A HARD RAIN
WHEN WILL MARKETS RESPOND?
Everything is in the end politics; it just takes a long route on occasion and rather like a frog in water, markets take time to realize that the pleasant feeling of warmth is a prelude to being boiled alive. We are well into the boiling phase, but how long before it all registers and an escape is finally attempted?
The purpose of politics seems ultimately to take an individualâs wealth and the fruits of their labour and give it firstly to the friends and allies of the confiscatory state and then use the remainder to buy votes. That bit does not ever really change, whoever is in charge.
So how does that truism impact markets on each side of the pond? Well, traditionally the UK state has been far greedier and done far more harm to the economy, than the US state has, which is why both GDP per capita is far worse than the US, and the FTSE has failed to rise, even in nominal terms, in two decades. Add back inflation and investing in UK PLC has been a long-term wealth destroyer. It enjoys that characteristic with the rest of Europe. As we have long said, lift the lid on any sensible UK pension fund, and you will find a lot of Apples inside.
In general, and this too is a platitude, well run dictatorships, especially those with access to world markets, do far better still, hence the rise of China. Of course, âwell runâ and âdictatorshipâ seldom sit well together, but nor do âpopulistâ and âwell runâ. In general markets are not greatly in favour of either populists or dictators, feeling the rule of law is not something either care that much about. But by implication neither are voters now too fussed about laws either.
LONDON OR WALL STREET FOR THE REST OF 21? - THE BIGGER PICTURE
So, the investing question is whether the US, despite being increasingly under the control of the populist wing of the Democratic Party, is a better bet than the UK? Or do we have the capacity to process a bigger picture?
And of course, we need to ask whether China is better than both. So far, the US is finding Biden to be no worse than the populist wing of the Republican Party, and the UK is feeling rather baffled, given Boris constantly talks right but acts left.
Put like that our current sentiment, that Biden will cause more damage than Boris, is at the least contentious. So, we should look for the good in Boris and the bad in Biden, to help justify that call. Not an easy balance, but what makes it easier is the relative valuations. In particular of tech, where the US has moved ahead massively, so a lot of the question can almost be reduced to asking if Tesla is worth it? Or if it is, what is the motivating force to make it still more overpriced?
Boris seems to be trapped by the doctors and his inability to fathom numbers, into driving us into a permanent state of fear and welfare dependency, which will keep the UK steadily in long term decline. If he can break free of that populist vice, we might have a slim chance.
The omens are mixed, banning travel to Portugal (again) looks like the familiar science trap, but of course might be a reaction to the EU also banning wider travel from the UK to the EU just before that. Given our relations with the EU, that oddly seems more likely (if childish).
By contrast the US is now operating near normally, a stark contrast, as we remain in de facto lockdown, tied up in fiddly, unpredictable, illogical restrictions.
CULTURE WARS AS INDICATORS OF INVESTOR SENTIMENT
Both the Queenâs Speech setting out the legislative agenda for the year and the visit of Viktor Orban, the Hungarian premier, may have been light on substance (they were), but boy were they heavy with Tory symbolism, coming hard on the heels of the local election wins.
Much of that proposed legislation was to placate the grass roots, I seriously doubt laws on de-platforming (of both the living and the stone hewn) will make much difference, but the Conservative base feels it is high time the left got some mild resistance, in cultural matters. There has been very little of that for the last two decades.
I suppose the brutal bashing of Bashir is in the same category, although from my own experience a BBC journalist who did not lie and cheat their way to a non-existent story, would have been the truer rarity. Although in that they differ little from the rest of their breed, but defenestrations at the National Gallery and revolt at the National Trust, have been a long time coming and indicate a new degree of solidity and confidence. This is long overdue since Blair assiduously stuffed placemen into those organisations. Neither Cameron nor May did much about them, having their focus on higher things, it transpires.
Does it matter? Well not really, to markets, but it is a counter to the reckless spending, and the chilling clarity with which Boris famously expressed his view on business during Brexit, so is a straw in the wind. Maybe other things will change.
DEFUND THE DOLLAR?
