Blain’s Morning Porridge, July 23 2020: This time it’s different?

Blain’s Morning Porridge – July 23 2020 : This Time It’s Different?

“Bubbles are far more dangerous when they are fuelled by debt”

This time it’s different”, is one of the most dangerous beliefs in financial markets. This time, things are different – but for a reason. Global Central Banks have pumped liquidity into the financial system to support the global economy as it struggles with a toxic economic shock of unprecedented scale. This may surprise some market participants, but they did not do it to pump stock markers and bond indices to stratospheric levels. They are doing it to save jobs, keep companies afloat and keep society stable.

Markets are indifferent to such concerns. They care about “up”. 

The liquidity effect has generated the market momentum that’s driven the rally since March 23rd– not fundamentals. It’s like watching moths being drawn to a flame. You just know this can’t last, and the bear trap is going to slam shut at some point. Questions are when and if ever? There are articles about big institutions quietly exiting Amazon, Apple, Alphabet, Facebook et al… there are tabs explaining how over 500,000 RobinHood accounts have bought Tesla in recent weeks, there are stories about insider selling.  

Who knows? 

Never forget Blain’s Market Mantra No 1: “The Market has but one objective; to inflict the maximum amount of pain on the maximum number of participants.”

When the American’s are chucking China out of Houston, and worse, the Chinese are taking English Premier Football off the TV (which is actually going to prove highly significant for some clubs), you know the world is really changing. Central Bank action is central bank action. A new Cold War is fundamentally serious… 

So please don’t waste my time by telling me Company X is such a fantastic investment proposition because its stock price has gone soaring higher. Tell me what the something special it does or what particular unique service is has proven it can deliver, makes it so valuable. Explain to me the rationale for it being able to generate secure cashflows, maintain orders through a worse case global trade scenario, and how it’s not subject to competitive threats likely to paradigm shift it into oblivion in a few months time. Don’t tell me to buy it because its going up because Robin Hood accounts are buying it….

It’s “going higher because it’s going higher” is not a reason I’d be buying a stock. 

All that excess liquidity driving market momentum has consequences – not least of which is blinding idiots to dangerous reality. 

One consequence is “financial asset stagflation”: prices of bonds and stocks are rising, but produce lower and lower returns. It’s undermining the natural selection of markets – allowing dead zombies to stalk the land, and the efficient allocation of capital. Long term it will destroy the value of pensions and undermine savings. Investing purely on upside price potential, and not long-term returns, will make financial asset markets irrelevant. If you are buying because a profitless stock is going higher, and this makes sense, I have a very pretty tulip, and I’m willing to sell it to you for $1 million. 

You would do much better investing y amount of capital directly into a factory making “stuff” you sell at z price – thus making a proper return. Safe, secure, dull, boring and predictable. 

A second consequence is being blind to reality – the volume of corporate defaults is rising and recoveries are falling. A US reader pointed out defaults this year already exceed the total for the whole of last year. As I pointed out yesterday, the liquidity deluge means refinancing is easy – but still we are getting defaults. What would happen if the markets normalise?? Which may be why they never do… 

This article by Pawel T. Mosakowski on the unsustainability of tighter spreads and higher defaults puts the data and the current madness of markets in context rather well..   

Meanwhile.. is it worth saying anything about Tesla making its 4th consecutive quarterly profit? It made $104 million profit on the back of $428 million from the sale of regulatory emission credits.  Hats off to Tesla – they have built a brand, are selling cars and…. Is it really worth $300 bln? Elon Musk just met the targets for his second dolup of bonus shares – a paper gain of $2.1 bln, although he can’t sell for 5 years. 

What makes Tesla worth so much? Its tech? Nope. Its patents? Nope.. Its promise? That all that data its collected and its mastery of driverless self-driving and monetising its cars as Robotaxis. Really.. believe whatever you want to believe. I won’t be selling my six accidental Tesla shares as the momentum of fools will probably carry them yet higher.. 

Five Things to Read today: 

A mixed bag of news this morning as EU gets ready to not dominate the European bond markets (a number of clients not convinced), the EU also decides to make markets better by regulating them some more because Mifid has helped so much. Meanwhile, what does the weaker dollar really mean? John Cleese gets frustrated and HSBC.. not a happy tale.

BBerg – European Rescue Fund Creates New Big Beast in Bond Market

FT – EU plans flurry of rules changes to boost market recovery

WSJ – Tumbling Dollar Unleashes Precious Metals Rally 

ZH – John Cleese: Society is now controlled by the most touchy, emotionally unstable, and fragile people

Torygraph – HSBC under fresh pressure over claims it checks clients pro-democracy links

If you want a giggle… My daughter’s Paddle board and I don’t go well together… Will try to post the video..

Out of time and back to the day job

Bill Blain

Shard Capital