Bill Blain: “There Is One Obvious Trigger That Could Lead To A Market Fall In The Second Half”

By Bill Blain of Mint Partners

Politics – More Destabilizing Than You Think!

“With comedy we can search for the profound…”

Dark skies, torrential rain and thinking about putting the log-burner on.. Welcome to high-summer in England. Markets are thin and the crowds trying to clamber on the train were noticeably lighter this morning. (Actually, the sun was shining this morning as my train sat listlessly somewhere “Sarf” of Wimbledon..)

Don’t be fooled into thinking what’s happening today isn’t critical – events now are setting the tone for the rest of 2017. If you want a title for today’s Porridge – try: “Politics – More Important than you think!”

The big debate is between the Macro Panglossians and the Micro Worriers. There are those  – those who believe the growing synchronous global recovery story will get even stronger, driven by positive economic factors: policy, low interest rates and low inflation. It’s difficult to fault their arguments in favour of a big secular shift into stocks, and to worry less about the bond markets as any rate increases will be limited. (If you buy into this scenario, you might want to think about how oversold the dollar might be..)

On the other side, 30 plus years in markets teaches us: “its never as good as you think..” (But its also true “its never as bad as it might be”…)

At the core of Worried Scenario is someone/thing presses the reset button and the second half of 2017 is remembered for a massive market down-flip. Some toxic combination of overvalued stocks (although we’re seeing a great earnings season). What might the trigger be? Central bank normalisation? The end of QE distortion..? 

The trick is to spot the likely threats.

The obvious one is politics.

Out of sync, out of control politics in Westminster and Washington dominated the weekend news flow. The Conservative party looks more fractured and unstable than anytime in the last 50 years. The Republican Party and Donald Trump look headed for the divorce courts. Politics in the two western economies supposedly driving global recovery have become profoundly negative – and that’s bound to impact market confidence. May and Trump look damaged, and the amount of time that will be spent analysing their longevity detracts from more useful discourse.

It’s a crying shame: both the UK and US governments should have been able to ride stronger global fundamentals and deliver growth. Instead both are myred in doubt, uncertainty and conflict. Politics is a key driver of confidence and weak government is reflected in weak sentiment. 

We don’t need to examine the details of the unfolding political catastrophes, who said or tweeted what…  just understand how deeply flawed politics dents confidence.

That said: the current political circus of failure is truly extraordinary. Who would believe a character from Comedia dell’arte – Scaramouche (key features: boasting, overconfidence and a coward at heart) – would emerge as Trump’s communicator in chief. The Presidency looks cocooned inside a cabal of Generals and Goldman Sachs alumni. (I am told we shouldn’t count Scaramucci as part of the Goldman World Domination Plan – apparently he was never part of the golden circle..) 

In the UK who would have guessed Boris wasn’t acting but actually was and always has been an utter buffoon, or that Spreadsheet Hammond shows such talent as a Macheivelian schemer. What rip in the reality of the universe did we tumble through into a world where people say Jacob Rees-Mogg is the top Tory politician? In any normal world he’d be a national treasure for his eccentricities – not a serious contender!

Whatever…. Its difficult to imagine either the UK or US getting back on the Growth Programme anytime soon..

Which means we should probably consider how to respond.

The obvious trade has been the simplistic “US/UK in Trouble, Europe looks to be improving… so buy Euro stocks and the Euro…” Simplistic and sounds plausible till you examine the detail to conclude Europe remains a very selective pie. The default setting in Europe remains Draghi and the ECB’s “do whatever it takes” stance. That’s a “courageous” bet ahead of German elections. (Again – politics!)

Bottom Line: Politics can still make this market worse.

Meanwhile.. Impressive results from HSBC. We like “dull boring and predictable” investments – and they don’t come much duller or more boring than the Home for Scottish Bank Clerks. (Think about it.. HSBC)

However.. I am concerned the bank is pandering to analysts by announcing a further $2 bln stock buyback. Normally we criticise firms for stock buybacks – it’s unimaginative and should you really be supporting managements who can’t find anything better to do with the money?

In the case of HSBC you could argue its demonstrating a strong and consistent flow of profitable business across the bank, and this really is a great opportunity to return capital to investors.

Or is it?

Are you an HSBC customer? Have you tried to speak to any “customer” manager, been into a branch, or used their banking apps recently? It’s pretty prehistoric. The customer experience is less than inspiring.. This is the digital age…

One would think it’s time for established banks to be evolving, rebuilding, modernising and preparing for the next Century of business – rather than just raking in the money.. The world of finance is undergoing massive evolutionary change. New winners and losers are emerging. If HSBC wants to be part of the future.. then it needs to be spending and reinventing itself for the digital age now… which is why I wonder if jam today for investors means dry bread and water tomorrow….