Bill Blain: "Some Of The Ongoing Market Evolution Really Scares Me"

Submitted by Bill Blain of Mint Partners

“Rate yourself and rake yourself, take all the courage you have left, wasted on fixing all the problems that you made in your own head.”

All the usual uncertainty, but are global stocks really so highly overvalued relative to GDP?

I’ve just spent the last week in the US, and it’s been a fascinating experience talking with clients and colleagues in the Big Apple. The key takeaway is I’m going to have to spend less time in the office and more time on the road listening (note – key word: LISTENING) to clients. There is a danger sitting comfortably here in my Canary Wharf eyrie means I’m missing much of the good and bad market evolution that’s going on.

I’ve come back with a whole host of new ideas, opportunities and contacts, but also a whole Pandora’s box of new things to worry about…

Some of the ongoing market evolution really scares me. Like the significance of the fragmentation of markets into smaller and smaller liquidity pools. Combined with trade-frustrating regulation, it’s just downright dangerous. But, that’s why we have market crisis – nothing a good punch in the nose for regulators to learn just how absolutely ferking wrong they have been. Problem is, much of danger lies so far below the visible surface, I’m not convinced markets really understand how potentially one-way current stock trading has become.

It’s not the regulators fault. They are just trying to make a safer world, based on what they know. Which sadly means cleaning up the last crisis – and fighting the next war with the weapons of the last one is never conducive to victory.  

The history of the markets has always been about smart “investment bankers/brokers” finding new and more innovative ways to relieve investors/savers of their cash with smart/complex products. I got a brilliant illustration: to paraphrase the famous Ben Graham quote; while standing in an office off Wall Street we were gazing at some moored yachts. My contact told me the big one was the principal partner’s. I asked the immortal question: “where are the customers’ yachts?”

But, enough worrying about trading platforms, dark pools and Systemic Integrators is a concern for tomorrow….

Today, it’s all about the litany of ongoing uncertainty. What will the ECB say on Thursday about the tapering of European QE (subset of worries including the German courts, coalition, etc), or how about Spain vs Catalunya (subset of worry being why the market is so unconcerned – answer being because they believe the explicit guarantee of the ECB to do whatever it takes), plus all the usual stuff about US Tax reform, Korea etc, and I’m not even sure we’re still worrying about the Kurds et al.

Yesterday, I got a call asking what I thought about the collapse in stocks… got to say I must have missed it. While I still think there is a very strong likelihood of market sentiment triggering a correction – it’s going to be a massive buying opportunity! So, instead of worrying about Europe and unsustainable corporate bond spreads, let’s talk about global stocks and the Buffet Index this morning. The Buffet Rule states Stocks are a screaming buy when Stock Market Cap is less than 50% of GDP, but are a sell when stocks are more than 120% of GDP. According to one story I read this morning, with global stocks hitting a market cap of $88 trillion, we’re at an eye-watering 116% level - perilously close to the 120% level around the 2008 Crash.

In terms of Buffet, it depends how you calculate global stocks capitalisation and GNP. My Macro Economist Martin Malone reckons the $88 trillion market cap number Bloomberg et al come up with is wrong!!!! His numbers show $79 trillion as the market cap, meaning we’re still only at 100% of Global GDP. Moreover, we’re expecting global growth (and this is based on IMF models) to achieve significant outperformance in coming years, meaning the global economy is set to hit $100 trillion plus early next decade, meaning the Buffet Index remains around 100% even if stocks rise 25% in the next few years.

Moreover, Martin’s done a lookback at the Buffet Index over the last few years, and sure enough it collapsed 53% in the big crash of 2008, but recovered 25% the following year. The 17% gain in the index this year follows three almost flat years where the Global economy has been fretting about China in 2014, Oil in 2015/16 in a generally depressed cycle phase. It’s no surprise its risen so much this year – we’ve finally got bullish economic indicators, bullish policy moves, and a political will biased towards growth.

The fact the index is so cosmetically high is another thing that’s going to persuade market bears out their lairs. Valuations are bound to worry investors who are concerned by the market froth. That’s why I still expect a sentiment panic and correction as a strong likelihood – and buying boots on moment!

(And I’m pretty sure I’ll get a stream of calls from Bloomberg et al demanding to know why we think they are over-valuing Global Stock valuations. If they call I will simply send them to Martin, and he’ll offer to sell them the fix!)
Finally, I know many readers of the Porridge are fans of Anthony Peters’ market missives. He was in hospital last week for a cancer operation, and I’m delighted to report it was a success and he’s well on the road to recovery!  Best Wishes to him!

Back to the day job!