What of Biden, well so far the US markets have taken slow comfort from the slender political majority, he holds, but the view is creeping in, that he really is going for broke, he is happy to unleash inflation, almost keen to do so, that letting Wall Street blow itself up, in the meme stock nonsense, and suppressing interest rates (which is vital if you are borrowing so much) and as a result trashing the dollar, is all fine, all part of the plan. Note the recent measures by China to prevent their currency appreciating too fast and by Putin (of all people) complaining at dollar fragility. Others may not attack it yet, but it increasingly looks like US policy.
Much of that perhaps matters little to Wall Street immediately; inflation makes you own real assets, bonds are now utter rubbish and so far, very little of US individual wealth is invested abroad. So, Wall Street almost inevitably drives itself up and thatâs a hard tiger to dismount.
But it maybe matters more to us Europeans, who need to both believe that US overvaluations will persist and critically that the dollar will not weaken further.
So, in the end politics do matter, not now, not today, but how these contrasting styles evolve over the rest of the year, will be very important to how currencies and markets respond.
Getting it right for the second half involves a big call, this year, as it did last.
Flat markets are not always still markets.
Charles Gillams
Monogram Capital Management Ltd
06.06.21
YELLOW BRICK ROAD
The recent elections in the UK probably result in a mildly stronger position for Boris in his Merkel persona, his Christian Democrat (CDU) disguise, so the fiscally left wing, culturally right-wing hybrid, that seems popular; but other than disasters averted, the poll achieves little more. For all the noise about the Hartlepool by-election, we are talking very small numbers, with a 40% turnout in a seat already slightly subscale due to depopulation and industrial decline. It has no resulting impact on the governing majority. Indeed, but for the Brexit Party, it would have been Tory already, so it really says nothing about the right-wing vote. The Tory Party is still miles from representing a majority view, but as long as the left is divided and the right united, that will persist.
Nor do I see much of interest in the council elections: a good result for the Tories in building on an already strong performance last time, which shifts the middle third of councils around in the quagmires of NOC or No Overall Control. This morass, like the bilges on a boat, washes left or right depending on the political tide. But with staff (and councillors) aware that only a few seats can shift them in or out of the NOC swamp, its impact is not great, particularly where they have elections three years out of four. These permanently transient councils tend to be run more for themselves than anything tedious like ideology or providing decent local services.
Neither Mayors nor Police Commissioners have any major power. Sadiq Khan, freshly back in office, faces a central government happy to call in his local plan (on housing) and impose central government representatives on his transport authority, thereby strapping one hand behind his back, in both his areas of real influence. Meanwhile London policing remains ultimately under Home Office control, so like the other areas is just for political grandstanding, not real service delivery. Policing in London also seems an enduring disaster: where it is needed, it is not wanted, where it is wanted, it is not needed.
Reading the Party Runes
So, what of Kier Starmer? Well, it also tells us little about his Cameron-lite policy of avoiding controversy, avoiding spending on fights he can neither win nor cares about, and ensuring he controls everything in the party. That policy is seemingly intact. The Corbyn wing will continue to spout for the microphones on demand, but matter little. The key issue is whether the big funders will want to have a go at winning the 2024 election. I think they will, but should they decide it too is lost, Starmer has a problem. If the partyâs money bags decide he canât win, he wonât.
For Boris it is at the least an endorsement of his recent COVID strategy, and that higher taxation to pay for the incredible spending splurge, has yet to impinge on votersâ minds. So, it permits him to carry on, but perhaps recover more of a strategic view, after the recent wallpaper storms? Does it make exiting COVID lockdowns any easier? Well, it should, but hard to tell if it will. Does it validate the extreme turn green? Not really, the Greens still did better in terms of new seats won, than either the Labour or Lib Dems, and are still advancing (from a very low base).
I am not sure if the Lib Dems expected much, they have Keirâs problem of irrelevance tied to being pro-European, when the EU is behaving more oddly than ever. So roughly holding their ground was fine. Indeed, they polled way ahead (17%) of national election ratings (which are more like 7%), but not over the magic 20% required to hit much power. Â Â Â
Those Strange US Job Numbers
Which brings us to the real shock from last week, the weird US jobs numbers on Friday. We have long said that how and if labour markets clear after the great lockdown experiment, is the vital economic issue. The problem never was the banks (so last crisis) nor the ability to borrow to sling money down the giant hole dug by the virus. Both are easy. But once you have smashed the economic system, does it regrow, like a lizardâs tail or simply start to rot and decay?
