Bill Blain: "Maybe It's Time To Quietly Exit"

By Bill Blain of Mint Partners

Blain’s Morning Porridge – May 15th 2017

“In yacht racing, there is no second.”

Ah the joy of a new week! What’s on the recipe today then?

My colleague Simon Denehy started the day by pointing out UK 2-year gilts yield 0.12% - (his description of that number was more colourful and expressive, but would have had me banned from ever blogging again) - while UK stocks yield an average dividend of 3.8%.

That imbalance between stocks and bonds goes some of the way to explaining why the FTSE has hit a new all-time high at 7445 (and up) this morning.. Perhaps it would be wrong to call it an “imbalance”. Stocks represent taking real risk on a company, while Gilts are sovereign bonds; as close as we can get to the risk-free cost of money.

But, there is clearly a disconnect between the risks of a company performance (and that it might not pay a dividend) and the price of stocks, which are about future performance and have taken off like a butcher’s dog with the sausages. Funny, but not a good thing. Its happening in stocks around the globe. This morning stocks are up because China is planning to boost market, last week it was improving global indices and numbers, and before that it was the “Trump-Jump” expectations.

Take a look at the chart of the FTSE (I’ve attached a Bloomberg) and there are a series of three very pronounced tops in 2000, 2007 and now… isn’t there something about 3 up-waves and two down waves (Elliot Wave sorcery).

Yet, I’m told Friday was about one of the most boring days in memory in terms of market activity (note below on what I was doing instead). Look at the volume numbers on that charts… daily volume is less than half what it was. For some reason it minds me of the old market adage: “sell in May and go-away”.

I’ve said many times before that the markets are being awfully complacent – why are they so high? Just because bond yields are so low is not a good answer.

Bond yields are low because of QE distortion artificially upping bond prices and thus keeping yields low – meaning if you believe that’s a good reason to buy stocks then you accept artificially low yields distorting all other financial asset prices is a good thing.

If global stocks aren’t close to all time highs because of expectations of future growth, profits to rise, and a generally strong sense the global economy is headed massively higher… then maybe its time to quietly exit. Take the cash, hide it in the mattress and wait for the next/coming storm to pass.

One interesting feature looking at a chart of the FTSE is the Black Tuesday crash of 1987 (I remember it well) and how fundamentally different it is to what has happened since. In Oct ‘87 the market tumbled almost overnight by 75% on an annualised basis, to a level 35% lower than the top. It took three years to recover. The crashes of 2000-3 (down 52% but 20% annually) and 2007-10 (down 49% but 19% annually), were more long-term taking 7-8 years to recover, while the crash of ’87 was a massive swift and sudden correction.

I idly wonder what the next crash is going to look like?

A modest correction of 20% like we saw between April 15 – Feb 16, something in line with the 00 and 07 “events”, or might it be a massive stock price “reset” in line with 1987? Place your bets ladies and gentlemen.. the laws of financial gravity and pointy lines on price charts cannot be denied! 

That blip in ’87 may look small and insignificant against today’s moves.. but in the context of the time…

Its like watching El Nino – how severe is it going to be..?

Moving on, or not if you happen to own a diesel (as I do). On the back of trying to ban Chelsea tractors from London, I’m struck by the number of articles and opinions emerging about the end of the combustion-engine automobile age. Get over it. It’s going to happen – which is why the global autos are in denial or change mode, and the tech giants are all developing transport groups.

If the 18th century was the age of burning wood, then the 19th century was the age of coal, the 20th century the age of oil, while the 21st century will be the age of capacitance – battery storage. It will be an industrial revolution to rank alongside anything so far – with massive implications across markets for absolutely everything.

With Britain now able to turn off all its coal-powered electric stations, we can now look at how to use stored energy to improve the human condition. Driverless electric cars and trucks have massive implications.

Meanwhile, my political dilemma continues to deepen.

I may now have to vote for Jeremy Corbyn just to avoid someone worse replacing him as Labour leader. Sudden front-runner in regards to the even worse than Corbyn position is Yvette Cooper.  She made a real Ed-Balls of Scotland’s chances of voting Labour when she tweeted something about keeping Scotland is to “persuade the Scots of the benefits of remaining English.” It was like hearing your grandma put a litter of cute fluffy kittens through the mangle…