Blain's Morning Porridge - Time to worry about stocks and global growth
Blain’s Morning Porridge – May 9th 2017
“I’ve met the Emperor of China and the only British working miner, but I’ve never…..”
A large part the Morning Porridge readership are active in the Fixed Income Bond markets. To those of us steeped in the mathematical beauty of yield curves, convexity and duration, the mechanics of the Stock Markets are crude and, in our humble opinion, at best a form of informed gambling.. Had I an idiot sibling (I don’t, both brothers are smarter than me) I often imagine he/she would probably have been a stockbroker.
However, gratuitous insults aside, whats going on in global equity markets should serve as something of a warning – we can’t ignore them in terms of what they indicate on underlying sentiment.
My stock-picking guru, the sagetastic Steve Previs, thinks we’re close to the top. Moreover, he says “we should get a wonderful buying opportunity later this year”. He’s been in the business as long as me and recognises pain = profit!
A glance at the stock indices might suggest there is nothing wrong. They go higher and higher – as the ELO once sang, they’re a living thing… But, the devil is in the detail. Most of the recent gains have been concentrated in a very small number of the mega-cap tech stocks – Apple, Google, Facebook and Amazon. Despite the absence of any real selling pressure (yet!), the rest of stocks are struggling to keep up the momentum. A handful of mega-cap stocks are masking underlying weakness..
(And notice I aint even asking if some the mega-tech and tech unicorns might just be a tad overvalued themselves.. nope.. won’t even go down that road…)
Steve points our near 1/3 of the rest of the SPX are in bear phase – meaning they are 20% down from 1 year highs – and the number of stocks falling below 200 day moving averages is growing.
Yet, the VIX volatility index is at its lowest level in 10-years according to the press. (Actually, Looking at my BBerg, it looks at its lowest in near a quarter century (last time it hit 9.77 was Dec 1993!) Am I pressing the wrong buttons?) Does the lack of fear reflect an exhausted tired market that believes zero volatility is normal, or is it an example of enormous complacency?
As I’ve said before, years with a 7 on the end tend to be really really nasty ones for markets. I’m thinking late summer/early autumn for the big one. However, by making that statement, I’ve probably cursed the prediction: Blain’s Mantra 1: “The market’s only objective is to inflict the maximum amount of pain on the maximum number of participants.” And a crash is only a crash when it comes as a complete surprise.. and as so many folk now expect it… well perhaps we’ll be the ones surprised?
Meanwhile, what is really going on in the rest of the World and the Bond Markets?
It’s related to the perhaps false confidence we’re seeing in stocks. Yesterday’s indifference to some French Bloke winning a French Election highlights just how bored and un-engaged markets are with the unfolding European story.
Why bother with Yoorp. There is further more crisis ahead, but its going to change in nature from short-term concerns about the politics of elections to the longer-term issues – the Politics of European Union. This will define the next few years as the Germany economic hegemony over Europe takes shape – what will it mean for the other European nations as they struggle to use the wrong currency in a German dominated economic union? That’s going to get very convoluted, very boring and very important – but a bored market might be missing much of the detail.
Which is why markets are looking for other stuff to worry about.
This morning I read China is now the number one global threat. Oh yes.. its been a while since we got all agitated about the Middle Kingdom. Slowing PMIs, commodities down again, slowing economy, lower inflation and a reminder the global economy isn’t just whatever Trump tweeted this morning.
On one hand, China President Xi needs financial stability to continue his steady consolidation of political power. The result is less likely to be China shocks – so stop worrying about the stock market, or just how much banks are going to struggle on NPLs, and consider the implications of longer duration economic slowdown – that’s going to remain an enormous break on the global economy.
On the other hand is the global economic position. The global authorities and supranational institutions are revising up their estimates and telling us how much growth is expanding across the advanced economies. There is much bright breezy talk of “goldilocks” economic conditions and “co-ordinated political will” to sustain growth. Budget deficits are shrinking, unemployment is falling. The G7 meeting this week will have already written a positive communique on growth and trade.
Which one do you believe is more likely.
Me? I’m thinking the risks are still about deflation rather than inflation.. and in this fully priced market, where bonds and stocks remain massively distorted due to QE, then its time to decouple from that risk… So, as always, I’m thinking about safe uncorrelated assets… and I’ve got some ideas… available to you at the end of the phone line!
Out of time..
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Bill Blain