Many of us would have avoided the deep wound in the first place, but now the experiment has been started it must conclude. So, what did happen to slash monthly US job creation from expectations of a million to just a quarter of that? The instant reaction that it meant inflation has gone and so bonds were fine, was as instant reactions often are, garbage.
The bull or âBidenâ case is that as they have the right medicine, it just needs a bigger dose, or to take it for longer. Seems credible; labour force stats are notoriously volatile, some of the job losses came from manufacturing, where supply shortages are biting, but thatâs transient. Some seem to indicate a mismatch of jobs to vacancies, hopefully also transitory.
Encouragingly, a spike in wage inflation and hourly rates indicated plenty of demand for workers.
Yet, slamming the brakes on, shutting the economy down and paying millions of people not to work, might have brutally destroyed the delicate economic system. Thousands of small firms, where the bulk of employment is created, have just gone. The complex prior system of sales, working capital, scheduling, delivering, inventory, payment has been eliminated. Sure, the people still exist, so do the premises, but the invisible mass, the self-directing hive, is lost: no map, no honey, no queen.
Bigger firms are also planning to work differently, perhaps needing less labour.
Once you stop working and get paid to be idle, and indeed have limited ways to spend your money, it feels easier to stay in bed, study Python, redecorate the house, or whatever, but not get back on the treadmill. Indeed, in a lot of cases, once you step off, stepping back on is hard and also downright counter intuitive. Sure, your old boss wants you back, but do you want the old boss back? Worth a look round at least? As the title song puts it, âthereâs plenty like me to be foundâ.
Well, we still go with the bull case.
However, the bear one is not trivial. If you canât get labour markets to clear, welfare will be embedded, as will high unemployment, deficits and unrest. It remains the most critical feature, worldwide of the recovery, and several questions about it remain as well, including the need to keep new bank lending elevated, cheap, available. Expanding needs cash, contracting creates it.
The oddity to us then remains, that if the liquidity barrage really does work, why should it work better in the US than elsewhere?
And if it works the same for all, donât US markets then look rather expensive?
Charles Gillams
Monogram Capital Management Ltd
What Could Possibly Go Wrong?
Everything seems fine in markets for now, both here in the UK and in the US; rather than speculating about what will stop this excellent run for investors, let us have a look at domestic politics to end the month.
Sadly, David Cameron seems to have attracted ire.
I have heard him called a born chancer, with negligible convictions of any sort, who rose to lead a major political party almost by chance. Did he swim with any passing tide, and was he indifferent to the fate of party or country? To me he looked like the perfect palimpsest for the London media, at the very outset; a proto-Blair, all boyish charm and no bottom.
He apparently always saw, much it seems like Blair did (whose property empire is already large), party politics as a stepping stone to making big bucks from a grateful establishment. Nor did he rate the sinister ranks of either his own back benchers or civil servants, as anything but temporary impediments, instead he was forever dressing up his administration with apparently like-minded commercial types or plausible media darlings; no loyalty or political principles seem to have been needed.
So, while it would be nice to think that it was bad luck that he fell in with Lex and his boys, in truth heâd sold that pass years ago, in the perennial belief that quick, slick answers lie at hand to all the fuddy duddy laws of economics, and that reward has little to do with risk.
Was Brexit ever an Uncertainty?
On the other hand, I am not inclined to blame him for Brexit, which for many foes is his true crime. I recently read the excellent and painstaking work by Bob Worcester of Mori, who worked for Harold Wilson and spotted what his research had located, was gold dust. His tome (with Mortimore, Baines and Gill) âExplaining Cameronâs Catastropheâ sets out month by month what the British public thought of the EU, from the moment we joined. Suffice to say you needed to be lightning fast to find a sliver of time, when it was anything but deep loathing.
So, there was no gamble: unless he was a total idiot, he knew the score, if they bothered to ask, the public answer was always going to be âNoâ. The time for the nation to force that pass was a decade earlier, if Blair had thought he could finesse the Euro, that would have embedded us in Europe, not left the UK semi detached (and detachable). Blair saw the same polling data, and knew he could not muster the troops. The spurned Tory back benchers, eased aside by Cameron, again saw the same data, and that the fissure was clearly there, they just needed to drive the stake in.
