Tuesday 23rd May 2017
The power and frailty of belief….
Read a newspaper and it’s clear there’s plenty of uncertainty and instability at work in the world.
Look at America. When President Trump isn’t under investigation for his links to the Russians, he’s sacking the head of the FBI, banging out tweets or circulating ‘alternative facts….’
Right now, bookmakers have Trump at even money to be impeached during his first term. In other words, he’s as likely to be drummed out of the White House as he is to reach the next election still in power.
That’s an unusual state of affairs that creates uncertainty….
- Bombs, war, turmoil, dispute….
Authoritarian regimes in Russia, China, Turkey and North Korea are all doing their bit to destabilize the world….
One is flying military jets into the airspace of other sovereign nations. Another is land-grabbing in the South China Sea. One insists on building nuclear warheads – come what may. Another has become a dictatorship….
Bloody wars persist in Syria, Yemen and South Sudan. Terror is a constant threat – just look at this morning’s headlines….
It’s impossible to know how Brexit negotiations will pan out or what it will mean. It could be nasty. ‘’If we fail, the consequences for Britain and for the economic security of ordinary working people will be dire,’ said Theresa May last week.
Before that comes to pass, we have the lies, inauthenticity and nonsense of another general election to endure….
- The big squeeze and a giant bubble….
Meanwhile British households are suffering the biggest financial squeeze since mid-2014.
Last week, the IHS Markit Household Finance Index fell to 42.4 – down from 42.5 in April. British consumers have less spare cash available to spend than at any time in the last 30-months. It will get worse.
In the background, a bubble of consumer debt grows bigger – with British consumers going hell-for-leather on the foot pump.
Figures released last week reveal that UK households have way more debt than households in other advanced economies. Bank of England figures say consumer debt continues to rise strongly….
The British economy is storing up trouble. Trouble that will play out….
A debt bubble makes Britain less resilient to economic shocks. It adds to the levels of uncertainty that consumers and investors are feeling. Or at least it should do. But, in-actuality, that doesn’t appear to be the case.
If consumers are trying to borrow their way out of a tight spot, investors simply aren’t feeling the turbulence. It’s as though they’ve really enjoyed the in-flight hospitality and are now sleeping through the tempest battering the plane….
- Correction – and rapid bounce-back….
Markets generally dislike uncertainty and instability. That is the received wisdom.
Uncertainty and instability make investors nervous – filling them with doubt, putting them on-guard and encouraging more cautious behavior until the road ahead, and what’s on it, comes into focus….
But, right now, investors are putting their foot down and ploughing on as though the road ahead is clear – despite obvious uncertainty. Events are not finding real or sustained expression in the stock markets.
For sure, stocks in Britain and the UK suffered a correction last week when it was reported Donald Trump had asked FBI chief James Comey to ‘let go’ of an investigation into former national security adviser, Michael Flynn.
The market got a bad case of the jitters. The FTSE 100, the FTSE 250, the S&P 500 and the Dow Jones Industrial all took a nose-dive.
But stocks didn’t fall out of the sky. They didn’t plummet to earth like a stricken airliner. They lost a little altitude, but it wasn’t long before the dive was corrected and lift regained.
If not quite at all-time-high levels, markets swiftly rebounded to levels not so very far away….
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- Disconnect between events and markets….
Markets are either incredibly resilient in the face of risk, uncertainty and instability. Or they are in danger of becoming complacent – their antenna befuddled by the fact markets have risen for months regardless of geo-political events….
Former Federal Reserve Chairman Ben Bernanke remarked on the phenomenon last week at a financial industry conference in Las Vegas. He noted how little markets have been affected by major political risks.
‘It puzzles me that markets are very blasé about political risk until the last minute,’ he told delegates.
Bernanke was focused on US events. US stocks have risen despite political scandals, provocative statements and a series of deeply-polarizing policy flotations all with their roots in the White House.
But the disconnect between events and markets has occurred in Britain too. And across Europe.
Little that happens seems to have lasting effect on the market. Nothing can keep it down. Nothing can hold it back.
- The power of belief….
I put it down to the power of belief. Belief is strong. Right now, belief keeps the market at heights previously unheard of….
Big market players believe. They believe markets will continue to deliver – whatever happens in the real world.
UBS Wealth Management’s recent survey of 2,800 millionaires says as much.
82% said this is the most unpredictable period in history. In other words, they recognize the existence of uncertainty and instability in the events around them.
But 77% also said they believe they can ‘accurately assess financial risk arising from uncertain events.’ 51% expect their finances to improve over the coming year. Just 13% expect their finances to deteriorate.
In other words, despite uncertainty and instability, confidence and belief remain high.
It is that confidence and belief that keeps the markets where they are and where they have been at. At least for now.
But it is important to keep in mind that belief is no more than belief. Confidence is only confidence. Neither is the same thing as a certain measurable outcome.
Like a dodgy ticker, belief can give out anytime. Confidence can collapse as quickly and completely as a house of cards….
That day is coming. Maybe not tomorrow. Maybe not next week. But a good deal sooner than many market players will acknowledge….
- I smell opportunity….
The Cape ratio for US shares is at 29 – compared with a 146-year average of 17. The figure has been higher just twice….
September 1929 when it reached 33 – just before the Wall Street crash. And December 1999 when it hit 44 – prior to the tech-bubble bursting.
The S&P 500 index has a current price to earnings (p/e) ratio of 21 – compared to a 63-year average of 16. It’s been higher four times – two of those were shortly before the Black Monday crash in 1987 and just ahead of the tech-bubble crash.
US stocks are currently valued at levels which have preceded major corrections in the past. The lessons of history are there to see for those who will read the signs. What goes up always comes down.
The market might believe it can manage uncertainty, circumvent instability and negotiate with risk. But sooner or later reality will win out.
It is a case of when and not if for US stocks – and markets all around the world (including the UK) will suffer from the after-shock. I’ve been saying it for a while. Now I say it again.
But I’m not worried. In fact, I smell a golden opportunity on the wind. More on that next time.
That’s how it looks from here….
I’ll be back with more next Tuesday morning.
All the best,