Blain: Speaking To Investors, It Feels That Confidence In The Trump Narrative Is Breaking

Blain’s Morning Porridge, submitted by Bill Blain of Shard Capital

“Whatever you think – he got elected because he pointed out huge troubles in our economy and democracy!”

No one should be in the least little bit surprised at yesterday’s market tremblor following Trump’s big reveal – he might not make a trade deal this side of the election! Quel Horror. (Sarcasm Alert) Stocks gapped down, and bonds rallied strongly – a knee jerk reaction. But it is more than that.  No one should be particularly surprised a China deal is off the table. (Bloomberg seem to think it is already back on). If you had been watching closely, it should have been obvious the “we’re going to get a deal” story could only be extended so long.  The question is how deep will this current wobble go?  Could it become a correction?  Or even a full Christmas crash? 

Speaking to investors yesterday, it definitely felt like something is breaking.  It’s not about the China/US spat – that is well understood. My clients are not stupid and understand how the mood in Beijing has changed – they see the Chinese don’t trust Trump and they are increasingly confident of their perception that although he barks and blusters, he is unlikely to act or bite.  That will inform their political choices – including responses to Hong Kong and Taiwan. 

What’s breaking is confidence in the current Trump narrative. The market’s concern is that the market narrative that’s driven stocks and bonds higher through the year is played out. It was based around two factors:

1. That Trump will remain disruptive, but a positive market force,  juicing prices via tweets, tax cuts and short-term fixes because his re-election depends on the perception of economic strength, and
2. Central Banks will continue to positively distort markets via accommodative policy and monetary experimentation because they can’t face the prospect of market weakness. 

It’s worked wonderfully well right through 2019 – thus far.  But now the narrative is breaking down, and the next thread is becoming increasingly important. Trump’s credibility with markets could be waning. Central banks are more focused on fiscal policy, and the market is becoming blasé about the Orange Being…

The bottom line is we may be past Peak-Trump.  For the last three years, markets have been collectively happy to coat-tail his actions.  I don’t believe many market participants ever had much time for him – at a personal level, (and the views I hear on his personality, or his actions as a blusterer, a finagler, a bully, and much much worse are more polarised than on any other politician – even Boris isn’t so divisive.) The collective market views was that as long as he kept delivering, fine… the market could put up with him. 

Although we’re all privately concerned about the ongoing White House Shenanigans and Impeachment, you’d have been foolish not to follow Trump’s market higher.  What’s not to like about a US president willing to juice the market with tax cuts and calls for the Fed to ease?  If the president says a Trade deal is about to happen, then why not follow the market higher? And you do.. till it stops..   

Now every trader who played that game is looking around to see what the rest of the market still believes. It’s like an Emperor’s new clothes moment – you knew the fat orange guy was stark-b*ll*x naked, but while everyone else said he was wearing clothes, you went along with it. If everyone walks away at the same time, then the market is potentially in trouble. 

A trade deal with China is highly unlikely – it hasn’t been likely for months.  Trump pretends it doesn’t matter, and has opened new fronts against South America on Steel and Yoorp on Digital Taxes. The reality is the Great Negotiator looks to have misjudged China – rather than the Chinese being intimidated by his deal making brilliance, they don’t trust him as far as they can throw him.  When the market loses confidence in his ability to keep delivering upside, then he’s in real trouble. 

What’s the new narrative? 

Fiscal policy is nailed on. There is the possibility of a rising inflationary threat as the credibility of the Government is roiled. And its now about corrections and the impact of new sustainability themes as the overriding investment story. 

This throws a new spin into the market. Market participants are not stupid – they follow the trade war narrative closely, they’ve been analyzing China, US and Global Trade for signs of deeper weakness.  What worries them is confidence.  The market has been trading higher and higher on the back of a strong belief. Now it is breaking and none of them are that surprised. Clearly Trump will be the major driver next year ahead of election, but at the moment the market is trying to figure out where we’ve gone…  

NATO 

NATO is 70 years old today. It appears weak and fractured – with the main players driven apart as the result of a host of factors: Trump’s undiplomatic calls for greater spending, a newly resurgent France bidding for the power under Macron as Germany heads into introspection as Merkel dithers into retirement, and the unsinkable aircraft carrier of the UK disengaging from Europe following Brexit. Does it matter? Are the Ruskies really a threat? 

Don’t bet against it. They have signalled they are. In October the Russian “surged” 10 attack submarines into the Atlantic. It might have been 8 because I’m told Nato’s ultra-sophisticated SOSUS line lost 2 of the brand new and ultra-silent Russian hunters. Nato’s response was poor – aircraft from around the alliance were gathered and a few old frigates sent out. The once mighty ASW capabilities of the Royal Navy are tied up protecting its two new aircraft carriers, and the fleet is short of manpower and assets. 

The Russians are sending a clear message: 10 subs in the Atlantic could stop all Trade.  Absolutely. What is Nato going to do about it?