Complacent Goldilocks Got Eaten by Bear

Blain’s Morning Porridge June 30^th 2021 – Complacent Goldilocks Got Eaten by Bear

“If you go down to the woods today, you’re sure of a big surprise..”

This morning… The weather on the Pacific Northwest has turned ugly, as might the financial weather if the current degree of market complacency proves unfounded!

England went noisily daft last night. After winning the Championship of Everything not quite the quarter-finals of last year’s European Cup against a team of geriatric Germans, next they take on the footballing might of the Icelandic Kindergarten reserves Ukraine. I resisted the temptation to go for the traditional Scottish ABE response (Anyone But England), and wish the Three Lions well…

What will it do to the economy? Clearly, it’s a great time to own a pub with a large outside space and giant TV. Not so good for Boris perhaps when they lose – Ted Heath famously lost an election in 1970 when England got hoofed out the World Cup in Mexico. I remember it well because we were collecting Esso coins bearing the visage of the England team… Anyone want to swap a Bobby for a Jack Charlton?

Meanwhile….

I don’t know if you’ve been reading about the “Heat Dome” in The Pacific North West of  America. 34 dead in Vancouver as a result of 47 degree temperatures! Its scary stuff. That’s utterly unliveable – and it’s a humid heat meaning its deadly. It’s not just deaths – there is serious infrastructure damage as roads melt and bridges buckle. Power outages have been triggered by air-con demand. Temperatures on the West Coast have nearly doubled from June averages from Oregon to British Columbia.

The phenomenon is caused by a blocking high of war air which after rising high in the atmosphere, then warms due to compression as it sinks back towards the earth. It’s like  “putting a lid on a saucepan” according to one paper. It shows the weather is far less predictable than we thought.

The reality is such freak weather events do occur – once in 10k years – but temperatures around the North West have risen by 3 degrees over the last 50 years – meaning an extreme weather event like this is magnified, more likely and maybe predictable? Heaven help us if it were to happen in the UK… can you imagine the excuses from Notwork Rail?

Back in the real world of markets..

This morning I just watched a massive, fully laden container ship sailing out of Southampton Water loaded with goods for the global markets. The sun is shining and what’s to worry about?

The global economy is reopen, the last dying embers of the pandemic are being hosed out, consumers are determined to consume, and aside from some simple supply side inflation adjustments … we have absolutely nothing to worry about…

Run for hills if I ever write something like that without a twinkle in my eye and wry smile on my lips… I am smiling now… but not in an overly wry way! Call my expression this morning… quizzical.

I am tempted to throw a selection of random words and phrases at the Porridge to see how they stick.. Let’s try Complacency, Unjustifiable, Eyes Wide Shut, Unaware, and, the classic shrug and Whateva…. I perceive markets where a frightening amount of participants believe what they want to believe, rather than what their market senses are telling them.. If I read about Goldilocks market conditions again, I shall scream!

As the first half of 2031 wends to a close, lots of accounts will be high-fiving themselves for getting it right. Generally doing nothing would be an ok strategy with all these miserable tracker funds doing so-so on the back of rising markets, shored up by the limitless largesse of Central Banks. Funds that got more involved and called the rotations into and out of “Fundamentals” and Disruptive Tech stocks have done well. Some must have got lucky by picking a couple of key market moments. Themes have changed – ask Cathie Wood what she’s going to do next that will prove extraordinary, clue: a Bitcoin ETF is not.

However, the general eb and flow of markets has fundamentally shifted this year – last year was about Pandemic. This year is about worrying about the consequences. Yet, the consensus for the next 6 months seems to be: (Ignore the numbers for a moment..)

• No Inflation                         (3)
• No Debt Bubbles                         (3)
• No Recession                         (7)
• Swift Recovery                         (7)
• Rising job Creation             (7)
• Rising Corporate Profits             (3)
• Trade Deals                         (3)
• Lessening geopolitical tension (2)
• Political stability                         (2)
• Coronavirus beaten (3)

If only it was so easy.

There are 10 things in my list above. If you score them 1-10, 10 being nailed on, and 1 being very unlikely… Call it my financial weather forecast. A score about 75 is “Fine & Settled”, below 25 is a storm warning. This morning, I get a score of 40.. which is not screaming “Danger, Danger Will Robinson”, but I would class as an “unsettled” outlook. It hints at further uncertainty to come…

Maybe I worry too much, but when markets are blind to consequences, they are blind to risks. The market is now full of contradictions – which have a habit of snapping back to bite painfully in the soft dangly parts.

For instance, the bond market has discounted inflation, yet we see it manifest in everything from logistics, food, housing and wages in the wake of the pandemic. The equity market is paying zero attention to corporate balance sheets – perhaps perceiving them as “just a credit thing” – and are anticipating bumper sales, despite rising leverage.

Meanwhile, Central Bankers are looking at what their decade of QE monetary experimentation and ultralow interest rates have done to the economy in horror! Mein Gott! What have we done.. they quietly mutter. They know that to pull back stimulus would be like pulling the hit from a junkie. They fear the consequences of normalising interest rates – but if they don’t the distortions on financial asset pricing and commercial behaviours will continue to multiply. As Elvis once said.. they’re “caught in a trap…”

If they start to talk about it – say in the late summer when Fed does it’s Jackson Hole central banking equivalent of the having fun – the markets will no doubt start to worry again! All of which means, I suspect, markets continue to drift for the next 6 weeks in the lazy summer flow.. enjoy the high… while it lasts..

Five Things To Read This Morning

BBerg – Commodity Traders Harvest Billions While Prices Rise for Everyone Else

BBerg – How Serious is JPMorgan’s $2.5 Trillion Green Ambition

FT – El-Erian: The inherent instability of the Goldilocks market consensus

WSJ – United Bets on Post Pandemic Growth With Its Biggest-Ever Jet Order

Torygraph – Project Fear was bad, but the PR guff about “Global Britain” never ceases to amaze

Out of time and back to the day job

Bill Blain

Strategist – Shard Capital