The Penny Drops: April Exposes Markets To Some Brutal Truths

Authored by Bill Blain via MorningPorridge.com,

“Trouble is, just because things are obvious doesn’t mean they’re true…” 

April 2022 will go down in market history as the month it all became obvious.. But what? That the global economy is in need of repair, markets are overly euphoric and consumers can’t consume when they are broke.

Sometimes the penny takes an awful long time to drop.

April 2022 has been one of the most interesting months I’ve seen in nearly 40 years messing around in markets. 30 days have confirmed a massive and diametric shift in thinking is underway. Take a look at the number of overturned market narratives, the undeliverable promises exposed, and the rising number of Doh! moments of shocked realisation stuff simply isn’t what markets thought it was.

Not only has the US economy actually shrank (by 1.4% Q1) for the first time since the pandemic, raising higher recession/stagflation fears, but for all the Netflix moments, the ructions in gas and oil, the political threats, the realisation moments, the discovery the Russian army as less than the Goliath we feared it was… April looks like it was just the start of our sense of “everything we think might be wrong” being set into hyperdrive.

There are two very different worlds at play here. There is the real world of consumers, retail and work. And then there is the world of markets and investment. I sometimes wonder if the market forgets who pays for it all..  The bottom line is that if prices are rising and incomes are falling, then.. something has to give….

There is much more to come in terms of this particular penny dropping.

Let’s start in the real world.. where it’s getting pretty damn miserable.

She-Who-Is-Mrs-Blain tells me the March Energy Bill was £360. That’s up from £140 this time last year. I daresay we can just about cope – but many families will struggle with £2600 plus a year extra when UK average family disposable income is $31.4k. (For the record – not a large house, and very well insulated.)

The ideal job is probably NHS hospital trust executive. You will get paid a couple of hundred thousand plus a 10% pay rise this year for a couple of days working from home, with a guaranteed index-linked 6 digit pension, and no-one in government will really care much if your trust fails or not, because it will give them excuse of pouring more money into it to look good, while raising national insurance again to pay for it..

We all care about the NHS. (Beware.. it is going to eat us all.) Nurses get paid negative the square-root of f***-all – where does the money go?

Meanwhile, Young Ms Blain has seen her take-home pay-packet slashed by higher taxes and NI contributions, having to pay back her student loan faster, and has been hit with a rent increase. She ain’t getting a long-delayed pay-rise as her company is struggling as consumers cut spending. The BOMD (The Bank of Mum and Dad) has tripled its provisions.

As someone pointed out, the relative impact on my daughter’s disposable income of buying a London Underground Ticket to work is about the same as Mrs Sunak’s legally unpaid taxes buying a brace of top of the range Ferraris every day plus an executive jet (with gold-blingy taps). Silly girl. Why doesn’t young Ms Blain save up and buy her own flat to cut her rent bill? asks Mrs Sunak.. That would put her on the path to wealth. Sure. You try living in London as a 25-year old and see how much you save.

The only thing giving hope and meaning to our miserable middle-class, middle-aged lives is the value of our homes – which can only ever go up and up and up! Er. No. Mortgage rates have risen faster than ever before, visits to home-buying sites have crashed. No one wants to pay stamp-duty and everyone’s savings are being hoovered out by tax demands. A house price crash is coming, and even though it will quickly reverse, (because that is the received wisdom about housing crashes here in the UK), it will make the miserable mood even worse..

So.. when it comes to buying more cheap crappy stuff off the internet, or replacing the car, or going on holiday (not that we could get new passports anyway)… its all just a bit of a solids-hitting-the-fan-show…

If consumers ain’t consuming.. remind me how corporates make money?

Back in the La La Land of markets.. There are also increasing signs everything in the garden is no longer rosy… If there is one aspect to the flipping of the market’s current polarity, it’s the abrupt turnaround in confidence in the once all-powerful FAANGs. (That’s Facebook, Apple, Amazon, Netflix and Google to we mere mortals.)

Once they were Gods. Now they stare sightless into the vast seas of sand…

Take a look at the headlines from yesterday’s market – these are all FAANG linked. See if you can spot a trend. (US Readers – mild use of sarcasm for dramatic effect warning…)

• Apple warning it’s likely to take a $ 8bln hit from supply chains and shutdowns in China. That’s the tip of the tip of the iceberg – anecdotally, firms across manufacturing from autos to defence say parts are increasingly unavailable. We thought supply chains would swiftly reopen post-Covid. In fact, supply has become even more sclerotic, and are unravelling the whole just-in-time parts dependent economy. Broken chains could take years to fix. The economy needs a defibrillator.

• Amazon takes a spanking from lower post-pandemic sales, supply-chains, staff-costs and inflation. Oh, and a $7.6 bln punch in the face from the crashing value of EV maker Rivian! Doh! Consumers have spotted most of its products are cheap nasty Chinese knock-offs. Now we know why Jeff got out. The retail world had its flirtation with big – now it is going back to small.

• Rumours are beginning to circulate of a bid for Netflix – hardly a surprise. When its bubble burst on flatlining subscriber models, it’s triggered a wake-up moment. Subscribers are good, but monetising them and profits are better. Take a look across the market – every subscription based service is now under massive pressure; from Disney to Spotify. That opens opportunities for consolidation.

• And from Wednesday; “Hope is not strategy” should be tattooed on the foreheads of Meta (Facebook) investors. Revenue continues to slow, and ad revenue continues to fall – and Zuck is actually cutting spending on his Metaverse vision “given the current business growth levels.” So just how exactly, does he intend to put the firm back on its feet?

• But things are never as bad as you think they are. Apple’s lost production and sales will be compensated by its services division – the FT put it nicely: “services gross margin north of 72.6%… its $14 bln profit last quarter was alone almost double the $7.5 bln net income at Facebook parent Meta.” Amazon might do better to give up the delivery business – Amazon Web Services made $6.5 bln compared to a $2.8 bln retail loss (its first loss in 7 yrs!)

FAANGs aren’t actually important. The market importance ascribed to them through the fantabulous 20-Teens was just a symptom of the market belief system. Apple will remain a great firm – but the rest? (Oh.. the power of a question mark.)

The market is not just FAANGs:

I can’t resist the tale of Teledoc Health –one of ARK founder Cathie Wood’s big picks. It crashed 40% y’day on the back of higher than expected costs, lower than expected sales growth, and a more competitive market. Wow.. who could have foreseen that? It’s down 91% since its high last year. Gonna change the World? Cathie said: “we truly believe our portfolio is full of the next Tesla, the next bitcoin”. Oh dear.. time to sell then..

I try not to write about Bitcoin anymore. All I ever get is tinfoil hat wearers complaining I haven’t read as much as them about it as they have, and if I only had the intellectual curiosity to really understand Bitcoin and why central banks are so evil, then I would be a buyer. Blah Blah Blah. I will not be sucked into an asset that’s only intrinsic value is what other desperate folk hope it might be. Excellent piece in the FT y’day from Jemima Kelly: Why I’m still not taking crypto seriously.

And if you are a Tesla owner.. your call. Take the Red Pill and believe whatever you want to believe. Me? Sorry…

Or how about retail brokerage Robinhood is slashing 9% of its workforce because it says it expanded too fast. Oh, and its meme-stock-trading retail marks have had their pockets emptied. It hasn’t turned a profit since its IPO. An overexpanded firm that is losing clients and is making losses. Apparently some analysts still think it’s got potential – I just checked on the WSJ and its ranked a hold with 5 buy ratings and 2 Sells. Really?

The world.. is not what we think it should be.. it is what it is.. and that is getting less pretty.