Blain's Morning Porridge - Politics vs Markets
Blain’s Morning Porridge – April 11th 2017
“The Surprise is not old, she has a bluff bow, lovely lines. She’s a fine seabird, weatherly, stiff and fast.”
Going to be shortish comment this morning. Lots going on, even though the market is somewhat stalemated at present. Some blogs say there is very little actually going on ahead of Easter holiday – but our desks are busy, and I’ve got a full day of meetings talking about stuff for the rest of this quarter!
Among the issues to note are the spiral down in volatility – which isn’t healthy, and the fact its still politically driven expectations of uncertainty driving markets. If markets are uncertain on what the political players are likely to do next – well that’s the major risk-on/risk-off switch at present. Politics and markets are a bad marriage – but divorce isn’t an option.
With Europe one political thread, Syria negotiations/blustering another, and Korea likely to be the next, there is no particular momentum in terms of market direction except to worry – but there are loads of individual stock and bond stories out there.
Like why does someone recommend Tesla as a buy, when other observers reckon it’s grossly overbought and likely to suffer a reality storm? One take is it’s a technological game changer and it’s a fairy story of new magic yet to come – the philospher’s stone of energy capacitance. The alternative is it’s a sell and when folk realise the batteries don’t last forever, will be difficult to replace, and may impact second hand values, the stock will tank. Er.. it probably wont.
The following is a quote from my chum Anthony Peters this morning:
“The secret to the electric vehicle business is no longer the powertrain but the energy storage technology and Musk is a leader in that field too. Through the Powerwell subsidiary, Tesla is certainly ahead of the game. It pumps its profits back into R&D and it is aiming at moving away from the higher end product into the more affordable vehicle space. Then, when it does, it will run into the big guys again. The Tesla business model with its non-dealership direct selling network is not naturally conducive to volume car making and a bigger Tesla which begins to eat GM’s and Ford’s volume car lunch might look a lot less shiny. Is it correctly priced at US$312.39/share? Not bad for a company which is currently forecast to make a loss this year of US$2.46 after losing US$2.87 last year and US$2.30 the year before. With that in mind, the stock rallied US$9.85 in Monday’s trading. Maybe I am a complete idiot....but they told me that in 1998 and 1999 when I resisted getting involved in the dot.com frenzy.”
There are plenty of other stories out there.
How about the fact the bond market remains as tight as tightly tight thing.. despite the fact Janet Yellen says the US economy is healthy, and most of the market still expects the Fed to hike a couple more times this year.
There are certainly credit opportunities out there. Fancy taking a punt on a well known German bank or Italians? Give me a shout.
How about something more “sophisticated” from the alternatives space?
Or who fancies a 2-yr construction loan with excellent credentials, solid delivery credentials, a great credit story and very strong supporting cast, that’s going to pay a multiple of current government bonds… Again… you know my phone number..
I was slightly concerned by Yellen’s comments y’day. She told us the US economy is doing fine with its ok looking growth and decent-ish employment. Its good but it’s not a boom – and therein may be the cold facts. The US economy has taken 10-years to recover from the sub-prime crash, the wake-up-and-smell-the-coffee moment about its economic borrowing base, and now it’s frankly exhausted after years furiously paddling against the tide towards recovery. Is she hinting at slowing recovery?
That may make sense. Which means the market faces a triple whammy from i) the fundamentals being less strong than markets expected, ii) the impact of monetary experimentation unwind (the massive distorting effects of QE on financial asset prices should not be discounted), and iii) ongoing political uncertainty around the globe.
And, of course, it may be the western economy has been undergoing dramatic restructuring under the surface these past 10 troubled ears. We’ve been focused on the visible stuff like banks, the rise of populism, Brexit and political stalemate in Washington (which shows little sign of abating), but the real changes are happening under the surface. Everyone has now read “Rise of the Robots” and knows their jobs are vulnerable, but other stuff is changing… expectations among millennials, the rise of zero-hours wageless slavery, rising income inequality.
There are laws of financial gravity – dictating that what goes up must come down according to the mechanics of mean reversion, while Newtonian motion dictates that every action there is an equal and opposite reaction – explaining that while a weaker pound sterling is a plus for spending, it’s a killer for high street spending.
Don’t overstress the UK numbers – the fact consumers may not be buying tat from the high street, but are still stuffing their wee fat faces in posh eateries and cocktail bars might equally suggest reduced spending is just a result of miserable consumers facing up to overspent credit cards and the sheer bloody slog that is modern life… (Yep, I still smarting from yesterday’s train odyssey!)
It’s no surprise the newspapers are full of glossy luxury good supplements, which almost no-one can possibly afford. Its like we’re living in some post-financial apocalyptic dystopia.. Bread and circuses for the masses…
Out of time
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Bill Blain