Complacent Goldilocks Got Eaten By Bear

Authored by Bill Blsain via MorningPorridge.com,

“If you go down to the woods today, you’re sure of a big surprise..”

The weather on the Pacific Northwest has turned ugly, as might the financial weather if the current degree of market complacency proves unfounded!

This morning I just watched a massive, fully laden container ship sailing out of Southampton Water loaded with goods for the global markets. The sun is shining and what’s to worry about?

The global economy is reopen, the last dying embers of the pandemic are being hosed out, consumers are determined to consume, and aside from some simple supply side inflation adjustments … we have absolutely nothing to worry about…

Run for hills if I ever write something like that without a twinkle in my eye and wry smile on my lips… I am smiling now… but not in an overly wry way! Call my expression this morning… quizzical.

I am tempted to throw a selection of random words and phrases at the Porridge to see how they stick.. Let’s try Complacency, Unjustifiable, Eyes Wide Shut, Unaware, and, the classic shrug and Whateva…. I perceive markets where a frightening amount of participants believe what they want to believe, rather than what their market senses are telling them.. If I read about Goldilocks market conditions again, I shall scream!

As the first half of 2021 closes, lots of accounts will be high-fiving themselves for getting it right. Generally doing nothing would be an ok strategy with all these miserable tracker funds doing so-so on the back of rising markets, shored up by the limitless largesse of Central Banks. Funds that got more involved and called the rotations into and out of “Fundamentals” and Disruptive Tech stocks have done well. Some must have got lucky by picking a couple of key market moments. Themes have changed – ask Cathie Wood what she’s going to do next that will prove extraordinary, clue: a Bitcoin ETF is not.

However, the general ebb and flow of markets has fundamentally shifted this year – last year was about Pandemic. This year is about worrying about the consequences. Yet, the consensus for the next 6 months seems to be: (Ignore the numbers for a moment..)

• No Inflation                         (3)

• No Debt Bubbles                         (3)

• No Recession                         (7)

• Swift Recovery                         (7)

• Rising job Creation             (7)

• Rising Corporate Profits             (3)

• Trade Deals                         (3)

• Lessening geopolitical tension (2)

• Political stability                         (2)

• Coronavirus beaten (3)

If only it was so easy.

There are 10 things in my list above. If you score them 1-10, 10 being nailed on, and 1 being very unlikely… Call it my financial weather forecast. A score about 75 is “Fine & Settled”, below 25 is a storm warning. This morning, I get a score of 40.. which is not screaming “Danger, Danger Will Robinson”, but I would class as an “unsettled” outlook. It hints at further uncertainty to come…

Maybe I worry too much, but when markets are blind to consequences, they are blind to risks. The market is now full of contradictions – which have a habit of snapping back to bite painfully in the soft dangly parts.

For instance, the bond market has discounted inflation, yet we see it manifest in everything from logistics, food, housing and wages in the wake of the pandemic. The equity market is paying zero attention to corporate balance sheets – perhaps perceiving them as “just a credit thing” – and are anticipating bumper sales, despite rising leverage.

Meanwhile, Central Bankers are looking at what their decade of QE monetary experimentation and ultralow interest rates have done to the economy in horror! Mein Gott! What have we done.. they quietly mutter. They know that to pull back stimulus would be like pulling the hit from a junkie. They fear the consequences of normalising interest rates – but if they don’t the distortions on financial asset pricing and commercial behaviours will continue to multiply. As Elvis once said.. they’re “caught in a trap…”

If they start to talk about it – say in the late summer when Fed does it’s Jackson Hole central banking equivalent of the having fun – the markets will no doubt start to worry again! All of which means, I suspect, markets continue to drift for the next 6 weeks in the lazy summer flow.. enjoy the high… while it lasts..