Blain's Morning Porridge - Oct 26th - ECB Meeting likely to be a cacophony of compromise, and wh
Blain’s Morning Porridge – October Thursday 26th 2017
“The same thing we do every night, Pinky – try to take over the World!
For the avoidance of doubt – the Morning Porridge is unrestricted market commentary, it is not investment advice…
Oh dear. It’s a foggy day in London town and it’s yet another “most important day ever for the ECB” as Yoorp’s very own properly grown-up Central Bank reveals ongoing plans for balance-sheet market domination/taper. I can hardly contain my rapt anticipation of the moment. I’m not even going to bother with a “US readers: Sarcasm Alert” because it’s just so blindingly obvious that even Americans will understand my cynicism…
The ECB’s free money and QE policies have been a massive success, say the Europhiles. Stabilising European economies, halting the deflationary death spiral, arresting the deterioration in the Sovereign Credit of Euro members, triggering growth (albeit aenemic), and restoring purpose to European unity. (Chords of “Ode to Joy” welling up in the background…)
Europhobes are ironically slow-clapping.
Sure, they chant, the ECB has enabled the crisis-shocked Euro economy to survive, but at what cost? They are mock-congratulating the ECB for policies that have perpetuated an unsustainable system that should have been strangled at inception: for papering over the cracks of still unfixed economies, unstable sovereign debt and banking systems, compromises that support Germany at the cost of institutionalised youth unemployment across the periphery, and massive unintended consequences for the future of Europe.
(Aye, do you remember what an economic heaven Europe was before the advent of the Euro? I do.. Italian bond yields in double digits and pretty much reflecting reality..)
I would love to know what ECB members really think before they serve us up another smorgasbord of platitudes this afternoon? The reality is they know it’s time to normalise and stop the market distortion – but how does it do that without precipitating a market crisis that puts us right back to 2012?
So… the game today, as it always is, will be about Draghi persuading markets less is more and more is less… which more-or-less describes whatever it is the ECB is there for. There will be a stack of mumble-swerve about …. “ongoing data”, “fluid market conditions”, “financial conditions” “market conditions” and how not to upset these. How about we compromise with something like cut the monthly purchases by about half to €30bln but extend the programme by 6 months which should placate the Germans and maintain the illusion that Italy, Spain et al are investible? Yeah, that should do it..
Whatever the ECB says or does today, it won’t be the end of the story.
Meanwhile, the ECB highlights the third part of this week’s Porridge Theme.
On Tuesday I was writing about how the stock market is vulnerable to a sentiment correction, but broadly should be on track for further gains if the global economy remains on track. On Wednesday, it was the imminent death of the bond market; looking at both short-term and ultra long bond cycles. Broadly, both these scenarios depend on aligned global growth to drive valuations higher. If our scenario is right, we’re bullish stocks and alternative assets and bearish bonds. Simples.. but many clients don’t agree – they are more concerned than us.
Today, let’s consider the threats.
First there are the “known unknowns” including:
The obvious geopolitical worries like Russia, Ukraine, Norte Korea, Saudi and just about any where else where folk are being unpleasant to each other or waking up to find their personal piggy banks empty, their water sources compromised, or global warming driven natural disasters creating strife.
The populist worries like Trump, Putin, Brexit, Catalunya vs Spain, Italian elections, etc.
And, the serious market worries like an oil price spike, the threat of rising inflation, and the current global recovery stumbling and quickly running into recession
Every economic player will have different views on how these play out. I think the experiences of the last few years highlights that political shocks aren’t actually that disruptive – we’ve survived the Brexit vote and we’re living with Trump. If the Italians are revolting or the Spanish get nasty, we’ll live with that. I even think an all-out stramash with El Norte Koreans would prove a speedbump for markets. We get over it pretty quickly.
The real known-unknown threats are the return of inflation (perhaps accompanied/triggered by an oil-shock) and the risk of recession. These are trends rather than events and therefore have longer-term market impacts.
And what about the “unknown unknowns” – which can be imagined into infinity (and beyond?). They could be anything, but I wonder about the human behavioural aspects to the equation – for instance the rise of the robot economy and potential luddite pushback, or the unintended consequences of big-data resulting in perilous economic behavioural mistakes. Plus all the usual stuff about flash crashes caused by over-enthusiastic algos or jacked-up supercomputers. We live in a more dangerous world than we think.
As a closing thought this morning - my stock picking colleague Steve Previs sent me the following link: http://www.indexindicators.com/charts/sp500-vs-sp500-stocks-above-200d-sma-params-3y-x-x-x/ showing the number of stocks trading above their 200 day average remains high, but is basically declining.
“Are you pondering what I’m pondering?”
No Porridge tomorrow – have a great weekend!
Bill Blain