Blain's Morning Porridge submitted by Bill Blain
“Christian Men, be sure, while God’s gifts possessing, you who will bless the poor shall yourselves find blessing...”
The Fed did not deliver us Gold, Frankincense or Myrrh. 2018’s “mood of angst about growth” wasn’t improved as the Fed closed a bad year with a 25 bp hike y’day. Powell ignored Trump and mumbleswerved about: “significant uncertainty on the ultimate destination of any further rate increases..” The way he said it; 2 hikes next year sounded less hawkish rather than more dovish. Markets reacted in a predictable fashion: Badly! Biggest post FOMC nosedive in years.
This will be my last porridge of 2018. Merry Christmas! As we kiss the last few days of the “worst year in memory” goodbye! Will 2019 be as bad? Of course not… but.. Things are seldom as bad as you fear…. they can be…. much much worse.
This time last year I was calling for a stock market correction (rather than full crash) in Q1. It didn’t happen till November. I was a fairly lone Cassandra on the likely unintended consequences of QE of the great QE unwind on all asset classes – warning an outbreak of subjective realism would crush overly tight bond spreads and inflated equity as the buybacks ended. It’s half happened.
The full effects of the QE wind-down are only now being felt and made apparent. It’s an ongoing threat. The fact so many investors still don’t get it is why I remain a massive bull on off-market alternatives, divergent, uncorrelated real assets producing real cashflows. I warned about the dangers of US tax cuts being a short-term boost solving few long-term issues like a balance consumption/production economy.
On a more positive tack, 2019 looks more likely to be a market “recuperative” year because the last few months of pain we’re going in “eyes open”. Its beginning to feels like markets are awaking from the years of QE somnambulance, and are more aware of the risks and prepared for them. A large part of the necessary stock market correction has occurred. More downside is possible, as is a rally off perceived lows. Selective stock and bond agony may be on the cards. We’re all aware of how over-levered the corporate bond sectors are.
On the other hand, strip out the noise on China slowdown, trade wars, Europe and such, and the global economic numbers look OK-ish despite the fears of recession. One of the performing trades for 2018 has been long dollar. It’s apparently the latest “most crowded trade on Wall Street..” and you have to wonder for how much longer. Earlier this week someone else wrote: “The fact that the USD is considered a top trade at a time when the US economy is slowing and the Fed may be set to pause”… What the Fed said last night is they are watching for more signs of direction. Growth is not over yet. Anyway.. what else would you buy except dollars? Sterling? Euro? Yen? Nothing stands out.
What about predictions for next year?
More of the same I’m afraid. As the unwind continues, Financial Assets inflated by the free-money effects of QE are still finding new equilibrium valuations. Markets will remain volatile. Tech change and supply fundamentals will continue to shock us – look at oil prices for an example; turning a good year for oil and energy into a question market. Or look at how iPhone sales in India have fallen off a cliff as people buy cheaper phones that do the same – commoditisation!
The thing that scares me most is liquidity – the lack of it.
All I can promise is fun on the political side. Populism is my main concern as bad politics leads to policy mistakes. The failures of Trump, Brexit and Europe, et al, increase populist uncertainty, fueled by unhappy poorer poor who resent income inequality and the perception they are doing worse because its someone’s fault other people are doing better. (It has ever been thus..)
So, to cope with 2019 perhaps this would be the time to remind readers of some of the important “Blain’s Market Mantras” to consider through the year: (These are not all my trading mantras, but ones I think worth carving into your desks before Jan 1.)
- The Market has but one objective: To inflict the maximum amount of pain on the maximum number of participants.
- The Market always overreacts.
- The Market has no memory – and neither do buyers
- The moment to buy/sell an asset is some point before you first think about it.
- Walking out first is better than crawling out last / The first cut is the cheapest
- A bid is a bid is a bid! And you should hit it harder and faster than the proverbial red-headed step-child.
- Investment Rules should strictly adhered to as they are always right – until they aren’t!
- The incredible thing about the Euro is number of people who actually believe in it..
- Investment rules and capital regulations lead to lazy investment allocations and unwise asset optimisation.
- Buy companies and countries with positive politics and reform agendas. Sell counties using someone else’s currency, or companies where the management are wearing new shoes.
- If a Country looks, feels, and smells bust.. it probably is.
- Ratings are just someone else’s expensive opinion
- Opinions are like bottoms. Everyone has one.
Armed with this list of dos and don’t you are now fully prepped for 2019. God help us all…
Have a great holiday season.. All the best to you and yours…