‘Harry Hindsight’, “Lucky Idiots”, & The Only Real Risk To Markets

Authored by Bill Blain via MorningPorridge.com,

“He spoke of lands not far, for lands they were in his mind..”

Harry Hindsight is the greatest trader none of us has ever met. He has 20/20 rear view vision. He’s made off like the proverbial butcher’s dog with the sausages through this crisis. He correctly foresaw how the greatest economic shock of the last 200 years was the perfect opportunity to arbitrage predictable Central Bank and Government responses, and make billions. 

Yet, I suspect Harry is now shorting the public markets he loaded up on in March, and is reinvesting the gains into gaming deepening distress. The picture is changing.  

Yesterday I wrote how the current disconnect is widening. Global stock markets continue to grind higher. The outlook for growth and jobs continues to deteriorate. It’s not healthy. It’s becoming obscene. Many investors still seem blind to the devasting potential of crisis in jobs, growth, welfare and inequality the apparent recovery in stocks is hiding.

If you think you’re a financial genius because you bought the rally on March 23rd (the bottom of the COVID crash, and incidentally, the day UK lockdown was announced), then you either arbitraged how Central Banks and Governments were going to press the MAX POWER button to juice the market through QE Infinity (QEI), bailouts and nationalising payrolls, (in which case, well done), or you were just a lucky idiot who bought into all the nonsense hype about an oversold opportunity. 

Do you perhaps think the liquidity Central Bank have pumped into the market might be related to recent stock and bond gains? (Clue: Yes.) 

The Fed’s balance sheet has expanded by over $3 trillion since March. Stock Market capitalisation has increased by …. about the same amount. $2.9 trillion. And bond market investors found another $1 trillion to put into the busiest corporate new issue market of all time because they saw it was backstopped by QEI and rates were going lower. Thank you Fed!

The only thing the market is worried about is when the QEI orgy MIGHT stop. That’s pretty obscene when millions of workers are about to lose their jobs across Europe, American cities are burning with injustice, and the virus is still reaping its toll across increasingly fraxious economies. The social risks are escalating faster than the market thinks.

Yet the only real risk the market perceives is “normalisation” – central banks around the globe switching off the cash spigot. Imagine what a “taper tantrum” might look like today if the BoE, The Fed and ECB decided to switch policies, raise rates and stop QE?  The market is making a very clear assumption that Central Banks will not stop, and this free ride is going to continue. 

Will it?

At some point Governments will have to act to directly address the economic disaster that’s unfolding. They may do so gently. Or it might get messy. There is certainly potential for a brutal socially driven correction and unwind of current policy if we don’t see a swift recovery, job creation and inequality addressed – this summer could be a season of riots as frustration and fury takes hold. 

I suspect Harry Hindsight is already investing on the basis Governments are seeking the former outcome; addressing the very real jobs, growth and welfare crash through sensible and considered fiscal and industrial policies designed to create jobs and stabilise the economy – rather than markets.

Harry has figured out just how much the global economy is going to change. He’s now investing in distressed opportunities – figuring what companies and sectors governments will target and focus support to, and looking for ways to invest into distressed assets in critical areas like property, infrastructure, education and industry, on the basis they are the long-term bases for post-COVID economy. 

Unfortunately, I am nowhere near as clever as Harry Hindsight… but I see the way he’s thinking:  What do markets hate most? Government intervention. 

If you were to propose the government effectively runs or dictates aspects of the economy, you will immediately be called a communist, reminded how state industries have failed everywhere and that governments can run the economy. Only free markets can do that. 

Twaddle! Markets are only showing a pulse because of state intervention and oodles of government money. 

But it’s a fair comment that governments don’t do running business well – bureaucracy thrives in all government sectors. So this time it’s likely to be governments encouraging the private sector to invest alongside. It might be state SME banks – like the idea the UK could use a new 3i. I suspect new business focused banks are going to be part of the future – and Harry will be investing in them.  

And we don’t need to wholly nationalise economies. Trends and themes are emerging.

Some firms are doing just fine. The big money pushing the largest stock market gains have been concentrated in the few really big FAAMA tech giants (Facebook, Apple, Amazon, Microsoft and Alphabet.) Gains in smaller stocks are largely on the back of virus narrative; if there is a positive story to tell – no matter how tenuous, stocks love a good story: so we’ve seen drugs companies, tractor part suppliers and pizza delivery firms have their five minutes of fame as they post spectacular but usually brief gains.

In the bond markets, the $1 trillion feeding frenzy of new issuance was focused entirely on larger companies. Their party was backstopped by QE Infinity, and Central Banks politely pretending no one is being downgraded. If Jerome Powell squints his eye hard enough some fallen angles might still look to be investment grade. 

There are dangers: 

We should not underestimate the continuing risk of the virus. Yesterday, I stated the “around the globe the virus numbers suggest we’re past the moment of greatest danger.” A reader quickly corrected me – it might be true for the most developed nations, but 75% of the global population in second tier nations are only now experiencing rising contagion rates. How less wealthy nations of the world treat the pandemic with limited health resources could well dominate headlines in coming months – especially when China and the West will be competing to support them! 

Politics are still throwing up a number of potential wobbly moments:

i) Can the UK negotiate a meaningful trade deal with Europe?  

ii) The coronavirus is proving a “heads it wins, tails you lose” scenario for politicians across Europe – raising the prospect of new rounds of populisim. 

iii) Who wins in November’s US election – bad, worse and worst scenarios exist. The result is going to set the tone of US engagement/disengagement for the next 25 years, and have enormous consequences for global growth. 

Market technicals look negative. I tend to try and fit the market narrative to what the technicals claim to show – for instance if the charts show a looming shock, I’ll figure out what the current China tension story is likely to be. Looking for an event that could trigger the down-phase the charts propose – is guesswork, but sometimes you get lucky. I was told yesterday its time to load up VIX, but also the charts show some very contradictory patterns. In other words… a correction is coming, but it might be a few days or a few months long… 

However, there is also hope: 

Yesterday it was a line in an FT article that set me thinking: If we are capable of constantly monitoring aeroplane engines, why can’t we monitor our bodies too? The story noted: 

Rolls-Royce gathers more than 70tn data points from its in-service aero-engines. So why do we most often wait for our bodily engines to develop a fault before we regularly collect health data? Thanks to the use of smartwatches and other wearable sensors, we carry permanent health monitors on our wrists. With the right apps, we can easily measure our temperature, heart rate, glucose levels, menstrual cycles, blood pressure and sleeping patterns. Such technology can help deliver the precious 3Ps of healthcare: personalisation, prevention and precision. It may also be able to provide early warning signals of a fourth P: pandemics. 

Imagine a world where all your health data is encrypted on your watch, smartphone and PC. Where your Doctor AI system is constantly monitoring changes, and referring you for blood samples or other tests when it thinks they are required. My heart Surgeon Nick Curzon told me about his vision for this kind of AI based system a few years ago. 

We all love the NHS – we’ve been out clapping doctors and nurses with pride. But it’s a massive top-heavy bureaucracy that doesn’t work particularly well Perhaps the virus is a chance for reform. Fewer health managers means more doctors and nurses!