Mellon on the Markets: Arabian nights

There has been quite a recovery in markets since the December lows. This has probably been induced by the substantial easing that is happening in monetary policy by five of the six key central banks globally. I saw some scary stats showing that in the last three months, broad money supply worldwide has been running at +27%.

This is clearly aberrant and unsustainable – if it carried on for any meaningful period of time, most of the world would look like Venezuela or Zimbabwe. But it’s instructive – central banks have been spooked (and particularly the ECB and the Chinese Central Bank) by indicators of slowing economic performance in their respective countries/blocs. So, where there was tightening, there is now hesitancy, or renewed pump-priming.

This has immediately fed through to stock markets (see the Chinese market, up sharply, for evidence) and a general collective sigh of optimism after the dire falls in late 2018. Bond yields, on a steady downward path, have now backed up a bit, reflecting the loosened conditions. Gavekal, a really good forecasting outfit, is now recommending selling bonds aggressively and I can see why.

Until literally the end of February, gold and silver were on a rampage (and they will resume that upward trajectory soon). Commodities have broadly risen, and real wages have been on a tear, almost everywhere. That’s a sign of capacity constraints running into excess demand, and that, in turn, means inflation.

This inflation (not yet reflected in the headline figures but lurking menacingly under the surface) is occurring at a time when economies are softening – with the eurozone in outright recession in some pockets, China sputtering, and the UK slowing (although doing better than the eurozone, despite the daily press gloom about Brexit). Japan remains Japan – always printing money, always accumulating government debt, and every desperate measure in the playbook being employed to try to kickstart a low-growth economy exhibiting seemingly perennial deflationary tendencies.

The Japanese are going to get what they wished for one day – in spades – and that is a lot of inflation. But they are not alone in this – inflation should be the top theme of the strategists who write eloquently but without conviction (pace Victor Hill of this parish, and Steen Jacobsen of Saxo Bank), because the inflation genie has been let out – and it’s coming home to roost. That’s why I am bullish on gold and silver, and it’s also why I’m bearish on bonds.

Arabian nights

But, speaking of genies, I spent the last week in the Gulf and I’m going back in a couple of weeks, after a quick trip to New York next week. I may be accumulating DNA damage in spades, but just think of the airmiles. I did some business in Dubai and Abu Dhabi and then we went to Oman for a few days’ holiday. I was gob-smacked by the progress of the region since I last spent serious time there. Most of the time I am transiting in Dubai airport (and please, roll on the new terminal!). It is incredible to observe what has happened over the last couple of decades. Yes, there is clearly an oversupply of real estate in Dubai, but that will sort itself out in due course.


Literally everyone I met is forward-looking, optimistic and smart as well as being well educated. Dubai has moved on from being a tourist destination for Russians and London cab drivers to being a sophisticated enclave on a par with Hong Kong or Singapore, with better roads, better buildings, and a rapidly improving cultural life. Abu Dhabi has the economic heft, and it too is showing signs of sophisticated prosperity blossoming all around. Oman is uniquely beautiful and again – amazing roads, a great port, a wonderful opera house and a spanking new airport in the capital Muscat.

Are we asleep in the West, with our crumbling infrastructure, petty rules and regulations based on oversensitive political correctness? Or are we just rolling over and letting the countries of the Near, Middle and Far East surpass us in every way, in just a couple of generations? Wake up Europe – you are sleepwalking to self-destruction! An example: I was lucky to meet the Minister of Artificial Intelligence of the UAE – where is Britain’s? Where is Germany’s? Enough said. Rise up, put on your gilets jaunes, but protest not at the unfairness of life, but at the lamentable turgidness of our political institutions. Look at a photograph of Dubai 40 years ago, as I did – and weep.

The next big themes?

In the meantime, as we contemplate our relegation to the lower divisions of economic activity, readers of Master Investor can console themselves that we intend for our own readers to have competitive edge over all other investors. So, that means we have to focus on what will make us money in a low-return world. Obviously, I think Juvenescence-type investments fit the bill, and I am always looking for other such broad themes – please come and listen at the Master Investor conference on April 6^th in London for my take on these.

Until then, I am bullish on sterling against the euro and the dollar. Brexit is gong to either be half-baked or not even go in the oven. If we stay in, we run some danger with Italy, whose situation is literally dire. I hear from friends all the usual arguments – that Italy’s debt is largely held domestically (no longer as true by the way), that there is a huge black economy etc. But that won’t make any difference when the chickens come home – and they are. Signore Salvini is, in my opinion, determined to lead Italy out of the eurozone, and hang the consequences. And as the lyrics of the old song go, the revolution won’t be broadcast. There will be no warning, other than missives such as this.

I think it prudent to keep some powder dry for this forthcoming spectacle. it will represent the biggest single financial turmoil since the second world war, and the single biggest opportunity for us since the economic crisis. Bank stocks in Europe – long ago the safe havens for widows and orphans – are down more than 90 per cent in 12 years. Yes. That’s the signal.

All the rest is noise.

Happy Hunting – and I hope to see many of you soon.

Jim Mellon 

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