Blain's Morning Porridge via Mint,
"From a technical perspective Bumble Bees can't fly. For heaven's sake don't tell the bees..."
Lots to talk about today including stroppy phone calls on the Fiscal cliff, more European six impossible things before breakfast, Deutsche Bank and HSBC money-laundering, but let's start with the potential train-wreck in progress that could be the UK. Watching George Osborne on Brek-Drek TV this morning I was pleasantly surprised at how good he was. Unfortunately, it's not over yet - but acknowledging the problem is halfway to a solution - take note France.
Fitch is warning of a UK downgrade this morning, but it's not enough to suggest that since France and the US have avoided catastrophic bond collapses in the wake of the loss of AAA status, then the UK will also be fine. As we cautioned yesterday - the global bond outlook is changing.
My spidey senses are a'jingle and reckon Gilts may struggle in 2013. While we know plenty of UK funds who will lap up the new 60 year Gilt (and we were massively in favour of the Century Gilt mooted earlier this year), the game might have changed. 5 more years of low-growth austerity is a given, but interest rates remaining low is not. Key to our concerns is declining Gilt demand, especially if we see global allocation shifts.
We already know the BOE is not going to be in the market aggressively with more QE. And new Governor shows distinctly bearish tendencies.
We already seen central bank FX managers far less active, so items like the Swiss Central bank and others playing sterling will be less a factor.
We see yesterday UK pension funds no longer Gilt focused as the discount rate is no longer Gilt dependent.
Will foreign investors continue to pump money into UK property market as a Euro hedge and will they be buyers of a sub-growth pants country?
The nasty truth might be we are already past peak-Gilt buying with a number of big-ticket players falling out the mix. Like I said yesterday, it could easily be exacerbated by a UK downgrade triggering unexpected ructions. The UK doesn't benefit from the suspension of disbelief and implied Euro support that explains why France bond yields hit record sub 2% lows y'day. Next year's market will not be so forgiving about downgrades - especially for an economy in recession on the unfashionable edge of an unfashionable continent.
On the other hand, as a prominent UK fund manager sagely noted y'day, there isn't much else for sterling based funds to buy - the sterling bond market is desperately short of long dated and corporate supply. (We'd love to be in the new issue market - it should be fish-in-a-barrel game!) As always, I am a buyer of longer dated sterling assets - hi and low grade!
All my above negative points above can be refuted.. but it's not just me... my colleague Macro-Man (he wears Spandex, flies round the City warning of catastrophe, and answers to the name of Martin Malone) says: "UK economic projections are nonsense". The forecasts released by Office of Budget Responsibility (aka The Ministry of Truth) say 30% of UK growth is going to come from Business Investment. CAPEX is expected to jump from £120 bln in 2012 to £180 bln by 2017. (If you want to talk to Martin, or get put on his releases, just ask!)
If he's right that MOT projections are pants, then on the basis QE has historically proved to be little less effective than pushing uphill on a length of wet wool, then we might just be staring down the Japanese abyss - no growth as CAPEX will stay subdued on the weak outlook.
(And I was amazed at the number of readers who called or blogged yesterday to agree with my observation the UK Tax office has turned from trusted servants of society into an out-of-control licensed gang of extortionists. Write to the papers, write to your MP with your experiences.)
Meanwhile, the news Deutsche Bank apparently sat on potential super-senior losses of $12 bln through the banking crisis is bound to anger the many bankers who saw their careers crumble or subsumed into bureaucracy. Other banks up the ying-yang with unhedgable risk went bust or were forced into the ignominy of public bailouts. Deutsche rather successfully boosted its "strongest European investment bank" credentials and grabbed market share. (Read the article in FT for full story.) And apparently if was bust the whole time? Pon my soul.. who would have known...
From a proper accounting or risk-management perspective DB should have been bust - but to the unknowing world it wasn't. And that sums up the complexity of the bank world - if management can hide or not recognise risks (and even sack whistleblowers who disagree with them), what's the answer? It's the No-See-Ums that kill institutions. On the basis if you can't see it, then it can't see you... should DB have survived? If Lehman had kept schtumm about its leverage and unquantifiable risk, would it still be with us?
Not getting caught is an objective all management have quietly inscribed into their heads - but I suspect Deutsche Bank failing that critical test will be yet more power to the regulators and oversight to stop it happening again. Another nail in the coffin of the investment banking model?
What else did we get today? Lots of Europe news - none of which is particularly noteworthy except for he said, she said, he said.
I've been told (forceably) my concerns the Greek buyback could be difficult are completely overstated. I am an idiot for even thinking it... apparently. (I knew I was an idiot... no need to shout it at me...) I'm told Greece will easily spend the Euro 10bln buyback funds to retire about ½ the outstanding Euro 62 bln of longer-dated new GGBs targeted by the exchange, according to sources close to the deal.
Rather than holdouts holding out for higher prices on the basis Germany et Europe will do anything to keep Greece going, most smart money is apparently looking at prices of 32% plus on Greek bonds as the last chance to get out before it degenerates again next year. Let's wait and see what the numbers are...