Blain’s Morning Porridge Oct 31th 2022 – Halloween, and a scary market outlook indeed – but not nearly as bad as you may fear!
“I saw a werewolf drinkin’ a piña colada at Trader Vic’s. His hair was perfect…”
Today: Halloween is a great time to be scared about markets. They are inconsistent, confused and uncertain, but the reality is even rising interest rates, inflation and trade wars sort themselves out – eventually. The real danger is how much worse bad politics and make a scary situation absolutely frightful.
Sorry for being a bit late with the porridge this afternoon.
First – a quick explanation….
Yet again, my day was disrupted by medical tests. (A number of readers have asked if everything is ok – and yes, I’m broadly as excellent as a chubby old bloke can be.) Since March this year I’ve been trying to get my “annual” heart check – which I haven’t had for years. Tests, tests and more tests. It’s the way the NHS works. Before I can see a consultant to assess my dodgy ticker, I need tests. Lots of them; blood tests, ECG, Ultrasound, 24 hour blood pressure (twice, first time it didn’t work), Echoes, 2 week Monitors, etc etc.
They are all administered in the same suite of hospital consultation rooms by the same team of nurses. But, rather than do them all in one single session, for each test I have to drive to Cardiology, have a heart-attack trying to find a parking space, spend 5 mins seeing the nurse for that day’s actual test, then back home. I’ve got it down to 3 hours there and back, and since today (and Wednesday later this week) will by my 8th and 9th successive trips to the General, I’ve lost 30 hour plus. Over 6 weeks, that’s had a significant impact on my productivity… but try explaining that to an NHS administrator…
I had the temerity to ask why these batteries of tests could not be arranged to happen together as a single convenient customer experience? They looked at me as if I had two heads. When I cancelled one appointment they arbitrarily set for me that clashed with a work-commitment, I was lectured about the difficulties I was causing.
The outcome of all these tests is I shall see a consultant – in March next year… and I know what he will do. Send me for more tests.
Back to the reality of today…
Halloween. Spooky things happen.. and they scare us because we simply don’t understand them.
A casual glance at the financial threat board could be the scariest thing you do today, yet, this morning I’m not even going to try and explain why stocks are about to post their best month in decades, the Dow Jones is up 14% since September, when inflation is soaring, interest rates rising, earnings crashing and everything about the global economy appears to be on the verge of a zombie holocaust.
I guess some folk are just closing their eyes and praying there are no monsters under the bed.. There are, there are…
You don’t need Van Helsing or Sherlock to explain today’s confusing, disconcerting world is a very complex place, moved by consequential “threads” linking events in ways we seldom appreciate until it’s too late. Events influence market expectations and outlooks, but the pace at which massive market “don’t-make-sense” and “no-see-em” movements are happening underlies much of the current uncertainty, volatility and nervous sentiment.
These factors impact risk appetites, future expectations and give the futurologists nightmares… To understand them, sometimes its probably best to forget everything we think we know, go back to fundamentals, and try to work out how we got here..
Nothing has really changed – except everything:
- We are seeing the end of the 2008-2022 financial bull phase, (which is just a leg of the 1975-2025 long-term cycle): We had 14 years of unbalanced, excessive monetary distortion, ultra-low interest rates and QE inflating financial asset markets, driving speculative investment, and negatively impacting corporate behaviours. Finally, it’s coming to end. Markets are relearning value and risk. What will follow is more likely to be a new, new financial normality: higher interest rates and stable returns, presaged by recessions/depressions, the intensity of which will vary around the globe.
- The global economy has just been hit by a multiple-bubble shocks: Covid, supply chains, China disengagement, and now the War in Ukraine have impacted energy, food and triggered a host of economic and inflation shocks. These are still working through, but inflation has become very real, morphing from exogenous inflations shocks into endogenous issues, primarily wage inflation, consumer incomes and scarcity.
- The outcomes for markets are crashing their way towards a new iteration: The last decade of extreme financialisation saw massive imbalances between the pursuit of wealth vs investment for growth and productivity gains, raising severe income-inequalities social and industrial tensions. Asset prices grew, but real incomes languished for 99% of people. The future will likely see a redefinition of economic goals and the distribution of wealth.
- There is a fundamental reassessment of business and commercial opportunities: The age of internet driven innovation has matured. The big tech firms have become big, bureucratic and vulnerable to the next competitive shift (see comment from last week: Big Tech reality bites. What’s the next revolution, and what opportunities will it spawn?
