The Year is dead – What about the next one?

Blain’s Morning Porridge – Dec 21st 2022: The Year is dead – what about the next one?

“Now is the solstice of the year, Winter is the glad song that you hear…”

This Morning: Markets are slumbering down for the next 10 days. Time to relax – if you can. It’s been an “interesting” year – and it’s going to remain that way going forward. Lots to worry about, but lots of opportunities to seek out!

2022 is effectively over! The number of clients already on holiday, (plus the scarcity of my colleagues y’day), strongly suggests the year has wended its way to its weary close. It was… an “interesting” year. Now it’s time for a brief break. The Morning Porridge will resume in the New Year. If anything “untoward” happens in coming days – then I’ll be firing up the commentary.

Consequences is my word of the year. It always is. (This year, calliope comes second.) Pivot wins my award as most over and mis-used word.

Nothing really changes in markets… they are all full of traps: leverage, liquidity, volatility and the laws of unintended consequences. The one thing we know about markets is they never sleep, are constantly in motion, and seek only to fulfil their ultimate purpose: “The objective of the market is to inflict the maximum amount of pain on the maximum number of participants”. What happens today has consequences tomorrow. 2022 was a year of extraordinary events – and the consequences will be working through markets for years.

My first Morning Porridge of 2022 warned “The Big Issue will be Energy”. So it proved.

The most consequential event was Russia’s invasion of Ukraine. Many of us never really believed it would happen, and when it did it confounded us. We never had in inkling how unprepared the Russians were, not how resilient the Ukrainians have proved to be. As Zelensky visits the US to keep support and arms flowing, the War is now a long-term feature on markets. The West is adapting swiftly to the changed energy environment – even the Germans getting new LGP facilities up and running.

The consequences will be with us for decades and will trigger whole new unintended events.  Consider the sheer scale of the European Energy Bailout. Yesterday, the EU authorised Germany to commit €41 billion to rescue gas giant Uniper SE, while nationalising other major gas companies. That’s a stupendous sum – and comes on top of the $200 bln Germany has already earmarked to support companies, consumers and the economy through the energy crisis. That’s a massive lump of state spending – even compared to the bank bailouts of 2008.

The UK has also spent considerable sums – but the new government has said it can’t remain a bottomless bucket of spending – as it was during Covid! It has also folded failing energy companies into the survivors – the current Octopus takeover of Bulb raising a whole series of questions about how it happened, and botched spending while Bulb was under government remit. These bailouts raise a host of questions.

While Germany can probably afford it, other less fiscally secure nations in the Euro want similar options. It adds to the sense of instability at the core of Europe’s fiscal accommodation within the Euro and ECB. The big political tests may still be coming – although I’m fairly confident most European politicians get it and why the EU is the best outcome. Europe remains a very different case to economies with genuine financial sovereignty.

The sheer scale of energy bailouts raise serious moral hazard questions for the future of the European economies, but when Russia invaded, the choice was either commit to bailing out Energy or economic surrender: giving into Putin’s demands in order to keep the energy spigots open. Sanctions were the right decision in terms of immediate short-term pain, but with clear long-term consequences which will favour the West.

The Energy crisis of 2022 will also give a renewed focus, and hopefully a more sensible approach to energy transition and renewables. We need a plan. Wind cant replace everything – even though it is cheap and easy, its not reliable. We need diversification and new thinking, invention and innovation across the energy sector, and not loose sight that energy = growth. In face of climate change, energy will be critical.

The second critical moment for markets in 2022 was the UK’s attempt at economic suicide in September. The new Liz Truss/Kwasi Kwarteng government will go down as a national humiliation and embarrassment for centuries. Whenever a Conservative candidate asks for your vote, ask them to explain how two such utter incompetents ever got to the highest positions in the land.

What they did was extraordinary – destroying the UK financial reputation at a stroke, and tipping the Virtuous Sovereign Trinity of Sterling Stability, Gilt Market Sustainability and the UK’s Political Competency into collapse. Months later a notional and fragile stability has been regained. What a wasted opportunity. The UK blew decades of soft power in a naked display of political dumbf*ckery.

