Blain’s Morning Porridge – Sept 24 2020 – A Falling Glass

“The storm comes. Use it to learn how to sail skillfully.”

There is a distinct chill in the air when it comes to markets this morning. Whatever Mnuchin and Powell say, the absence of further stimulus in the run up to a possibly tumultuous American election that may stretch uncertainty till Inauguration day in Jan 2021 is dominating the action in the US. (What kinds confusion might occur as they argue who runs the country..?) The “risks are weighted to the downside” says the Fed. The rising dollar is like a falling barometer telling us a Gale is coming.

The glass is falling… 

Here in Europe, the dominant force is the Coronavirus, recession and jobs. It’s not just a UK crisis. Growth has fled. Recession in a sinking European economy will deepen. Even Sweden is admitting rising infections require a response – which will be measured, minimal and left to individuals to enforce. Something must be seriously wrong in France – they are copying Boris with 10 pm bar closings. France admitting England is right? That is serious m*rde. It’s not just stocks. Bond markets are beginning to sag with credit under increasing pressure. It’s a sign confidence is waning.

What more can governments and central banks do? We’ve thrown the kitchen sink at the virus, but the numbers are rising. Central Banks have cut rates to historically lowest levels ever and economic activity is falling… QE Infinity promises liquidity is not an issue – but holders want to sell….

Arr… Capt’n.. I can feel a storms a’coming… 

It’s been feeling autumnal all month – this morning I was woken by lashing rain, followed by  a clear blue sky at 7.00 am. As I finish the Porridge, its blowing half-pelicans out there! Even blowing the young olives off the trees on the balcony in front of me. It’s an equinoxal gale – with more rain and wind to come. I know that because I watched the weather forecast.

Markets in these uncertain times feel much the same, hope followed by despair… Up and down… However, Financial forecasting of markets is not a science – it remains a dark art. Markets are all about behaviours – which are notoriously difficult to predict.

There are the market chartists – who pour over carefully constructed charts, lines and curves seeking logic in numbers while scrabbling for hints on what markets might do. They rely on the properties of magical number series like Fibonacci or Elliot Wave rules to determine the up and downs of prices. (I suspect many of them hedge their prognostications by also examining the livers of slaughtered sheep to divine the day’s financial auguries.) And, yes, it worries me that computer algorithms are running markets based on what the chart’s experience tells them..

In the past weather lore was considered essential knowledge for farmers, traders, and sailors. Knowing what the sky, hills, trees, the behaviours of cattle and sheep, and clouds were telling about the weather was critical. Experienced countrymen and sailors with a “weather eye” could read the signs. They could tell it was going to rain by the leaves on trees turning inside out, a shift in the wind, a sudden chill or heat in the air, or the cattle lying down. If the sheep were hiding in the deep combes and folds of the valley, then a wind was coming. If the waves were developing white-horses, then a blow was imminent. Grey mares high in the sky – thin whispy cirrus clouds like a horse’s tail – meant a front was approaching and likely to being rain – time to get the harvest in, or to reef the sails. The price of goods would change with the weather.

Weather forecasting changed from lore to science thanks to the efforts of Admiral Robert Fitzroy. He was a religious man, who clashed with Charles Darwin when he skippered HMS Beagle on the voyage that changed the world and led to Darwin’s “The Origin of Species.” Fitzroy was an equally clever chap, and a superb oceanographer. He realised the weather had patterns that might be predictable. He founded what is today the Meteorological Office to collate and compute data and observations from ships and shore stations – and distributed the first forecasts across the land. Queen Victoria would consult him as to when it was safe for her to sail across the Solent. Today the Weather Area West of Biscay is named Fitzroy in his honour.

Financial and market forecasting is still an art. The great traders and investors get that – and develop a feel for all the inputs. If I have any sense of it – it’s what’s crept into my bones through 35 years man and boy in markets. I’m that grizzled old fisherman who can look at a piece of seaweed to opine on where to fish today – he might not have a clue about it, but he’ll say it with confidence. It’s up to the younger fisherman to listen or ignore me.

Arr… pass me a glass of rum… 

I like to think I’ve developed a keen weather-eye for markets. I tell myself I can sniff trouble coming. I watch, and particularly listen, for the sounds of approaching opportunity. (For every financial storm is ultimately a market opportunity..) I’m not watching the leaves on trees, or clouds, but the behaviour of the flock. The way cattle behave oft resembles the actions of the crowd and its peculiar madness. And I know October is oft a bad month.

Discerning what is coming in financial markets is hit and miss. There is so much noise that it becomes difficult to discern the behaviours that drive markets. I used to watch the early morning financial TV shows – but the experts they bring in seldom get to say anything before the next advert proclaiming “We have your market interests at heart” blares through. Lies, lies and more lies. And why do they all have American hosts who nasally gabble at 10,000 words per minute? I can’t keep up.

No. To understand the financial weather, you need to listen. I can feel a storm approaching.

First: There is a crack in the Tech Narrative that’s been driving markets. It spells a correction and a reassessment. It might be the current travails of the US not-making-any-trucks truck maker Nikola might be the trigger, that will precipitate a reversal. If it fooled GM into paying billions for a truck company yet to make a truck, then who else is pulling the proverbial wool over our eyes?

The parallels with the crash 20-years ago are obvious. It will sort out the wheat from the chaff… which is why I’ll be putting names like Apple and Amazon into the long-term hold portfolio, and waiting for the next bounce to sell my Teslas.

Second: I detect increasing desperation from Government here in Europe to stem the economic consequences of Coronavirus. Listen to the behaviours; its muddled, priorities are becoming confused, policies are increasingly contradictory and self-defeating. Sunak will put new employee protections in place, but knows the new anti-virus measures will trigger inevitable hospitality failures and unemployment, with serious multiplier effects across the economy. Morale is tumbling as fast as the economic prospects. Across Europe is feels the recession is deepening. It becomes a self-fulfilling force.

Third: Crashing oil and commodity prices add to the underlying woe.

Fourth: Geopolitics.. lest we forget, the west has picked an economic fight with China. Don’t forget about it. They are still there…waiting.. watching… biding their time.. waiting for that moment….

However, let’s not despair…

35 years in markets and weathering many’s a gale means I’ve learnt many things, Capt’n… Gales pass!

The trick is surviving and staying afloat: to avoid being caught on the lee shores of default, to be drawn onto the rocks by the siren-songs of the mer-unicorns, or to be left high and dry on the sandbars of bursting bubbles… Aye, the Gale will pass and the ships that survive get the highest market prices while picking up the floatsam and jetsom left by the storm.

Opportunity beckons… 

Five Things too Read This Morning

The Felder Report – Don’t Overlook The Vampire Squid’s Role in the Recent Tesla Call Buying Frenzy

WSJ – How Nikola Stock Got Torched by a Short Seller

FT – Donald Trump refuses to commit to peaceful transfer of power

BBerg – HSBC Loyalists Lose Faith After Stocks $83 Billion Plunge

Garuniad – Pandemic has wiped out $3.5 trillion in work income, says ILO

Out of time, and back to the day job

Bill Blain

Shard Capital