The Everything Sell Off – Triggers and Consequences

Blain’s Morning Porridge – September 27^th 2022 – The Everything Sell Off – Triggers and Consequences

“This ain’t Kansas anymore…”

This morning: Global Markets have nosedived – the UK’s confidence crisis is one trigger alongside rising recession risks, crashing consumer spending and host of indications we ain’t near done on higher interest rates as inflation becomes embedded into economies and dollar strength continues unabated.

For Subscribers only; there will be a second Morning Porridge comment later today on the unfolding UK Crisis. I’m trying to confirm some information I received yesterday – and once I do, will print.

Meanwhile..

I’ve worked in financial markets for nearly 40 years now, and two things still amaze and delight me:

1. The way the market cuts through the crap to set the price. The market is not clever, it is not omnipotent, and it has no memory – it keeps making the same mistakes over and over again. The market is but a simple voting machine, weighing the collective perspective of all market participants.
2. How individuals cling to their beliefs and opinions, convinced they are right and the market is wrong. Oft times they are buried, (as I have been on Tesla), but occasionally insights and understanding of why the market is charging off down a path to stupidity are proved right and profitable.

Markets would be very boring indeed if we all believed the same thing – the consensus. Looking outside the consensus and trying to figure it out is actually a skill (well, I’m bound to say that..) It gets particularly difficult and confusing when markets reach points like this..

Take a look at the headlines, and the market commentariat clearly believes we’re on the brink of an extraordinary financial crisis:

Wall Street at Lowest Level Since Dec 2020

Goldman and BlackRock Sour on Stocks as Recession Risk Rises

Dow Tumbles into Bear Market

Rampant dollar pauses as bears stalk stocks

Investment banks see dollar surge setting stage for something to break..

You can’t try to be smart – you either are or you aren’t. The next few months are likely to be a boom time for smart traders. As this crisis crescendos, anticipating and acting on the opportunities is going to prove a boom time for some. Most of us are going to get hosed to some degree. Relax. It’s going to be like going to the dentist – multiple root canals without any anaesthetic, and a very loud drill for a very long appointment. (Been there, done that..)

Where are we this morning?

In simple market terms, the mid-summer dead-cat stock bounce is over. Brutal reality bites back. Stocks are falling. Bond yields are rising. The big issue is the strength of the dollar – sucking the economic life-force out of the global economy. Doubts and fears – they are multiplying!

There are multiple triggers for the fear from inflation, the energy crisis, but it does look like the extraordinary collapse in confidence in the UK the last few days has precipitated crisis. How lovely – Kwasi Kwarteng is going to get a global financial crash named after him… The Kwasi-Krisis? The UK Chancellor’s misjudged Special Fiscal Operation is sending shocks rippling round markets and undermining sentiment. If London has fallen – who is next?

But, it’s more complex than one fool’s arrogant mistakes. A whole raft of conflicting forces are coming together, and they are setting up to be a monumental ouch moment. I have therefore written DON’T PANIC in large friendly letters across the top of this morning’s porridge… but maybe we should. (Remember, the sun will come out tomorrow.. but the S&P won’t necessarily go higher…)

The collapse of confidence in the UK has been extraordinary. As noted y’day, the UK is not going to default, it is not going to vanish in a puff of white smoke, but it is entering a period of likely market and political instability. It will be followed by similar uncertainties in Europe as we adjust to the reality of the new Italian coalition – which will be rent by frictions all of its own. A new wave of uncertainty roils around the globe…

Global Recession looks nailed on. Corporate earnings are going to come under extreme pressure as discretionary spending plummets. Look for pain across the board. Banking, finance and investment will struggle as savings fall, where the bulk of recent IPOs are under-water, the new issue launch slips are empty, business is drying up and bank earnings are falling.

It will happen in new retail where Amazon is seeing orders slow and cancelling “fulfilment centre” acquisitions, and Apple is shuttering production lines of its new iPhone 14 as shop sales fail to match expectations. It will happen across trade, supplies chains, transport, manufacturing and about every single aspect of the modern economy, right up to the moment when it all starts to recover again….

The long-term unwind of the last 12 years of QE/Easy Money distortions continues apace. Market participants who think Central Banks are just about done containing inflation are wrong. Bond yields have not finished widening. They will have normalised when we have positive real yields, and with inflation at 8-10% around the West, that probably means double digits – with all the economic pain and misery in terms of personal and domestic borrowing that entails.

Inflation will peak, recession will still activity, and rates will normalise back lower – but in a new global economy that doesn’t benefit from China exporting deflation. It was China’s low cost of production that underlay the ultra-low interest rates of 1990-2021, magnified by the monetary policy mistakes around QE.

That era is so over. Perversely, once we have removed the distortion effects of the QE era, higher “normalised” interest rates may actually increase productive non-financial asset investment into the real economy; plant, jobs, factories, businesses and other real assets. Get ready for the stock markets playing a far less dominant role in the economy. It’s a good time to tell your kids to prepare for careers outside financial markets.

But in the short-medium term, inflation is here, and it intends to stay. It’s no longer about supply chain glitches or the energy shock, it’s now embedded into economies, triggering crisis, pain, uncertainty and industrial unrest as workers seek higher wages at a time of economic slowdown to compensate crashing real incomes. Central Banks know the only cure is short, sharp pain to cure inflation meaning yet higher rates before it becomes endemic and semi-permanent.

Anyone for the last few choc-ices?

Five Things to Read This Morning

Bberg – Morgan Stanley Says Dollar Surge Tends to End in Crisis

Torygraph – Markets doubt Bailey can avoid emergency rate rise after plunge in pound

FT – The cost of China’s information vacuum

BBerg – The Sneaky Genius of Apple’s AirPods Empire

WSJ – China Reins in its Belt and Road Program, $1 Trillion Later

Out of time, and back to the day job.. further comment on UK later today.

Bill Blain

Strategist, Shard Capital