Blain's Morning Porridge - March 14th 2018: Market complacency, believing what you want to belie
Blain’s Morning Porridge – March 14th 2018
“We are in danger of destroying ourselves by our greed and stupidity. We cannot remain looking inwards at ourselves on a small and increasingly polluted and overcrowded planet.”
The Morning Porridge is unrestricted market commentary freely available to all investors on an unsolicited basis. It is not investment research.
Sorry for the lack of Porridge last few weeks, but it’s been busy. After a week on the slopes (nothing broken, except my pride when I managed to rip my ski-pants! long story…), I’ve been playing catch-up on markets and projects. Today was the first time since November I’ve walked to the office without a hat. 10 days ago we flew out from a snowed-in UK. When we returned, our garden was a riot of daffodils and blossom. Yet the weather forecast says Winter will hit again on Saturday… Does that tell us something about markets?
I smell complacency.
Other commentaries describe markets as neutral. Despite all the recent economic data, geopolitics swinging towards protectionism, sheaves of worrying corporate news and general noise, February’s market crash already feels a distant memory. Nasdaq hit a new record high? The 10-yr bond is still sitting below 3% at 2.82% this morning because of the lack of perceived inflation.
The global recovery trockles on. It might be psychological – markets are all about “headology”. None of the big threats apparently materialised – so everyone has moved back into “don’t worry – be happy” mode. The new German coalition got done, Italy is Italy, and Trump threatening trade wars has proved a momentary effect. Yesterday he stumped markets by firing Rex Tillerson – increasing fears of the hard Trump line on trade. Apparently that’s a good thing? Or do we just have new things to fear?
All things matter – they have consequences… which may not be immediate! (For example, a Bloomberg story this morning reckons Merkel’s weakness means she is willing to trade Jen’s Weidmann’s shoe-in to the ECB job in return for wider EU support. Go figure the long-term consequences of not appointing a smart, strong successor to Draghi.. Clue: they are not attractive!)
While markets are past the February VIX/VAR shock-inspired fear and panic stage, they still can’t figure what’s really happening. A common mistake is to fit the narrative to the apparent facts and finding ways to explain what is happening in markets that match your market views and objectives – reinforcing what you already believe. For instance, last week’s “headwinds have become tailwinds” language perfectly suited the mood of continued US growth: strong job creation, but muted wage inflation? Yep.. that’s an easy story to buy. Or, it might be a head fund manager confidently declaring stocks will crash if the 10-yr hits 3%.
Folk are spinning the news positively because they desperately want the good vibes to continue. “This time it’s different” is one of the common themes we’re hearing from clients and reading in analyst commentary. (Can’t say research!) One example of how views shift to fit the narrative is analysts putting a positive spin on Trump’s spats with China and the threat of tariffs. Its classic “market hasn’t reacted negatively, so let’s try to explain why it’s a good thing.” So this week its commentary about a Strong Trump bringing China into line… etc..
I do think the world has changed – Trump has been one catalyst. The market increasingly understands Trump plays by different rules, and is using blunt language and tariffs as an economic carrot/stick. 10 years of unconventional monetary policy is another factor. Broader unconventional policy is going to be the watchword in coming years. That’s happening in the geopolitical space where Trump is challenging the status quo – aggressively dealing with the Chinese on intellectual property, Europe on Tariffs, and generally playing the 19th Century Industrialist to achieve favoured nation status again for the US.
It looks like it’s working (and will continue to do so right up till the moment it doesn’t!) – holding the dollar low is great for the US! Not so great for Europe, where I suspect Draghi will be tearing his hair out as his carefully built Jenga recovery tower wobbles on Euro strength!
Unconventional is also what’s happening in terms of monetary and fiscal policy – US rates are still below trend, plus tax cuts have just flooded the corporate sector, and next we’ll get fiscal spending. Its pretty much unprecedented in terms of an economy at full employment – although I’m assured its happened before. I suppose we should be scared what kind of long term pressures it is building up? Hidden inflation, financial asset inflation or something worse?
Powell commented a while back that “ overheating has shown up in the form of financial excess..” NSS! It’s absolutely clear prices – or as serious analysts would say: “valuations” – are high in bond yield spreads and stock prices. Which means any correction – as we saw in Feb – looks likely to be short, sharp and violent!
Meanwhile, I’d like to give the second half of this morning’s Porridge to my colleague Steve Previs and his interesting observations on comings and goings at the White House:
“This might be speculation, but when the President choses members of the public to serve in his cabinet or on his advisory team, they must eliminate all potential conflicts of interest. This includes any stockholdings in companies that may benefit from their service in government. As a result, all cabinet appointees must divest (sell) said stockholdings to avoid any impropriety. Because these are “forced sales” and the seller may actually be disadvantaged as a result (selling below cost), these sales are allowed to take place free of any taxes.
These people can sell their stockholdings and not pay the taxes that a normal seller would pay. To be perfectly clear, the taxes are deferred indefinitely. Therefore, after selling the shares, these people can put the proceeds plus any deferred compensation into a diversified trust, deferring the tax indefinitely. To make a long story short, and citing information from The New York Times, Bloomberg News and The Wall Street Journal, Mr. Cohn has indefinitely deferred paying tax on roughly $300 million and Mr. Tillerson on $235 million. Please understand, we in no way begrudge these fellows for their good fortune. After all, they had very comfortable positions and were at the very highest echelons of business and finance. They sacrificed those lifestyles to serve their country.
Unfortunately, after only one year of service, they have either resigned or been unceremoniously sacked. Anyway, the bottom line is that two very smart, immensely wealthy men, spent a year serving their country and for that they avoided paying tens of millions of dollars in taxes. We’re sure they donate copious amounts to their own favourite charities which we applaud. However, it’s nice work if you can get it!
Well, there you go then.. Back to the day job..
Bill Blain