“We should skip Mondays. The weekends give clients too much time to worry…”
Last week ended on yet more record highs. Markets high-fiving all over the place. Stock market cheerleaders are talking about new higher target levels – 15%+ gains this month already, and they expect more. The bulls see nothing to stop the longest and steepest stock market rally in 160 years going higher for longer. Market’s just can’t get enough! On the back of half-a-trade deal and pretty dismal Chinese numbers? Meanwhile, bond markets also soared on the back of record European sovereign order and a blowout Italian bond sale (!). Tesla is worth more than the rest of US autos combined, and no one blinked. Nothing seems to phase these markets. Doubts? Damn the torpedoes full steam ahead…
Er… are you sure?
Stop Right There. This week could be a shocker. This could be a very big and very negative week. Perhaps it’s time to tighten your seat belt, and check the Brace Position card in the seatbelt.
What’s got me worried?
I get calls all the time from chartists warning me of “significant” market formations signalling imminent shifts – I usually don’t pay much attention and ignore what I struggle to understand. But, late last week, no less than 3 of the chartists I’ve come to trust all called with the same warning: the charts all point to something significant about to happen.
Taken together, three separate chartists hardly make a statistically significant market sample, but they all point the same way: Stocks – Down, Bonds – Up, Oil – Down, Gold – up and the beginning of a great secular shunt down for the Dollar against the Yuan.
If they are right, then markets could get scary. Or maybe the charts are just playing mind-games with us. If you believe markets can only keep going higher – then Remember Blain’s Mantra No 1: Markets have but one objective: to inflict the maximum amount of pain on the maximum amount of participants.
I don’t know enough about charting to make much of it myself, but I’ve seen enough to recognise the repetitive nature of market driven behaviour. Market patterns do repeat and are therefore worth paying attention to. For instance, for a superb overview, that a look at my chum David Murrin’s website. His global forecasts and commentary is worth a sign up to run through his chart-supported outlook and reading of the underlying forces at play.
But don’t let charts ruin this beautiful Monday morning. Do a little due diligence yourself on how all monster rallies close. And then look at the economic reality and the factors that move markets. Ask yourself the following questions:
1) How euphoric or exhausted are markets?
2) Where are economic factors pushing prices? Growth, central bank policy, consumer confidence, and inflation.
3) How do political factors support prices? Geopolitics, domestic politics and uncertainty levels,
4) Do technical factors justify prices – price/earnings ratio, corporate earnings, Market cap to GDP (the Buffett factor),
5) Is there an imminent trigger point on the horizon?
6) Is the “No-See-Um event” risk elevated – clue: you never know
7) How is firm is market confidence?
How did you score?
You can’t deny Markets look to be in a state of dangerous euphoria – do they have the adrenaline left in the tank to move higher?
Global growth looks back on track, but will remain slow due to ongoing trade uncertainty in Europe and China (better now a phase 1 deal has been done, but who really trusts each other?). Central banks remain accommodative – but what ammunition do they have to solve a new crisis? Consumer confidence remains nervous in the wake of low pay and uncertainty – Housing demand is rising in US and UK, but consumer spending is in flux (look at autos as buyers put off spending plans). There is record employment in the US and UK, but many jobs aren’t paying that much. There is no apparent inflation (outside financial assets) to worry about.
Geopolitics looks more difficult than ever – the square off between the US and China isn’t over by a long-shot, and will be reflected in the big currency game – US$/Yuan. US protectionism and isolationism is causing fundamental uncertainty around the globe. Domestic populism isn’t really so much about the demonised shift-left, but an even more insidious rightwards lurch as countries become protectionist and anti-immigrant.
Markets are definitely distorted – P/Es are a record levels, earning are marginal at best, and the stock market to GDP has never been so high. Companies are highly indebted and spent the money on rewarding execs through stock buybacks. It’s difficult to justify further gains when markets are already so highly priced – it looks like FOMO of missing further upside is overcoming doubts on the rally’s longevity.
We can talk about potential trigger points from the stock market below, but a No-See-Um Black Swan event, or a sudden correction in confidence could shake market far more aggressively than expected, uncovering a host of ancillary problems like debt, leverage and liquidity.
But no-one is particularly worried. Why should we worry – Global Central Banks are going to bail us out if anything goes wrong. And perhaps that’s the biggest risk of all. Global interest rates are effectively zero. An increasing number of commentators are beginning to state the downright bleeding obvious: Zero-Interest Rate Policies do little to stimulate real growth, but create a host of unintended long-term negative consequences in terms of market, investment, corporate and entrepreneurial behaviours.
If there was a sudden loss of confidence in global bonds or equity, would easing rates a further 1% or ever 10% make any real difference? The answer is yes – but only if Central Banks further defile themselves and keep buying financial assets. Who could then resist free money at negative interest rates to buy financial assets secure in the belief they will rise in price because Central Banks are de facto guaranteeing it? It happened for most of the 2010s, so why not again?
You can only fool people so long. Eventually folk see through it… and see it for the Ponzi-esque distortion it is. And they will sell. And they will buy bonds secure in the knowledge that even if stocks break from here, there is zero threat of higher rates. And they will buy Gold. And they will sell Oil because a stock market collapse puts the long-awaited recession into fast gear.
And the big big issue will be the dollar, because for all the bluff and bluster, markets are markets and a collapse will crush confidence at a time when the Yuan and dollar are ever so clearly a competing pair. The last 100 years were all about the US and the dollar. The next 20 could be be very different: China vs US, US vs Yuan. Confidence in the dollar could take a substantial dunt. David Murrin is now calling USD/RMB the Empire Cross to reflect the reality of what’s occurring.
What scares me most?
For the past months, I’ve been aggressively trolled for my temerity in questioning why Tesla is so highly priced. I’ve become familiar with a scary genre of free-market US market commentary. The programmes are basically evolved boiler houses – touting baseless opinions as unquestionable fact. They are truly remarkable – hosted by highly animated shouty hosts assuring their viewers Wall Street is full of crooks who don’t want you to know the trading secrets they are sharing. They peddle bad conspiracy theories. I’ve never been able to watch one through to the end, but I just know they’ll be touting penny-stocks that are about to make big time money, and telling viewers where to send their money.
These “trading bootcamps” pray on desperate retail investors desperate to pay off their debts, their homes and fund their futures. 2 years ago they were telling everyone they could be Bitcoin billionaires. Now, among other things, they are touting the same auto stock.
They peddle very bad advice. When a stock goes stratospheric for no obvious reason except hype, it’s not good advice to ignore analyst recommendations, because “whatever the crooks on Wall Street says, this stock is going higher. You can’t fight that upward trajectory. Buy because the trend is your friend.”
Yeah, right… The above is about the most scary thing I’ve heard. The moment you trust the trend is when you lose.
I can just imagine what might happen if the current Euphoria collapses. Maybe on the event of a stock market disappointment, or a narrative break. Among others I’ve got Boeing, Tesla and GE on my list. Who is on yours?
Bill Blain is a well-known City of London commentator, and has 35 years’ market experience as an investment banker. He currently is Strategist at Shard Capital, a London-based boutique.
Republished from the Morning Porridge by permission.