Blain: "The Big Fear I’m Hearing Today Is "Liquidity" – What Happens If We Do Get A Meltdown?"

Submitted by Bill Blain of Mint Partners

“Time you straighten right out, better think of the future, else you’ll wind up in jail.”

This morning we are all “cautiously optimistic”, apparently

The world reminds me of a duck: Serene and calm(ish) on the surface. Paddling furiously under the water. That’s one way to picture the current round of geopolitical manoeuvring across Asia: China-Japan, US-Korea, China-US dialogs. Forget the Trump noise, but these discussions are likely to lead to new dynamic across Asia.. If the outcome of the current games are as positive as we expect/hope, then the prospects for the global economy are pretty solid. Ducks can pivot on a heart-beat! Over the next 10-years or so we expect to see South-East Asia’s middle classes grow from around 600mm to over 2 billion – that’s an enormous market to sell into. It will be ripe with opportunity – and we have ideas, but not without challenge.

Much of what we see on the news, and read on the wires is just NOISE. It’s getting more confusing as twitterfeeds, fake-news, and rogue media provide more information than analysts can analyse to strip facts from the sturm-et-drang of “click-bait”. Noise can cause markets to go up, down, sideways and shake-it-all-about – but within the noise are clear trends. Some negative, some positive. Much to our surprise – like what’s happening in Asia -some of the noise is far more positive than we expected!  

This morning I’m tempted to check some of the stuff I’m reading about Macron.. comparing himself to Trump seems a mistake of the first-egg, but hey-ho! As for the UK – the less said about our sorry excuse for government.. the better. They’ve dug themselves into a horrible mess over Windrush…. But I’m afraid it could get worse. As the blame game deepens, the Conservatives unerring ability to do the wrong thing is coming to the fore. Apologise Now! Put right the wrongs that have been done to our citizens, and then do the decent thing by resigning. End of.

Noise can be the small stuff – like an article that flashes up quoting a “reputable” investment manager trashing the outlook for a particular stock. It gets whooshed round the market as “click-bait”: with everyone reading it, sagely agreeing and the stock plummets. Few folk bother to check the facts: that the article first appeared in some meaningless rag somewhere obscure, or the supposedly “reputable” investor actually runs a $100k “hedge fund” from his garage. Its news and views and gets read no matter how wrong it is. (Sorry if this reads like Fake-News 101 to millennials who understand modern media..!)

At the other end of the scale is Big Noise. A good example is Oil. We’ve collectively bought into three big arguments over the past few years: i) the collapse of the oil monopoly (the increasing irrelevance of OPEC), ii) the US becoming the swing producer likely to constrain prices when shale/fracking kicks in at, say, £50. iii) Oil is no longer such an important commodity as the big carbon shift continues. Our conclusion was oil prices are likely to remain lower into perpetuity. That ignores the dynamics– we’ve absorbed most of the floating oil glut of excess stocks, demand is rising in line with economic growth and cheap oil, the swing producer is more than happy to produce, and the dynamics of Russia/Saudi oil have surprised us by becoming a fixed market feature. Folk need Oil. Higher oil prices, and a good example of how the NOISE led most of us to expect something utterly different.

Which leads us to this morning’s conundrum – where are markets going? We have two things worrying us:

  • Stock Markets look due a correction – they’ve wobbled along this year, and the noise from pundits saying they look overvalued and need a price correction is thunderous. Yet, we’ve still got solid company results coming in, and an economic environment that feels solid (although more tenuous to perceive 18 months down the road.)
  • Bond markets remain overly tight – spreads between asset classes and risk look implausibly tight, get continue to ratchet in. At some point risk vs return has to be considered, yet default rates remain low.

We’re all aware why markets are so tight. Too much money chasing assets as a result of unconventional monentary policy – QE? (I still reckon there is an enormous bill coming our way when we experience the unintended consequences and lashback of QE – but that’s a story for another morning….) Or is due to yield tourists rolling down the risk curve in search of higher returns in assets the don’t properly understand? Or is it the number of asset bubbles; like tech valuations, Fin-tech, cryptocurrencies etc that look ripe to burst?

All these things worry and concern asset managers. The big fear I’m hearing today is “liquidity” – what happens if we do get a market meltdown, bond and stock markets take a knock and we see the kind of market suspension we had in 2008? Investment managers will always tell you they are long-term investors – while keeping a time frame of a few days if markets look likely to go up/down (because that’s how their bosses measure them!).

Liquidity is whatever someone else is prepared to pay for your asset. In times of market dislocation its bound to be wide. Perhaps a better answer is not to worry about it – but choose the assets that are not only defensive, but most likely to simply get wet when the rains come and dry off quickly thereafter? Thinking back to the great bond rout of 2008 – most of the bonds that crashed far below 100 par as a result of liquidity being switched off, rose back very quickly as markets recovered.

Therefore: pick assets with duck like characteristics. They will get wet when the storm comes, but will shake their feathers remaining dry, warm and snug when the sun comes out again.. Not quite so sure about the legions of triple BBB issuers and inflated stock prices..  but…

And finally, my contribution to the “Click-Bait” world. Listening to my teenage nephews and nieces (plus my own millennials) at my parent’s Diamond Wedding party, I’m seriously worried about Facebook. They’ve already made up their minds… they understand stuff I just don’t….