Blain's Morning Porridge - Jan 29th 2018 - Sell Bonds and Buy Risk! Stocks go stratospheric, but
Blain’s Morning Porridge – January 29th 2018
“I don’t want to sound like a sore loser, but when it’s over, if I’m dead.. kill him.”
The Morning Porridge is unrestricted market commentary freely available to all investors on an unsolicited basis. It is not investment research.
Southern Rail screwed up again this morning. Points failures in London and Woking turning my short trip into yet another punishing Odyssey. At least I got a seat. Hundreds didn’t. 100% record this year of being massively late, inconvenienced, angry etc on Monday mornings… I am calm and focused as I plan my revenge and recite the mantra..… Anger is the mind-killer….
Back in the world of finance… If you want a starkest signal yet of how badly wrong this might go, and how much trouble we might be in, here it is: Apparently a major Japan bank is embarking on hiring spree. Man the lifeboats!
On the other hand, I still buy the Risk story: Sell “safe” bonds because Winter is coming in a bond bear market, rates are rising and buy Risk Assets because the world is recovering. I’m just a tad concerned on how frothy its becoming. There are lots of worrying and strange portents whenever you look..
Markets are hitting new highs again and again and again and again and again....Corporate results are strong – 77% of results thus far have beaten expectations! Analyse the markets – or even better, pay my Macro Man Martin Malone for his Alphabook Macro Research product and he’ll do it for you – and its clear corporate earnings, investment, cap-ex and rising exports are fuelling a much stronger boom than the look-back economic releases. Anecdotal evidence on the US economy’s real strength: full restaurants, parking lots putting up prices, the price of a babysitter, etc, all point to Boom! That’s why the 10-year bond now yields 2.71% and some folk think Yellen’s last act as Fed Head this week could even be a hike!
Donald Trump made it even better by telling Davos what he reckoned they wanted to hear: no trade war, and bragging about how much value he’s added to the pockets of stock market investors. Whoopee! Stocks rally even more.. But… The gods punish hubris. What will he tweet if it all goes flipside? Linking his presidency’s success to stock prices might prove less attractive if we get a correction.
The truth lies in bond markets…
Brett Golledge, one of my senior bond traders is warning of Red Flags as the Credit Cycle turns... Vix rising, Bond yields up, hi-yield wobbles and even investment grade bonds struggling, he reminds us equities typically lag a bonds by a few months.. Brett thinks we’re in the 9th Innings, (A surprising baseball allusion from a chap as English as they come… ), as ETFs signal a bear market. As its rates driven, his view is that a bear phase in Investment Grade/Hi-yield will be brutal.
Meanwhile, my money markets colleague in BGC, Kevin Humphreys is warning of shifting sands in ECB policy – Dutch member Klaas Knot warned Sunday TV viewers of the need to end QE asap – no reason for it any more, and hinting the governing council will end it in September. A taper tantrum in the offing? It certainly won’t help as the credit cycle decline steepens. Where do bond yields in the US go when the hike comes?
Pick up any paper this morning and run through the headlines about how 2018 has seen the strongest, most extreme, most rewarding start to a year ever. Savour the comments about January’s stock gains giving managers there target returns for the year in a month. Read the justifications for further upside: repatriated corporate cash going into buybacks, the fact that the weak economic data in the recent GDP was lookback while AI forward analysis confirms underlying strength. It alls screams keep buying..
Problem is – AI can’t measure sentiment, greed and fear. Markets are all about irrational behaviour. The papers are also full of sage investors commenting about “new valuation ranges” looking expensive, record price-to-earning ratios, and potential risk. Such talk makes folk defensive and worries them.. so they look to hedge their gains.. and that’s when a 7% monthly gain looks a tad wobbly. The underlying macro might be fantastic, but markets are fearful places.. and frothy markets can panic.
If it happens, put your buying boots on for the dips..
Very late and out of time..
Bill Blain