Bill Blain: "Markets Are Becoming Increasingly Binary"

From Blain's Morning Porridge by Bill Blain of Mint Partners

This morning we’ve got a Risk-Off blip as the market winds itself into a tizz because suddenly the US recovery isn’t looking so well founded on the back of yesterday’s slowing Auto-sales number. Shock and horror! And it might get worse… we’ve got employment numbers on Friday, (which might be less strong than expected, therefore confirming it’s the end of everything), and who knows what Trump will say to China… 

Stop! No need to panic.. Worry, yes.

Panic.. not yet. 

If I were to take heed of everything I read across the financial media/blogo/analysis-o-sphere, I’d not only be utterly confused, but probably wrong. However, it feels like time to figure out if I am a bull or a bear, and what the consequences for bonds and stocks are likely to be..

Markets feel a tad binary at the moment. Up or down? Pass me that bright new shiny multi-sided UK pound coin and let’s flip it…

Headsthere is still a very positive sentiment “thread” across markets. Its based around stronger European growth in Germany, Northern Europe, France and Spain, recovering sentiment towards Sterling, the Fed playing a smart catch-up game on rates as the US economy will continues to strengthen and justify current equity valuations. Generally it’s a “relax… it will be alright” vibe to activity. My stock picking colleagues say there is no sustained selling pressure.

This positive “never mind the torpedoes” approach plays up Macro expectations. My macro economist, Martin Malone is a beaming bull – confident the hard data of economic growth will catch up and justify the soft noise markets currently trade on. Yesterday he was saying: “The rates and macro environment remains bullish for asset prices.”

Martin points to global equities adding around $6 trillion in value over the past 6 months – despite all the political ructions, upsets, surprises, uncertainties and the bafflement that passes for modern politics. He makes a good point – despite Trump and Brexit confounding the establishment – we’re still up! Europe is worth watching – outperformance is likely because it’s been lagging the US, and the ECB will remain accommodative.


Tails: the other side of the sentiment coin remains very negative – predicting breakdown across all the above markers, fuelled by political fears from just about every corner of the globe.. (I’ve never understood that particular cliché; the globe is a globe and has no corners.. but…) Think about the Trump risk (ie failed “reform” and “China risk” this week), Korea, The Russian Outrage yesterday, France (must watch the debate tonight), or Europe and Brexit risks.

Some of that negativity is reflected in the risk-off theme this morning. The doomsters are warning that the Republican/Trump failure to manage the US political process delaying any reform, and the possibility the US earnings season might be disappointing, means that stock market valuations can’t be contained, and they are getting panicky wondering what will happen if/when the Fed starts to wind down its balance sheet….

And looking at some of the recent numbers on US household debt, a worrying trend hits me. While mortgage debt and credit card debt is down – and is more concentrated among the wealthier older generation, student loans and auto-debt have risen dramatically. US society is more and more divided into haves and have-nots.

Education and Autos are the two sectors of the US retail debt market causing the most concern among followers of recent financial history – many are predicting we’ll get a 2007 sub-prime crisis from cars or students.

The long-term implications of indentured slavery among young college graduates and no one able to afford pick-up trucks are unknown, but guessable. Diminished consumer wealth as the US workforce grows older mired in high-debt while facing fewer job opportunities as robotisation takes hold. Meanwhile, the car industry looks founded in sand as smokestack pick-up trucks look unaffordable, and the tech giants plan a car revolution based on Teslas for the mega-wealthy, Mac-Cars for the hipsters and UBERs for the rest of us.

I can’t help but think that’s not a positive vision for broad-based US growth?

Meanwhile, probably lots of other things like European banks and such we should be worrying about.. but they can wait for tomorrow!

So am I a bull or a bear..?
Out of time!


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