Beginning to look like a Messy Cascade

Blain’s Morning Porridge – September 20 September 2021: Beginning to look like a messy cascade

“Steam in the subway Earth is afire”

This Morning – The most destructive rock falls start with a single pebble trigging a cascading chain reaction. Are markets heading towards a cascading crash as spiking energy costs join inflation and supply chains on the list of likely meltdown trigger points? Or should we relax?

Slightly late with the Porridge  – today’s photo is of this morning’s commute: sailing back as the sun rose from the Isle of Wight Festival to our home port in Hamble. Last night’s closing set by Duran Duran was simply massively brilliant and entertaining.

Naturally, I never had much time for the band in the 1980s – the girls adored them, but as lads we’d try to pick edgier music. These bands have gone… but Duran Duran thrive on a catalogue of great songs – which should set any reader to thinking about how to monetise their embedded value. Simon and the Band could make a multiple of millions if they sold the catalogue. Music as an asset is a strong performing asset class.

But back to this morning’s theme…

What a great time the 1980s were. Maybe it was a reaction to glam rock, prog rock and teeny-boppers, or maybe it was the UK’s miserable 1970’s economy that spawned first Punk Rock, then New Wave and New Romantics and morphed into the new reality of Cool Britannia in the 1990s? 20 years of Brilliant Britain!

Whatever… I have a horrible sinking feeling the next few years of economic uncertainty, monetary repression, austerity, political incompetence, and likely stagnation are likely to be as generative of angsty bands as the 1970s were.. I’m predicting the return of Punk v.2.0!

The outlook doesn’t feel great.

Because I was actually sailing at 6 am this morning.. I didn’t get a chance to do much except peruse the headlines. “Energy price rises: taxpayers face bill for propping up suppliers” says the Thunderer (The Times). It predicts the UK’s wild west of small energy firms are about to be swamped by energy price uncertainty, triggering a slew of defaults and a taxpayer rescue. Ministers say there is no problem.. the UK has a “diverse gas supply”. Bollchocks… The UK has almost zero gas reserves and thinks we can go to Germany for gas, at a time when Germany has effectively put itself under the Russian gas cosh. Putin looks happy – which is never encouraging.

This all feels unlikely to end well. It’s not just energy supplies that feel wobbly.

Here in the UK, furlough payments to support jobs are about to end. VAT in eateries is being reintroduced. Yet, the economy is running nowhere near normal. The newspapers are talking about massive post pandemic redundancies – even though the UK employment data looks positive. We’ve got Government scaring the bejesus out of voters will talk of rising taxes to pay for it all.. Austerity and recession don’t go well together. And a worsening supply chain crash increasingly looks likely to cascade into full blown crisis as one small problem morphs into multiple large problems down the line.

Take a look at sterling. It’s under pressure because of the known unknows like; How will Brexit really play out? Is coronavirus about to trigger further slowdown and lockdowns? What are the chances of a full blown recession and market crash? Or… what about the more difficult one; how competently will the UK handle potential stagflation if these factors combine to push the economy downhill?

There is a danger of a negative feedback loop developing in FX – confidence in the nation’s ability to control inflation diminishes, causing FX markets to sell its currency, which has the effect of generating inflation as the cost of imports rise, or forces central banks to pre-emptively raise rates, thus triggering a full recession. Recession plus inflation – stagflation. Whoops.

There are massive policy risks. Typically the one the market expects Central Banks to make is raising rates too early and quickly, killing a recovery. The alternative is leaving them unchecked and fuelling inflation – in which case start reading 2 paragraphs up again.

The risk today is Central Banks will keep interest rates low as long as possible. The last thing the delicate confidence of markets could cope with today would be a wholesale market meltdown – which is possible whenever Central Banks taper QE and push rates higher. That would create an entirely expected and predictable crash as the money that’s been causing massive financial asset inflation is like a rug being pulled. It would trigger a reassessment of yields.

However, a market crash following the outbreak of a supply chain meltdown triggering recession, combined with galloping inflation would trigger something far more destructive – a run-away meltdown across all markets including FX. To be blunt – I’d probably chose the deep blue sea option: central banks risking a market crash by rising rates than the devil option of stagflation triggering a full meltdown crisis.

Whatever happens, it will be different from 2008. There is less chance of a full banking crisis – regulation has pulled the bank out the market with the multiple risks they once contained transferred from Banks into End-Investors. All it means is the pain will be felt by someone different – probably retail savers when they see their pension savings burnt!

The sun maybe shining… but there is a chill in the wind. Its all about Gas – how futures are soaring on fears of a supply crunch this winter, and how the National Grid found the electric tank was nearly empty. Empty supermarkets, Amazon selling little-else but cheap and shoddy China knock-offs and a growing sense shortage and queues are becoming normal. Last week’s headlines about closed Fertilizer plants are just one hint of massive knock-on effects to come – without domestic fertilizer supply it will have to be imported, at a time when every country is struggling. The result is likely to be a struggling agricultural sector next year, lower yields and higher prices.

Try building a house. Forget it. Cement, bricks and glass are on the unavailable list – unless, of course, you are willing to pay – inflation..

In short.. what a damn mess..

Bill Blain

Strategist – Shard Capital