- Global geopolitical change and realignments: The era of globalisation is over. Russia shot its bolt in Ukraine. China has shifted from being cheapest to deliver, to becoming a closed, “surveilled” consumer/autocracy, changing expectations it will export further growth. Much of the world is declining to take sides, leaving the West lest well supported. It’s time to acknowledge the fault-lines are shifting.
- Shifts in global leadership and politics: Western democracies look tired as political parties become increasingly fractured and politics becomes increasing polarised. As the UK example shows “bad” political decisions impact economies, while the US gridlock may end up in protectionism.
Cumulatively, these forces can nullify each other, or they can become magnified into even bigger threats as they reinforce themselves. How smoothly they interact will be key for just how strongly the world recovers from its current destabilisation.
There may actually be reasons to be hopeful:
Despite the screams of the troll-bots, global central banks and the financial authorities are generally on the ball. They understand the need for nuance in times of financial uncertainty, and clear consideration to be seen in their decisions. On one-hand – no one wants a repeat of the Lehman crisis moment, with the global financial collapse they could have systemically triggered. On the other – central banks understand the moral hazard and market distortions further financial bailouts would create. They know we have to wean ourselves off them. They are moving markets on to a more realistic expectations base.
Inflation may now be long term, but the inflation shock may prove shorter lived than expected. The biggest crisis is in Europe where energy insecurity fuelled the race for Gas and Gas infrastructure post Ukraine. That’s achieved results: storage facilities are full, new supply lines are opening, and Russia’s ability to hold the West “energy-hostage” is diminished. There is a chance Central banks will be able to hold rates lower than expected and become more accommodative sooner than anticipated, staving off a deep and damaging corporate crisis.
Russia is not the threat we thought it was. Its failure in Ukraine surprised Western Analysts who’d overestimated its military effectiveness. That’s worried the Chinese most – their systems, leadership and tactical/strategic doctrines are broadly similar. The fear of a Ukraine-level failure if the People Army to attack Taiwan will delay Chinese expansionary plans as they try to modernise their forces, introduce greater lower rank initiative and decision making (a threat in the surveillance state China has become), while seeking to match Western Tech.
Much of the shock in markets boils down to:
- Bond yields– 60% of market participants have only known QE Zero-Interest Rate Markets. The fact bond yields are now rising, and set the risk-free rate was always theoretical to them. Now its happening, they are beginning to understand how the risk-free rate works – with all the implications that has in terms of unsustainability for heavily indebted, low profit companies but the importance of credit risk and balance sheet metrics. Relearn the basics time.
- Speculation – low rates fuelled speculative bubbles. These are popped or popping, and the market is relearning basic truths.
It’s amazing how quickly people learn when forced.
Sadly, the biggest risks to markets remain in dysfunctional Politics.
I’ve used my Virtuous Sovereign Trinity model as a simple way to explain how successful modern economies succeed or fail. If it has competent politics, a stable currency and a sustainable bond market, then its likely to succeed.
The critical variable is competent politics. Get that right so the economy is working in terms of industrial and financial infrastructure, trade, regulation and a political system that delivers sound policies without corruption, few shocks and surprises, then generally the other two will follow.
If there was one factor that truly scares me it’s how deeply politics has become polarised between baying political factions who seem to have utterly lost sight of the need to direct policy to improve the national lot. The current political incompetence in the UK is entirely about the internal failure of the Conservative party. (Ask any UK voter and they will tell you they are equally scared by the Labour party and worry it will prove as internally divided when it gets into power.)
In the US, my Republican chums are delighted the polls now show the Reds on route to taking both Congress and the Senate, effectively gridlocking policy till the next Presidential election. Last years these guys were all assuring me President Trump was done and finished. Now they tell me to stop focusing on Trump, but just on how awful Biden is. I can’t help but think they are not speaking out because they fear the Mid-term successes for the Republicans will be claimed by Trump, reinforcing his grip on the Party.
I have a double on Boris and Trump to leading their parties in elections.
My conclusion is markets will always rationalise, energy prices and inflation will mellow, global geopolitical divides are widening, and that global trade will always succeed in finding its level because its everyone’s interest that it does. The one area I don’t see a coming improvement in outlook is Politics. Politics is not rational, it is emotional. As the stakes get higher, then political stability is likely to become even more erratic and that brings on going danger to markets.
And you will note I have not referred to the very real threats of global climate change or rising social and industrial tensions are a result of busted politics…. A topic for another day very soon.
No time for Five Things this morning
Out of time, and back to the day job
Strategist – Shard Capital