There's no use in a-crying
May 18, 2017

Mint - Blain's Morning Porridge

This is the second morning in a row where my computer has decided to switch itself off midway through writing the Morning Porridge. Fortunately we have a great IT team, but even they weren't quick enough to stop a mini-tantrum as the Blair/Hulk went loco..…

I was going to write a parable about the difficulties of the gorilla clearing alligators from swamps this morning. It was going to be terribly witty and amusing – but this is getting SERIOUS..

Did the market pause for a breath yesterday? Was it just a little Trump Temper Tantrum Dump? Or did the snap sell-off reaction to growing US political uncertainty and the unfolding leadership crisis within the US herald a decisive market break?

While my bearish Cassandra-like warnings of impending stock market doom generally get ignored, I'm not the only commentator who now fears a reversal in global stocks could be as catastrophic and as serious as what we saw in the global credit/bond markets in 2007/08.

Here's my take on what's happening politically. The Paul Ryan faction of the Republican party are increasingly realising they have backed an impossible loser. Their concern is simple – unless "their" Trump administration delivers on election promises, they are going to be hammered in the next election cycle in 2018 – and find themselves out of Washington. Their motivations are that simple – keep their jobs.

The sensible republicans see the chances of tax reform, infrastructure boost and the jobs boost to the economy at threat. Either Trump is "stepped aside" for Vice President Pence to deliver (a low probability) or more likely we see a series of "pacts" between Republicans and Trump where the Donald's behaviour is seriously "contained".

Even such agreements will be no guarantee of success in the face of the Republican lunatic fringe. The markets would remain politically volatile on expectations Trump won't behave. If Trump were to be impeached, sure we'd get a sell-off, but probably a recovery would follow as the market would then expect Mike Pence to deliver.

The outlook for US politics therefore remains bearish with further shocks to come. Meanwhile, what's really happening in stock markets is that we are close to record highs because US and global stocks gorged themselves on expectations the Trump Jump would deliver a massive cathartic boost to the global economy.

Now they increasingly fear the momentum and positivity has gone. It really doesn't matter what short-term economic data and numbers say, or whatever the rosy upticks in growth forecasts from bodies like the International Monetary Fund reveal – they will all fade like snow in June if sentiment collapses.

All an avalanche needs is a couple of snowflakes to shift. This might just be happening. PLUS…we know less than we think we do.

The market is fooling itself if it thinks we understand the complexities of stock markets. Remember, in 2007 it was the shocking degree of hidden/mistaken credit creation and overleverage that sank fixed income markets. There is even more hidden dross behind current global stock record highs.

This time we have a host of worries about overvalued markets. For a start there are the distortion effects of quantitative easing causing asset price inflation across financial assets. This is very apparent in stocks where cheap money from low interest rates has fuelled non-capital expenditure spending on stock buybacks.

Also, the liquidity implications of the amount of cash tied up in exchange-traded funds are dimly understood. The amount of passive money is scary. Folk might just want it back sometime. Remember, the floor of the New York Stock Exchange has 27 entry points, but only one exit.

We don't really understand how high frequency trading might wobble markets – some folk think HFT is just market lubrication, but who knows how algos will perform under sudden pressure?

And what about the degree of leverage now in the system? You have momentum players and folk placing capped and floored market bets, and massive amounts of linked leverage "containing" it. Derivatives? Huh…we know there is nothing to worry about there...but someone is always a winner when someone else loses!

VIX might remain at ultra-low levels, but there are very sound technical reasons why low volume, high stock levels and artificially low rates kill VIX. Big banks and dealers have been hedging stocks, keeping a lid on volatility, and using ETFs. It's complex, but remember, I'm a fixed income player rather than a stockpicker.

So…what do you think?

Meanwhile, things get even worse for the battered middle classes. I read there is a Brazil nut shortage on the way. FFS! How are we supposed to cope with that? We've already had the great iceberg lettuce famine (not a major problem for me), the panic over killer avocados and now it's Brazil nuts. Please...just what are the middle classes to do??

Out of time..

