Blain’s Morning Porridge, submitted by Bill Blain of Mint Partners
February nearly behind us – where does that leave the rest of the year?
“And if the band you’re in starts playing different tunes….”
It’s a pleasure to be writing the Porridge this morning after London was hit by the vicious “Beast from the East” Whiteout last night, with nearly 2 whole snowflakes causing mass train cancellations and panic consumer buying. Thankfully the authorities had prepared us all with their “yellow snow alert”, (what’s the first thing a baby polar bear learns?), and so we were all prepared and wrapped up warm. London survived Snowmaggedon! The next Blizzard hits Thursday – we shall be wearing shorts and sunglasses. (US readers – extreme sarcasm alert..)
February looks like its closing on constructive tone. So much for the VAR/VIX Volatility Crash. It almost feels like it didn’t happen. Don’t be fooled. Markets are in “wait and see” mode rather than convinced on direction. Volumes (particularly in stocks) are suspiciously low.
This week’s key issues are the Italian Elections – where we’re effectively blind because of 2 week no-polling regulations, German coalition concerns – where we simply can’t guess how the SPD membership will vote, and what the new Fed-Hed is going to say. Its just more of the same – apparently. Most folk are breathing a sigh of relief that February’s early slides didn’t turn into market rout and ruin.
With US stocks total market capitalisation now trading right up to 143% of US GDP – the Buffet Chart (attached), a number of folk have warned the market looks unsustainable. However, the structure of the market has also changed. The stock market is more balanced across sectors (in 2000, 40% of value was in Tech, today its 27%). My macro-economist colleague Martin Malone believes the breadth of the US market means we can stop worrying and upgrade the Equity/GDP target from the 20-yr average of 100% to 150%.
The truth is we’re into a new 2 part reality. Things have changed.
There is the short-term action; what happens next on the charts. Then there is the market going through a longer-term paradigm shift as we adapt to the new reality. We have to be challenging the way we think about markets – get out of the mindset of the last few years, and into a more market driven way of thinking to reflect how things have changed. We’ve shifted gears in both bonds and stocks. Apparently over 60% of fund management professionals have less than 8 years market experience – which means they haven’t seen bond bear markets, liquidity ice-storms, or genuine fear in stocks. We can warn about them – much like the authorities did about last night’s non-blizzard.
The new fundamentals are different – stop worrying about deflation and figure out the reality that inflation might be unmeasured (especially in Europe)!. The outlook is changed – the global financial crash has given way to global synchronous growth. Central banks remain an issue – figure out how wrong they might be, and the risk they panic. And, politics will remain “fluid” and volatile – driven by increased perceptions of income inequality as a fertile breeding ground for populism. It’s a new world.. try to read it.
But taken as a whole, what’s not to like? Global Growth!
Lets start with central banks where the focus today will be on Jerome Powell’s first public comments as Fed Chairman: Will he hint a hawkish 4 hike pace, or a dovish 3 hike ramble? It’s the words that go with it that will count – what will he say about momentum, growth, etc. On the other hand, the first reference I can find to the Powell Put (thanks Ara Levonian for alerting me to the fact the market is already discussing it) came as early as Feb 5th in Marketwatch – when some Fed watcher opined the sell-off in stocks is not a concern; “don’t even think about a Powell put.” The key thing is to take a look at the 10-year Treasury chart – then try to convince yourself we’re not in bear phase.
What about politics? It feels like there is massive risk in Italy, in Germany and the UK, but these things are seldom as bad as they promise. While Brexit remains an unholy mess… just imagine how shocked you would be, and how quickly your market assessment would have to change if Theresa May was suddenly able to govern close to competently? (Sure that would require a whole fleet of No 37 buses to impact cabinet ministers with prejudice.. but, you never know..) The bottom line is politics is going to change our base line assumptions.
Which leaves growth – the real driver of value. Although large swathes of the investment community believe growth may stall later this year or early in 2019, all the global institutions are positive. Global GDP is rising, justifying higher stocks and risk assets. With that pace of growth still modest, and inflation threats limited, there might not even be so much to fear in bonds.
Hmmm.. it all sounds very positive… Yep… I’m a buyer. Buy Risk. Sell Bonds.