So, Cameron played his poor hand as fast and as politely as he could and quit. The press may yet nail him for some sleaze, although I have seen no evidence of illegality; the knowledge that he had just become the pleading messenger boy for so shabby an outfit should be shameful enough.
Does it matter? Of course, but will any serious attempt be made to avoid such situations? I canât see it, the problem with putting a pickaxe through the trough, is those swinging it must in so doing destroy their own retirement. Not going to happen - not with the media ensuring our politics is more facile, ephemeral, and poisonous than ever (and it applies in other Western democracies too).
Forthcoming Elections in the UK
We do have a stack of elections shortly so these faux pas might count. Although the general feel is that they donât matter, or the electoral answer is obvious, which I broadly agree with.
The London Mayor should be important, but I think Boris gave up on London a while ago, besides he has little sway over the party there. The Birmingham Mayor looks safe, mainly by selectively distancing himself from the party, or at least its leader. Tory Associations are only dimly aware of local boundaries and take a good century or so to align with any geographical reality, so their grip is weak in the urban Midlands.
I sense the Shires, the Tory heartland, will be rocked a bit, as these seats were last fought just before Theresa May produced the daftest manifesto in many a long year, from her own absurd clique of sleazy imported magicians. So, the seats now being defended by Tories still reflect the landslide she never had, but that her local representatives did enjoy; from triumph to disaster in four short weeks.
So yes, the Cameron debacle will cost votes, but not enough to make much difference. You can see Labour are not going for it just yet, although the sight of Keir ambling past an open goal and telling himself it is too early to score (is it ever too early too score?) is most endearing. Still as Cameron ably showed, keep your powder dry, donât get involved and almost anyone can be elected.
In the longer run, I see no sign of the Tories holding power at the next General Election; policies are still being sputtered out in a fairly random fashion, attempts at grass roots soundings seem pedestrian, and history does not suggest they can win again. It will be their third PM and fourth election in a row, you need a true implosion in the opposition to get that. Which seems a stroke of luck that is unlikely to be repeated. Still, it is a bit early to prognosticate even so.
And what about North of the Border?
I suspect what Cameron has done, is let Sturgeon off the hook. It is suddenly easy to say âthey are all the sameâ with renewed conviction, and it makes it a little harder for the pro union parties to show any united front. So, I assume the Scottish Parliamentary elections will cause a slight raising of the temperature, and a lot of unwelcome noise, but I expect the SNP are still broadly happy to wait for Keir to come asking for a deal; it might be bad for the country, but good for him. I have not seen enough to doubt he will take the apple, if offered.Â
Indeed, the pandemic has been an excellent crisis for Nationalists. Someone somewhere let both devolved Parliaments exploit the chaos over COVID to strike a very distinct national stance, as if the virus could read passports. They quickly erected de facto borders against the English; when political separation does come, donât expect those fences to stay down for long. This sideshow can cause real damage.
Here incidentally, is what happened to the public sector jobs since 2000 - and what impact devolution has had on those numbers. I invite you to draw your own conclusions.
on 23 March 2021)
So, will there be a setback to this rally?
So, I see no new political crisis brewing here, nor frankly in the US; Biden has overall had a pretty easy run so far, so I would look elsewhere for the setback to this rally.
We will get one, markets will shy at something before midsummer. We also note that once more the IPO frenzy is sucking a great deal of liquidity out of fund managersâ pockets.
Beyond that belief, looking for specific problems has been well enough covered by others.
In any event having had an early Easter, we will now be writing next after those same elections and perhaps on that very topic.
Charles Gillams
Monogram Capital Management Ltd
END OF TERM REPORT
Easter neatly finishes off the first quarter too, how is the world doing? A mixed bag really, although for many of us, perhaps better than we expected.
MERKEL AND MACRON MIGHT BE RIGHT
Although I am afraid, we have moved from the tub-thumping section on the Astra Zeneca vaccine, into more of the dry analytical camp. Here, I am sad to say the evidence of a rare but fatal side effect is growing more compelling by the day. The case for the UK vaccine policy has always been pure statistics, so the disease will kill more people than the vaccine, but donât confuse that with saying vaccines canât kill and maim, they do.