Bill Blain

Head of Capital Markets / Alternative Assets





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Mint - Blain's Morning Porridge

This is the second morning in a row where my computer has decided to switch itself off midway through writing the Morning Porridge. Fortunately we have a great IT team, but even they weren't quick enough to stop a mini-tantrum as the Blair/Hulk went loco..…

I was going to write a parable about the difficulties of the gorilla clearing alligators from swamps this morning. It was going to be terribly witty and amusing – but this is getting SERIOUS..

Did the market pause for a breath yesterday? Was it just a little Trump Temper Tantrum Dump? Or did the snap sell-off reaction to growing US political uncertainty and the unfolding leadership crisis within the US herald a decisive market break?

While my bearish Cassandra-like warnings of impending stock market doom generally get ignored, I'm not the only commentator who now fears a reversal in global stocks could be as catastrophic and as serious as what we saw in the global credit/bond markets in 2007/08.

Here's my take on what's happening politically. The Paul Ryan faction of the Republican party are increasingly realising they have backed an impossible loser. Their concern is simple – unless "their" Trump administration delivers on election promises, they are going to be hammered in the next election cycle in 2018 – and find themselves out of Washington. Their motivations are that simple – keep their jobs.

The sensible republicans see the chances of tax reform, infrastructure boost and the jobs boost to the economy at threat. Either Trump is "stepped aside" for Vice President Pence to deliver (a low probability) or more likely we see a series of "pacts" between Republicans and Trump where the Donald's behaviour is seriously "contained".

Even such agreements will be no guarantee of success in the face of the Republican lunatic fringe. The markets would remain politically volatile on expectations Trump won't behave. If Trump were to be impeached, sure we'd get a sell-off, but probably a recovery would follow as the market would then expect Mike Pence to deliver.

The outlook for US politics therefore remains bearish with further shocks to come. Meanwhile, what's really happening in stock markets is that we are close to record highs because US and global stocks gorged themselves on expectations the Trump Jump would deliver a massive cathartic boost to the global economy.

Now they increasingly fear the momentum and positivity has gone. It really doesn't matter what short-term economic data and numbers say, or whatever the rosy upticks in growth forecasts from bodies like the International Monetary Fund reveal – they will all fade like snow in June if sentiment collapses.

All an avalanche needs is a couple of snowflakes to shift. This might just be happening. PLUS…we know less than we think we do.

The market is fooling itself if it thinks we understand the complexities of stock markets. Remember, in 2007 it was the shocking degree of hidden/mistaken credit creation and overleverage that sank fixed income markets. There is even more hidden dross behind current global stock record highs.

This time we have a host of worries about overvalued markets. For a start there are the distortion effects of quantitative easing causing asset price inflation across financial assets. This is very apparent in stocks where cheap money from low interest rates has fuelled non-capital expenditure spending on stock buybacks.

Also, the liquidity implications of the amount of cash tied up in exchange-traded funds are dimly understood. The amount of passive money is scary. Folk might just want it back sometime. Remember, the floor of the New York Stock Exchange has 27 entry points, but only one exit.

We don't really understand how high frequency trading might wobble markets – some folk think HFT is just market lubrication, but who knows how algos will perform under sudden pressure?

And what about the degree of leverage now in the system? You have momentum players and folk placing capped and floored market bets, and massive amounts of linked leverage "containing" it. Derivatives? Huh…we know there is nothing to worry about there...but someone is always a winner when someone else loses!

VIX might remain at ultra-low levels, but there are very sound technical reasons why low volume, high stock levels and artificially low rates kill VIX. Big banks and dealers have been hedging stocks, keeping a lid on volatility, and using ETFs. It's complex, but remember, I'm a fixed income player rather than a stockpicker.

So…what do you think?

Meanwhile, things get even worse for the battered middle classes. I read there is a Brazil nut shortage on the way. FFS! How are we supposed to cope with that? We've already had the great iceberg lettuce famine (not a major problem for me), the panic over killer avocados and now it's Brazil nuts. Please...just what are the middle classes to do??

Out of time..

Bill Blain

Head of Capital Markets / Alternative Assets



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