That's logic

Mint – Blain’s Morning Porridge

“If it were so, it might be; and if it were so, it would be, but as it ain’t, it ain't. That’s logic.”

Goodness.. what a curiouser and curiouser market we find ourselves in. I glanced at five market report/commentaries this morning and every single one used “neutral” in the opening paragraph. I guess this makes six!

The market keeps a weather eye on Greece – but the consensus view is the immediate crisis has passed. On China – the authorities have got the market jitters under control – or under an iron cosh – it doesn’t really matter which. Numerous folk are worrying about the likelihood of a looming EM (emerging market) crisis triggered by Brazil or Venezuela, while others fret about Costa Rica and imminent default. Yet, by and large, markets are thin and summery. I can confidently predict we’re going to be talking about all these topics again and again in coming months. Greece is not going anywhere soon.

On the basis the market is always going to be worrying about something, let’s try to focus on some real issues. The first is the bond market. We’ve been calling a bear market since April – when the second treasury drop of the year occurred alongside the bottom-busting reversal in bunds. The first US tumble was the 1.65% to 2.25% decline in Jan/Feb, while the second took us from 1.85% to 2.45% concurrent with the Bund move from 0.07% to around 0.7%. In the US, we’ve seen two down waves – isn’t that the classic Elliot wave downtrend? I don’t subscribe to the smoke, mirrors and ripping the gizzards from cats approach of the chartists… but, hey, maybe they are on to something….

            The question is whether there is any real need for a further spike in bond yields. Macro guys say it’s going to happen… but.. the market knows:

Inflation remains zero;

Strong dollar is deflationary;

Commodity prices are at 15-year lows;

Oil prices likely to go lower on rising supply and falling demand;

There are precious few signs of real global growth; 

Increasing lip service towards talk-talk and the concept of co-ordinated growth initiatives, while political imperatives will increasingly tend to favour protectionism and beggar-thy-neighbour FX polices to attract votes from electorates at the end of their tethers after eight years of recession and austerity;

Stock market showing distinct wobbles on FX fears;

Markets now feel overvalued – making everyone nervous with an eye to the exits.

Yet…US Federal Reserve Chair Janet Yellen will likely go ahead and hike US rates in September. Lots of folk think that will be the market’s kiss of death. But maybe it won’t bat and eyelid? Perhaps it’s all fully priced in – sell the rumour and buy the fact? After all, we’ve had plenty of time to prepare for it. Perhaps, in a longer-for-lower low growth, deflationary world, bonds at these levels still represent a perverse form of value? The market has survived taper tantrums and flash crashes… why not an official rate hike? And remember, bonds are the risk-free rate – the Treasury has the keys to the printing press.

Not so in Yoorp. What value should we ascribe to European sovereign credits yielding less than 1% for 10 years? Germany doesn’t even have its own currency; it might have massive trade surpluses to the rest of Europe, but it also has massive and building contingent liabilities to its currency partners if it were all to unravel. Hence I remain a dollar bull.

The second factor on my mind is the extraordinary ructions in stock markets in recent days. We should be paying more attention – they highlight nervous stock sentiment. Apple has been a wake-up-call. You have to wonder what possible market logic dictates that a premier stock - a company that actually makes and sells lots of real things to real people on a 20x multiple - takes a massive shoeing even though it beat expectations.

As always, it’s a game of two halves. The pro-argument is to buy Apple on any weakness. The stock has been harshly treated and the market has ignored the positives like signs of burgeoning demand in China, replacement buyers and the sheer power of its brand. On the other hand, the naysayers point-out smartphones are increasingly a commodity. You can buy a Huwai for a few bucks that essentially does exactly the same thing as an iPhone for 1% of the price. Others point to Microsoft’s dismal experience with Nokia – “remember, a few years ago, Nokia was the gold-standard of the mobile market.”

Sic Semper Tyrannis… or is it Valar Morghulis?  

My point is that if stock markets can react so manically to good news, what is the danger they go completely hatstand on really bad news?

 

No Porridge tomorrow as I’m off taking clients on what looks to be a very damp Mint Sailing day. Still got some places on August 7 and August 28.

 

Have a great weekend

 

Bill Blain

44 207 786 3877

44 7770 881033

[email protected]

[email protected]