerbated by corporate greed – witness the current UK rental market crisis.
- Speculated that gold is probably the smart place to be… just before it hit a new record level!
I could easily spin these issues, and another thousand negative thoughts, to create a vision of imminent catastrophe… but I don’t need to: Dr Doom, Nouriel Roubini has already written it all, adding deglobalisation, adverse demographics, and the central banking trilemma of inflation, recession and an unstable banking system to the mix – Risk in the Age of Bank Failure. (Seriously, if you are going to watch it, enjoy a game of bullshit bingo by writing down the worst 30 things you can possibly imagine or fear may happen first, and I will bet you call “house” in minutes. Its dire (in an “entertaining way”), and will quite put you off your breakfast.)
My key trading mantra is “Things are never as bad as you fear, but seldom as good as you hope.”
The smarter parts of the professional market thinks the same way. That’s what defines the difference between experienced financier/investor/market players and the media trying to flog financial media subscriptions or the celebrity doomster trying sell the next book on the imminent end of the market economy. Crises sell. I love crisis because I’m old enough to realise a market is not a collection of facts – it’s a voting machine of opinions. When there is crisis – it is often opportunity:
- Liquidity drying up in illiquid securities is an opportunity to seek out the good ones and bid them cheaply.
- Periods of banking crisis create windows to buy the good ones (and the survivable ones (they are not necessarily the same)), cheap.
- Periods of recession don’t stop the global economy – they just make investment more challenging in terms of finding the names that will benefit and those that won’t.
But markets are changing – focusing on the wrong nuances. Last week saw Janet Yellen tell a senator the US authorities would not go as far as to give unlimited unilateral deposit guarantees. The market immediately threw its toy’s out the pram, together with a deluge of hostile comments about Yellen’s supposed incompetency. What she did do was tell depositors their money would be safe, because the Fed and Government would act as required to make it so. Not a guarantee – but a clear commitment to resolve crisis as/if it occurs.
I am wondering if markets have become a little too polarised – just like politics? Look at the pages of the financial commentariat, like ZeroHedge and others, and they are full of the blame game. How Jerome Powell, Janet Yellen, and what’s-his-name at the Bank of England, are personally responsible for the crises in market. These articles are liberally sprinkled with “academic” comments like:
“The purpose of the stress testing programme should be to highlight the vulnerability of our banking system and the need to rebuild it. Instead, it has achieved the exact opposite, portraying a weak banking system as strong. This is like having a ship radar system that cannot detect an iceberg in plain view.”
It’s all marvellous Harry Hindsight observational comedy – but the reality understood by the professional market is Central Banks, Regulators and Fund Managers struggle as much as the most brilliant financier to figure the swirling waters of the global economy, the mood of markets and how they should react. Thus it ever was. Things go up, they go down. Get used to it..
Let’s see what the day brings……
Five Things to Ponder this Morning:
Out of time, and back to the day job..
Strategist – Shard Capital