Blain’s Morning Porridge – Sept 8th 2020 – Whatever next?

Blain’s Morning Porridge – Sept 8th 2020 – Whatever next?

“If you want to swim the English Channel, leave your doubts on the beach..”

Apologies for lack of Porridge y’day – technical problems. In the wake of the revelations about SoftBank’s being revealed as the multi-billion Tech-Option whale, yesterday’s note was going to be short and to the point: Correction – Sell. Wait. Buy!

It still feels like a correction is underway – but does it actually matter? The narrative is already moving on about the big rotation from Tech into… well what?

If there is another sector of the global economy that promises similar gains and the upside  we’ve seen from solid Tech firms… then I’m all ears. Perhaps it’s going to be retail – based on the strength with which consumers have been spending their furlough payments? (Before the Scheme ends next month and UK unemployment hits 3 million.) Or will it be oil on the basis a repressed recovery is about to boom?

Maybe it’s still Tech: I suspect this is where the Tech sector diverges into the real and rational and out of the irrationally stupid. Hold and buy the dips on the strong fundamental growth tech stocks – and sell the irrational over-hyped bubble nonsense.

What is clear is that is not going to be an all-in market collapse – we all least not immediately. (A few days can be a long-time in markets.) I can’t help but wonder if the stock market shenanigans of the past week has something of a distraction. The defining narrative of 2020 hasn’t changed: it’s still a game rationalising between the real effects of the pandemic and the distortions government and central banks have imposed on relative values:

1) The ongoing Pandemic disruption remains real. Do we slow down on the threat of further lockdowns as infection rates rise and the continuing economic pain that’s being inflicted on economies that have lost 10% plus from tourism and hospitality? Or do the hopes for a vaccine (which Donald Trump is now suggesting will be available just before the election), and the reality the global economy (with the exception of a few sectors) is showing resilience and recovery, justify upside hopes?

2) In terms of relative value, the effect of “do-what-ever-it-takes” central bank monetary splurges mean equities have become the only return game in town. If it’s all doom and gloom, feel free to buy NIRP sovereign bonds, or corporate debt because central bank QE Infinity Programmes provide a backstop guarantee! If it’s going to get worse and inflation is your fear, then buy Gold for the value and inflation hedge. But if you believe the Pandemic is just a blip, then accept equity prices are inflated.. get over it and buy. What else would you do with money? Leave it in the bank?

The bottom line is that global central banks are not going to pull the rug from under markets by risking a monumental taper tantrum. If they even hint at pulling supports like QE Infinity or programmes to provide bank liquidity… that will be the time to panic. (The fact no Central banks are lining up to make supportive market noises is slightly concerning, but hey-ho…)

There are, of course, other issues to also consider that might still wreck the rest of the year….

Four years ago we were discussing trade deals and economic cooperation with China. Today the US president is calling for de-couplingand a bespoke economic embargo by penalising firms that import Chinese goods. China bashing has become a central plank of the current election. The narrative on the relationship with China has absolutely changed – China is now the West’s clear economic foe. Stories on how China is picking on Australian journalists as it attempts to counter allegations the Pandemic might just be their fault are “instructive”.

So much for the UK pinning its post Brexit hopes upon new markets in Asia. China will be closed to us. India will be delighted with the increasing likelihood Rishi Sunak will take over from Boris Johnson – but anyone with experience doing business with Indian firms will know Indian’s have a very simple approach to business cooperation: they take 100% and you get Zero. Thankfully there will still be Australia and New Zealand… ok, that’s a market about 1/20th  the size of Europe, but at least they speak our language.

I try not to write about Brexit – it awakens too many old wounds as solid Remainers and fulminating Leavers reopen old arguments that are already decided. The remainers will whitter on about how they predicted this, and it’s the end of the everything, while the leavers will blame the French and say the EU is trying to bully us.

The looming impasse on the EU and the UK agreeing a trade deal by year end is stalled on two issues – fishing and will the UK abide by European rules on state aid. The first is solvable to everyone’s advantage. The second is an angels on the head a pin question: the UK was always the European nation most likely to abide by UK rules. As former Tory leader William Hague said over the weekend: “The EU is worried that we will do things that we won’t, and the UK is trying to reserve the right to do things that wouldn’t do us any good.”  

But will we will get a Brexit Trade agreement in time?  It will be “less-than-optimal” if we don’t. Who knows… but what will it mean for the prospects and market for UK Inc? Far less, I suspect than how it potentially damages Europe. Brexit failure is already priced into UK markets – witness the recent slides in sterling and funds pulled from UK funds. The upside potential of a successful negotiation and compromise is not.

Europe worries me more: as the tourist destinations on the Med have found out, a summer without the English and the €38 billion they spent in 2019, is a bad summer. While the Brussels Eurocracy will remain tough on Britain it could backfire as Euro strength causes serious issues for European industry.

Time to bang some heads together…

Five Things to Read This Morning

CapX – Can Europe learn from Japanification? It may be too late

FT – This US stock bubble could rank among biggest in history

WSJ – Companies Brace for Profit Hit From Euro Rally

BBerg – Currency Markets are Making a Dangerous Brexit Bet

Garuniad – Leaked EU cables reveal growing mistrust of UK in Brexit talks

Let’s see where the markets go today…. Out of time and back to the day job..

Bill Blain

Shard Capital