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Blain: "More And More Folk Muttering Darkly About 'Late Cycle' Drift"

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Submitted by Bill Blain of Mint Partners

"Late Cycle", thin markets and boom to bust fears stifle activity

“Well, I’ve been foolish too many times, now I’m determined, I’m gonna get it right…..”

What’s going on in markets?  A glance at price charts highlights the recent upside. But, if there is a theme to the market this morning, I’d say they are looking tired and unconvinced. Why? Phrase of the day is “Late Cycle”.

Take a look at the market numbers and ask if they really are “reasons to be cheerful?” The 10-year bond remains range bound at 2.85%, stock markets look top and tailed (with a worrying number of people who should know better saying daft things like: “its my strongest ever conviction trade – buy stocks”), and oil prices remain strong at $70.

The current upside drift in markets is being fuelled by short-term positivity.

  • Geopolitics look sound: Nothing to worry. Korea is going to be solved – might even reap a peace dividend. The Russians have not kicked off after the Syria strikes. The prospects for negotiation on trade with China are looking stronger. Apparently.
  • Policy is looking strong: US tax cuts are positively impacting Q1 reporting results and therefore sentiment. European inflation is edging up – to the extent where QE is threatened. China has embarked on a massive liquidity into its economy to oil the financial sector.
  • Markets are buoyed by a massive wave of investment cash looking to play: hence much of the stock upside thinking.

However, the actual price action in stock markets doesn’t look convincing, and the volumes don’t look like a buying binge. More like covering positions. It feels like we’re still waiting for something to develop. In credit markets we’re still seeing a flood of supply, but there are clear concerns about liquidity traps in BBB credit, and the likelihood of a faster pace of US rate rises.

The flattening US yield curve is glossed over by the Global Macro Alignment prognosticators, but the 2-10yr curve flattening from 80 to 40 is a cause for concern. Inverted curves are never positive and scream recession. The trick is working out how much enforced duration buying by global investors of the 10-yr is making that cosmetic metric look worse than it should be.. ie: if you are a global investor what else can you do except by the long-end of the Treasury market? (Why? Because…)

You have to wonder where this is heading. Volumes, flat curves, slowing numbers look to be dark hints, portents, signs and shadows of recession lurking in the shadows. “Winter is Coming” say the analysts… More and more folk muttering darkly about “late cycle” drift… Recent lacklustre UK numbers, the unfounded worries about flattening curves, the concerns about 10-years of post-crisis financial exhaustion, economists wondering if entrepreneurs have forgotten how to entrep after so long a period of costless money and the simplicity of buying back their own shares.

At some point all booms bust, but when? When does labour tightness stall the economy (and what changed)? Where is inflation? Are corporates holding back CapEx because they forsee a slowdown? What to spend their tax-windfalls on – stock buybacks? Yeah, simple…

I might introduce a new market mantra: “Things are never as bad the might be”, but equally; “they are never as good as you hope.”

The reality is global fundamentals, trade growth and new trade initiatives could probably keep the rally going a while longer.. but when folk start to worry.. what’s to stop them?

Continuing the theme of not quite as great as you think it is… it looks to be a great time to be a US investment bank as Morgan Stanley posts stunning Q1 numbers, while Goldman also looked to have done well – but didn’t. Strip out the noise: The FT clinically dissects the Squid’s recent growth.

MS’s gains looked market driven, which we all know could switch off equally quickly. The imposition of tougher US stress tests, and continuing the returns in volatile markets will remain a big ask.

Meanwhile, its not such a great time for Deutsche Bank where the regulator has asked it to file a capital contingency plan for a quietus of its investment banking operation, while the night of the long knifes continues for senior staff associated with former CEO Cryan. Market banking remains as tough as ever, and isn’t getting any easier.

However, full marks to Barclays tech analysts who produced an 89 page research report on Tesla explaining their doubts on the name. At 89 pages they remarked “while it’s a bit skimpy for our European readers; “we recognise many US investors, and especially those on the tech side, need a twitter-length summary”. Barclay’s provided a series of tweets which boiled down to: the established car makers eating Tesla’s lunch, the failure of Tesla’s automation programme, rising production costs as a third shift is introduced, and advice to re-rate the Auto-dinosaurs.

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