The big issue for markets was how close the Kwarteng budget pushed a global pensions meltdown as crashing Gilts and leverage triggered a liquidity storm as pension funds tried to meet margin calls. Crisis was averted by the Bank of England, but it reminded us most financial crashes are about liquidity, and today’s markets are less liquid than ever before. That’s largely due to post 2008 regulation, and the fact Central Banks assumed the position of market makers and liquidity providers of last resort through quantitative easing – from which they have now withdrawn!

When the next financial crisis strikes, inevitably the Central Banks will be called to bail us out again – so we better hope they will be as on the ball as the Bank of England proved to be… But, again, that raises a moral hazard question…. When markets fail to function, we still expect Central Banks to ride to the rescue, thus encouraging speculation?

The third big issue was the Global Economy. We scan every scrap of data to discern the likelihood of recession, stagflation, inflation, the end of globalisation, global trade and the rest. Are central banks really anywhere close to a “pivot” on rising interesting rates, and how entrenched inflation is? Is a mild or hard recession nailed on? We still don’t know… but we never have been able to predict how economies change and react to stimulus – despite employing millions of economists who think we can….

Most stories I’ve written in the Porridge this year are broadly about facets of the global economy – politics, commodities, shipping, China, aviation, growth vs fundamentals. That isn’t going to change.

Politics has been fascinating – the general sense of disappointment in our political leaders continues apace. Polarisation and incivility. Voters in the UK are heartily sick of the endemic sleaze and dissent within Government. In the US the GOP is struggling to unravel itself from Trump’s tentacles, Putin made a terrible miscalculation in Ukraine, while Xi’s China Covid policies now look his weak spots. Politics is an area that can oft surprise us – just when things look particularly bad, something new comes knocking – although I have my doubts.

I posted over 250 comments through the year, and I did get a couple of things right. Back in Dec 2021 I suggested ARK, the US disruptive tech evangelist led by Cathie Wood would become one the trainwrecks of the new year. It’s down 66%! The collapse in Tesla, the Big Tech FAANGM stocks, the immolation of the whole cryptocurrency and confabulations of NFTs proved me right – the focus of investment into stocks has swung 180 degrees from hallucinatory “growth” towards fundamental business strengths.

Through the year I never really found enough time to really dig into the bursting of the crypto-bubble scams or the end of meme-stock madness. To my way of thinking they were more symptoms of distorted financial malaise and greed, rather than investible concepts. But one thing that did make me think was an interview I read yesterday with a young crypto-investor who lost $14,000 in the collapse of FTX:

• The guy said “The Tech itself, the crypto, seems fine, the problem is the institutions around it. They are the ones who undermine the trust…” He goes on to blame the New York Times and other media for building up players like Sam Bankman-Fried and other crypto-kings (few queens I note.)

What made me take note has his absolute lack of self-awareness or responsibility for his investment decisions. There are millions who will forever blame markets for their losses in crypto, failing to accept they been sucked into an investment sector with zero real utility or value, based solely on what the last greater fool will pay. If anyone is guilty, then it’s the celebrity hawkers who sold themselves to promote the crap – stick a couple of them in jail.

Five Things To Read This Morning

FT                    Lessons from the gilts crisis

WSJ                 Stock Picking Makes a Comeback in Market Turbulence

BBerg              Cathie Wood Loads Up Telsa Amid Growing Criticism of Elon Musk

The Atlantic     China’s War Against Taiwan Has Already Started

Torygraph       Elon Musk will quit Twitter – “someone foolish enough” to take over!

Holiday!

From tomorrow I’m sleeping late, taking a few days respite, and looking forward to some balanced over-indulgence. The cellar is full, the feast is ordered, and my wife has spent the gross national product of a small nation on cheese as a contribution to the Christmas festivities! We will spend the coming days with friends and family, and if I think about markets.. it will be by mistake….

But it’s a mistake I can’t help but keep making!

It remains my greatest pleasure writing the Porridge – a useful distraction from my day job. It may be nonsense.. but it gets me thinking each day!

Merry Christmas, Happy Holidays and Guid and Prosperous New Year to us all..

Bill Blain

Shard