Blain: "Clients Are Absolutely Miserable, There Is Nothing To Be Cheerful About"

Blain's Morning Porridge submitted by Bill Blain

“I give myself very good advice, but I very seldom follow it..”

As we approach the end of November and the start of the serious party season, 2019 Market Guesses are hitting inboxes across the financial world. Some of them might even merit being opened and read!

Although we’ve now seen something of a recovery from last week’s lows – stocks are higher, and even GE bonds have gained a few points, the underlying mood remains negative. Speaking to clients y’day… more than a few can’t see the point in opening the investment banks’ glossy outlooks. Everything is so absolutely miserable.. there is nothing on the horizon to be cheerful about. We are all doomed… doomed… 

Yep. They might be right. There is an awful lot of distortion still to be corrected. Asset prices need a healthy dose of reality. I can understand why analysts think equity markets are doomed because buy-back programmes are drying up as rates rise. Bond markets are in tatters due to declining credit quality and rising rates. There are increasing fears about the unintended consequences of the end of the QE monetary experiment as the end of yield tourism kicks every asset class in the vulnerable box.

The party feels over.. time for the inevitable hangover… Anyone for the last few choc-ices?

Is it really that bad…? 

If I find the time I might run up a list of things we are unlikely to see next year - top of which will be a Brexit solution that pleases anyone. We’ve got 2 weeks of intense politicking to look forward to before the UK parliamentary vote around Dec 11th. That means lots of ongoing UK instability as Theresa May attempts to cobble together a majority. (I’m holding back the launch of an exciting UK property linked deal just because the mood feels so bad!)

It really isn’t helpful that Brexit continues to dominate the headlines - the rumours circling about backroom Brussels deals on ceding sovereignty of Gibraltar to Spain won’t help placate the legions of gammon.

My mole in Brussels says its actually more serious - apparently the Danes are demanding they get East Anglia, the French want the Channel Islands and have put in a claim for a large swathe of Chelsea, while the Irish will receive the North and most of the Scottish Islands.. Norway is getting Shetland and Orkney (although no one seems particularly bothered they aren’t even in the EU!) The Germans are claiming the North Sea on the basis the Shipping Forecast refers to the German Bight. The Swedes were offered York, but after thinking about it, politely declined. No one knows who gets North or South Utsire. 

On the other hand, I remain confident some kind of UK/EU solution will be found, and suddenly everyone will be happy, joyful and the UK will see a spectacular relief rally.. (what the ***k have I been smoking???) I’m frankly surprised bookies are calling the parliamentary vote at 50/50. Ms May must have an awful lot of photos of Conservative MPs in compromising situations.. Good luck to her – and, any deal is better than more Brexit. Stop talking – start doing!

I’ve been working in markets for over 30 years and its never felt more like we’re living in the times of a mad Red Queen. Donald Trump’s interview in the WSJ this morning is a must read – (there is a link to it on the website https://morningporridge.com/stuff-im-watching). Some confusion about interest rates vs tariffs, but the man lays out his economic genius clearly.. (US Readers – obvious Sarcasm Alert)

If you add a mad, bad, and dangerous to cross president to the anecdotal evidence of global slowdown – the heat coming out US and London property markets, GM shuttering US plants, and weaker than expected data across the US, China and Europe - it feels like entropy and momentum has been sucked out of activity! 

Meanwhile, the Carlos Ghosn Japan story beggars belief. I fail to see how any company exec could have ripped off his own company to such an extent unless they were utterly and equally complicit in it! It’s a coup. Over the years corporate Japan’s record against successful and reforming Occidental businessmen has been uniformly awful and utterly corrupt. The picture of a Japanese corporate shogun expressing his outrage is utterly hollow – and reflects badly on them. As I’ve asked before – would you really want to invest in companies with corporate governance standards so corrupt? 

Back to markets, and the outlook for next year is complex.  As the age of QE experimentation and distortion ends, a new age of financial reality is emerging. Its back to the old choices: markets that reflect growth, are least distorted by the unintended consequences of QE and are thus least likely to suffer from its unwind, acknowledge the reality of normalising interest rates, the risks of the new normal slow growth economy,  factor in politics and populism, and don’t neglect that volatility equals opportunity! Simples eh?

The recent declines in stock prices – most clearly the over $1 trillion decline in the FAANG tech stocks – makes the market look cosmetically cheap. But is it yet realistic? Higher interest rates (and the crisis at GE) means its far less likely we’ll see the $4 trillion wall of stock buybacks continue. A very small shift in allocations from stocks to bonds will further reduce money driving stock momentum – and that’s very possible as yield tourism diminishes.  A very interesting research note from Jeffries makes an informed estimate US investors hold around $36 trillion in stocks. A 10% shift back to higher yielding bonds will have a dramatic effect…

While the Fed may slow the pace of US interest rate hikes if clearer signals of a looming recession emerge, the likelihood remains for higher rates. With 10 year Treasuries hovering around 3% plus – more than a few accounts regard them as an attractive defensive cash proxy.