Given the choice, would I now have avoided the AZ shot? Yes, I probably would, and waited for the Pfizer jab to arrive on these shores. Will I duck the second Astra shot (if offered) well on health grounds yes; but if the state (or another state) is going to impose onerous restrictions on my freedom of movement as a result, well, I probably value my residual sanity enough to grin and bare my arm.
But lower down the risk pyramid? Especially for younger women, where the risk of a fatal COVID infection is vanishingly low (particularly now the wretched thing has indeed vanished here) well, I am certainly not in the camp that wants to sack them for saying âno to a needleâ. Once we have choices, I think restrictions on the Oxford vaccine are now defensible.
As for a commercial product, well good luck to the Italians, having caused a trade row, I am not sure that seized vaccine shipment is much good now. Of course, we could and should export it all, strictly for use on the over 50âs; but is the product now irretrievably tainted? While those handful of fatal cases will now be tragically added to those âroutineâ claims for vaccine damage off the NHS. The US has pushing on for a thousand vaccine claims settled every year, for some half million dollars apiece, it is not that rare an event.
Despite that, the first quarter story still remains a medical triumph. Astra in the scheme of things has already saved thousands of lives. Other less blunt instruments will soon follow. The end of lockdown is coming. Will episodic waves of infection keep turning up, almost at random in time and space? Of course, thatâs the whole thing with a mutating virus.
WHERE NEXT FOR MARKETS
Markets however are still torn, that patchy vaccine roll out and the fiscal bazookas deployed (and in cases still being deployed) are blasting it higher. However, the bond markets have reacted far more quickly than we expected and done so globally. The US having the nearest thing to a free market in town, have seen rates jump first, but they will drag everyone along, and pull every currency down against the dollar.
The issue is simply how far and how fast will rates rise. But the squeeze is already on, neither Archegos, nor Erdogan are in our view co-incidences. Both are real world impacts striking hard at billions of dollars and millions of people; there is more to come. Deliveroo may also be telling us something about the competition for single horned ungulates too, which would be rather good news.
Here is the Freddie Mac housing note, for the assiduous. We would expect markets to overshoot, as usual, so the path of the US 10 Year interest rates, may have already peaked for the year.
While the US Federal Reserve also have a (secret) number in mind, above which it canât let interest rates go. The current US administration has become complacent on wealth creation and hates markets too, so would rather enjoy a hard correction and a softer dollar.
My guess is this gets ugly at 2% (from 1.75% now), either because markets are spooked or Central Bank action follows, so the idea that it is already close to the top looks solid, but it is becoming about fine margins. While that 2% ceiling will itself drift upwards through the year if inflation is really back.
However, for now, many people doubt if inflation or rates are going that high, or if they do, they are confident the Federal Reserve will call the bond marketâs bluff. None of this is particularly good news for long term investors navigating the next six months; the fuse has already been lit.
METALS SHOW THEIR METTLE
One of the pleasures of Easter is time to tackle a growing pile of Annual Reports. These are now (for single stocks) well beyond the capacity of any sane person to absorb, but fortunately 90% of their content has become heavily standardised virtue signaling, or almost meaningless numerical disclosures, plus the familiar pang of disgust at just how useless remuneration committees really are. The system is still not working.
Out of that pile a couple of global mining stocks come to hand, which are instructive on a few levels: it is a story of steady profits, restored dividends, falling production volumes, reined in cap ex, a bit of a mess on anything you canât easily store in bulk and flashes of resource nationalism, as Chinaâs persistent meddling and manipulation in commodity trades continues.
None of that speaks to me of the fabled commodity super-cycle, there is no single consistent story in those tomes. No one high volume product with no possible substitute exists; I guess copper is close, but once COVID restrictions (and workforce discontent) are removed, I expect it will just about add enough capacity to cover the expected infrastructure surge.
So, while profits were up, if production was down, that remains a story of subdued demand and price increases will now pull forward more production. So once more, this time from commodities, inflation (as all the Central Banks keep telling us), is probably going to spike higher and fall back. To embed inflation, you need persistent pricing power, not temporary shortages. Miners are not opening big new holes in the ground; indeed, they trend towards divestment still.
