Big Shifts last week set to dominate markets long term

Blain’s Morning Porridge – Nov 14th: Big Shifts last week set to dominate markets long term

“I think there is a world market for maybe five computers.” 

This morning: “Last week saw a succession of fundamental shifts in how the global economy is working: inflation, China’s reopening, western politics, crypto, Climate Change, Tech stocks, and in Ukraine. These all have significant potential market implications.”

What have we got to look forward to this week? So much to worry about there was only one possible way to cope come Sunday morning: I went for a nice long swim, raced my dinghy, followed by too many post-race drinks, finishing with a fantastic meal with chums prepared by She-who-is-Mrs-Blain, before early-to-bed for a nicely sozzled slumber… and did not open the financial pages at any point!

Lots of people in the yacht clubs y’day were asking me about Crypto – but very few questions about bond yields.. which says it all about what normal people think matters in finance.. The back garden remains unattended… a tomorrow or the day/week/month after project.

But its back to reality with a crunch this morning..

Last week was massive in terms of the fundamental turnabouts we saw… Collectively, these could set the tone for the global economy for years. These are all themes and opportunities I will be returning to in depth in coming days:

• The market is giddy on the declining pace of US inflation, rallying massively on expectations the Fed’s tightening cycle will slow.
• China announcing the easing of its strict Covid lockdowns, and help for the ailing property sector.
• The beginning of a fundamental reset in US politics – in both red and blue camps.
• A(nother?) terminal moment for cryptocurrencies
• COP27 degenerating into something far less than a plan for climate salvation.
• Fundamental reassessment of the value of tech stocks as the sector looks, tired, less-genius like, and subject to market law.
• Russia consolidating its lines in Ukraine.

This week the themes will continue to develop at the Indonesia G20 meeting and the UK’s autumn statement “throw-of-the-dice” budget statement. (It might not be a shocking as we fear…)

What does it all mean for markets?

First up, we are not out the inflation woods yet. Inflation is not the problem – it’s the consequences that matter. Although the weather forecasts are for a warm dry winter in Europe, Energy costs remain a threat. The US is less vulnerable, but until real bond interest rates (yield plus inflation) turn positive, and the economy adjusts to inflation, nothing is fundamentally sorted.

The CPI market gain at the tail of last week was a classic “relief” rally – a market willing itself higher after a fall on any positive news. It justified all the analysts who were saying stocks were cheap. Never forget: The market has but one objective: to inflict the maximum amount of pain on the maximum number of participants!

Although pace of price inflation (still rising prices, but rising less steeply), it still has to work its way around the global economy – which we are seeing now in terms of falling discretionary consumer spending, and particularly rising wage demands. Wage Inflation is never transitory – and has tremendous economic consequences. Controlling persistent wage demands requires economic pain…

China reopening has proved a boon for Hong Kong’s stock market – with China based analysts predicting “double digit” growth next year as global growth resumes. But these rosy expectations factor in a “perfect” Chinese economy, while the reality is one of the Party (Chinese Communist Party) overseeing a surveillance state with many economic crises ranging from property markets, corruption and a potential domestic loan crisis – there are just too many inefficiencies within the Chinese State to expect it to reopen and stimulate global growth smoothly.

Last week’s US midterms highlighted the folly of the Republicans remaining in thrall to Donald Trump. Whatever he announces tomorrow – whether he goes ahead with his threat to stand in 2024 – is immaterial. Trump and Mitch McConnell are in their dotage. The Republicans see a better future in the next generation of younger, more energised and better connected politicians like Ron DeSantis.

The problem for the Democrats is even greater – Biden is the baby of his party leadership at 79! Nancy Pelosi is 82, while the great progressive hope Andrea Ocasio-Cortez (AOC) is just too “progressive” to appeal across the whole electorate. Both parties desperately need new blood in the leadership roles. The Republicans are in the lead in that regard, but are likely to favour Trump-like clones: which is likely to be isolationist and bad for global trade and geopolitical stability.

I’ve always argued cryptocurrencies have zero intrinsic value or point – but I’m happy enough to trade them on the basis of greater fool theory and understanding the hue of the Emperor’s New Clothes. That FXT has collapsed and other rickety exchanges are wobbling is no surprise. (One exchange has revealed over 20% of its assets are the joke Shiba Inu coin!) Ccypto barkers are blaming regulators for the collapse – which I think is hilarious.

But crypto really is finished. Last week the US Department of Justice recovered over $3 bln of bitcoin stolen over a decade ago –  the fact the Feds were able to trace it should be a wake-up shock for crypto shysters.

Even more importantly, IBM’s new Osprey quantum computer has 433 qubits, eight times are powerful than Google’s Sycamore with a mere 53 qubits! IBM will follow Osprey with a 1000+ qubit model next year.

These superconducting quantum computers need be kept close to absolute zero to work – but eventually they will become mainstream. The current Osprey model is already powerful enough to process more information states than there are atoms in the universe – says IBM. The implications for the economy are immense, but terminal for cryptocurrencies. The new quantum computers don’t even need to crack their code – just the possibility they can makes them obsolete!

COP27 in Egypt is apparently little fun. My colleagues attending the conference say it’s tough, and it’s increasingly clear such a vast gathering of Governments and attendant bankers, financiers and other con-men have little chance of agreeing anything except more words and compromises to be unravelled next time. Its looking more and more important we see real progress, and I suspect that will come from the private sector stepping in to invent, innovate and develop new sources of power, capacitance and climate mitigation strategies. It’s already happening – and I will follow this up with a note later this week…

Back in global Tech land, Elon Musk’s handling of Twitter is either the smartest thing a human being has ever done, but is more likely to be his moment of hubris. Taken together with Meta sacking 11,000 staff, it feels like the gods of tech look more like failing men on a daily basis. Some big tech giants are maturing nicely, having built deep moats around their businesses, but even Apple know it will not remain at the top of the corporate pile for ever. The new new thing will always come around and Apple’s suite of bright shiny white consumer products will just become another brand.

What comes next? Which leads back to my previous paragraph about the bureaucratic gloop that is COP. New and diversified renewable power sources plus climate mitigation products could be the next boom cycle. More about this later.

And finally, there is the Russians withdrawing to a more defensible line in South Ukraine. Does this represent an opportunity for Ukraine to negotiate? Should they?

Five Things to Read This Morning

BBerg               China’s Big Tech Becomes Target for Investors FOMO

FT                     Emboldened Xi Jinping steps back on to world stage with G20 Summit

WSJ                  China Dials Back Property Restrictions in Bid to Reverse Economic Slide

Torygraph         Big Short Author plans book on notorious crypto founder

Guardian          Is austerity the only way for Jeremy Hunt to reassure the markets?

Out of time, and back to the day job…

Bill Blain

Strategist – Shard Capital