Blain's Morning Porridge - Nov 30th 2017. "Stretched Valuations and Macro Uncertainty"
Blain’s Morning Porridge – St Andrews Day, November 30th 2017
“I know you can fight, but it’s our wits that make us men….”
For the avoidance of doubt – the Morning Porridge is unrestricted market commentary freely available to all qualified investors on an unsolicited basis. It is not investment advice…
My Hat was assassinated last night.
I am in mourning. The unnamed perpetrator (actually it was Professor Mark Blythe, well known Brown University economist, author of many books on difficult political-economy conundrums, and Hat-Murdering Dundonian), achieved a comedy classic. While explaining the inevitable QE political end-game (clue – it’s not pretty), he sent his glass of wine spinning across the table. Sadly my hat was on the shelf below and the wine then drip, drip, dripped into it with the inevitable dousing myself in a puddle of red wine later in the evening as I put it on. Laughed? Damn near punched him!
What does one do next? A phone call to Bates of Jermyn Street for a new Fedora and advice on hat cleaning is on the cards….
Meanwhile, back on Planet Earth, “stretched valuations and macro uncertainty” are the watchwords of the cautious few who aren’t participating in the current binge buying market orgy. Don’t even think about Bitcoin. If you do, go read a comic instead of this..
For believers, nothing seems likely to derail the remorseless upside moves… Aside from some minor wobbles in tech stocks (perhaps driven by my comments y’day on driverless cars and the inevitability tech can’t deliver everything it promises), it’s all looking like a buy-a-thon out there.
It all feels to darn perfect…
With a Brexit deal in sight, we’ve even got the remarkably unexpected outcome that even Theresa May has got lucky! For once she doesn’t look an utter national embarrassment (although Nigel Farage is inevitably screaming she’s a sell-out). Being publically insulted by Trump might be the best thing to ever happen to her.
Finger-wagging the Trump will reap massive rewards. I feel a war with America coming on. For the US President to publically tweet-insulting our dearly beloved national treasure of a Prime Minister is unforgivable stuff. I’m afraid the only option left is a fight to the death between them. (There, two problems neatly solved…) I’ve never found it necessary to criticise the American Premier – he does a great job confirming himself as a bigoted racist laughing stock.
The soar-away pound sterling looks the obvious way to play the positive Brexit sentiment. Assuming there really is a deal on the table, then UK bonds look tight, the stock market is looking fully priced – so it’s the currency to play.
In the US it’s the prospects for a tax-overhaul bill – looking stronger all the time. The outlook for the US economy – “broad based” as the Fed says – leaves many investors happy. But are they too complacent?
By this time, I am sure everyone will have seen the Goldman’s 2018 Macro Outlook – “Too late for Goldilocks but too soon for the Bears”. It’s a classic sit-on-the-fence note, pointing out the markets’ Pavlovian reaction for the last few years has been to consciously link tail risk events like political populism, bank troubles, recessionary numbers and central bank intervention with market downside.
Something has changed.
The downside feedback loop hasn’t functioned through 2017. Instead a new behavioural paradigm shift occurred. Investors now believe negatives don’t impact growth and that market upside is unlimited. The result has been massive gains for anyone who blithely accepts the new reality that nothing was going wrong. Goldman wrote: “The reduction in perceived tail risks coupled with higher growth expectations has helped to push equites higher as the equity risk premium moderated.”
However, risks do remain real. Mustn’t forget that! Remember my key mantra: the market has but one objective: to inflict the maximum amount of pain on the maximum number of participants!
The remorseless upside is unlikely to be sustained through 2018 – as the Squid says “valuations are stretched”, quantitative tightening “QT” is a concern, growth will moderate and lower returns, and rules of financial gravity will prevail. “The highest valuations since 1900 mean pain is coming” scream the headlines on the Goldman note.
Our view is the macro outlook remains positive, and it’s more likely we’ll see pain in the bond markets. The big threats are 1) Upside Economic Shock – negative for rates, and 2) and inflation shock. We’ll come out with an outlook piece putting together our expectations in December.
Have a happy St Andrews Day (Patron Saint of Scotland and a few lessor nations like Russia, Prussia and parts of Greece!)
Anyone know where I can buy a hat in Canary Wharf?
Bill Blain