Overall, because of that vast liquidity surge, market rises are possibly more deferred than cancelled, but what felt a âno brainerâ in the autumn and winter, feels a lot less compelling, as spring arrives.
We hope you have had a rest over the break. We will be taking a pause from writing for May Day, as opposed to Easter, although not from fraternal solidarity, but because Easter has come early this year.
Charles Gillams
Monogram Capital Management Ltd
What doesnât sink me makes me stronger
First published on 20 December 2020
A strange old year winds down, with proof once more of the exceptional power of suggestion and the great strength of cohesion.
Tired Markets, Bullish Investors
So what now? Clearly markets are tired, we have the odd position that investors are almost universally bullish on next year, that fund managers report unusually low uninvested cash, and yet it still feels like thereâs no great power behind the mainstream markets. Indeed, over much of the developed world after the November vaccine/Biden sudden jump in markets, not that much has happened overall, a slow grind higher at best.
We see that lull as temporary, reflecting the month or so of pain and uncertainty before the onset of spring. Yet if anything we ourselves also want a little more liquidity, driven in part, by our awareness that markets are always thin and unstable going into the year end, so we can see little to be gained by jumping in this week.
Typically positions for 2021 will be taken in mid-January, once we have a reasonable steer on how 2020 ended. Not that that matters greatly either, neither of the next two quarters (or indeed the last two) will be in any way normal, Q1 2021 will be heavily influenced by COVID, but 2021 Q2 will see it fade very fast in the sunlight. Lots of scope for extreme volatility in that switch around.
But then, why rush in?
A lot could still go wrong. We assume Brexit disputes are just typical posturing for the crowd, but given those involved, maybe thatâs brave. We assume the vaccines will work, which is one of the key points in this whole saga. Indeed, almost everything has been conjecture and spin, with the virus seeming to come and go regardless of our frantic efforts and illusions. It has been barely possible to discern cause and effect for all our demented jumping about. However, the vaccine is going to be at last a single, vital, fixed data point.
By late January if we (and the markets) are right, the most vulnerable will have been given a 95% effective shot, excess mortality should tumble, indeed you should almost be able to watch the vaccine defences build week by week, as ICUâs empty. The rush to start vaccination, played far better by the UK (a rare event it is true) was all about getting the vulnerable sheltered before the very worst of the winter. In that case this epidemic is over, and the fearsome fangs will have been drawn in a few weeks.
So, in that case, why dive in now, if waiting a short while answers that most fundamental question. Besides nearly everything looks too good to be true. Our own returns are clearly too good, typically they have been double figures for most managers, even our low volatility products are (depending of course on the next week) going to end up there, which is truly exceptional for a good year. For a year in which economic growth has been halted for so much of the time, it is downright amazing.
Overbought?
We have already (in the VT-GTRF) shifted into slightly higher risk areas, such as Listed Private Equity, where we see good value. But we are reluctant to go much deeper just yet. Every emerging market that feels half credible is already at a twelve month high, and frankly the data from those is even less reliable than ours. All the Wall Street overbought signals are flashing red. There is clearly too much speculative cash racing about looking for a home, be it DoorDash or those irrepressible SPACs.
Government debt is in an elegant swallow dive onto the zero axis, you are getting very little return to lend to some odd places.
So, we will enjoy some pensive digestion after the feast, if we are somehow wrong to the upside, we almost donât care, whatâs better than best? Being wrong to the downside, seems the graver error.
Echoes of the Weimar
We started with a quote from one of the trio of great Weimar philosophers; now there is a history to conjure with. In a year when democracy seemed set to topple, when there are indeed no facts only interpretations and when it became government policy globally to stoke up inflation to destroy the value of money and create negative interest rates, Weimar has many echoes. Throwing in its capture by a communist dictatorship and assault by ideological zealots, leading to near terminal decline, means comparisons just get too spooky.
So, to leave you with one of the Weimar trio, as you head into whatever glee Boris has left with you, âMan muss noch Chaos in sich haben, um einen tanzenden Stern gebaren zu konnenâ.
That is, we all need, in whatever we do, a bit of luck, inspiration or indeed plain chaos to pick up the inspiration to move on to better things.
We wish you well for Christmas and the New Year.
We will return to the fray on the 10th January, no wiser, but we will hopefully know more.
Charles Gillams