Blain: "It's A Bad Week For The Credibility Of Mohammed bin Salman"

Blain's Morning Porrdige, submitted by Bill Blain of Shard Capital

Saudi….

Its turning into a bad week for the credibility of Mohammed bin Salman, the defacto ruler of Saudi.  After the Globe’s third largest defence spending state was crippled by supposedly unsophisticated Houthi rebels (with some likely assistance from Iran) when they struck his oil infrastructure, this morning the headlines are all about how MBS is now arm-twisting rich Saudi’s to buy into the discredited Aramco IPO. 

Investors around the globe are increasingly disinclined to invest in the rising political risk swirling around Saudi and MBS.  They have serious doubts about any chance of objective corporate governance of Aramco.  Its broadly seen as MBS’ piggy bank.  Such concerns clearly don’t worry his wealthier subjects, who are apparently delighted to have been offered the opportunity to invest upwards of $100mm. The alternative was to spend some time in basement of the luxury Ritz-Carlton in Riyadh.  As a comment in one paper suggested: it’s hard to resist an equity salesman carrying a bone-saw.

MBS is determined to justify his own $2 trillion Aramco valuation.  He and Adam Neumann of WeWork really should spend some time together to discuss delusional pricing.  To reach such a number means suspending disbelief and rounding up compliant stuffees.  He will be ably assisted by the western Investment Banks signed up for the deal – if you want an update on how the book is developing, then please ask Goldman, JP Morgan, Morgan Stanley of CSFB, who must be delighted to be seen supporting the deal which is attracting such eminent public support.

However, a number of my sources suggest things look increasingly questionable in the desert kingdom.  Looking at the photos of the Houthi drone strikes, the damage and the holes made in the gas tanks look suspiciously regular and well placed.  MBS’s shakedown of his royal cousins and the nation’s business leaders stands alongside rising revulsion at his own spending.   As defacto absolute ruler he feels above question, but domestic tensions are rising.  More than a few analysts suspect the Houthis may have had inside assistance for a growing Saudi domestic insurgency. 

Trump and Kushner are going to struggle with that one..

Back in the real world…

It worried me how polarized opinions in Europe have become.  My recent mailbag shows 100% of European readers think Boris Johnson should be shot, blame him for all this mess, and think the UK is mad to be leaving.  British correspondents are exhausted by the political nonsense and generally desirous about getting it over with, and moving on.  Since everyone is at each other’s throats, let me stir it up a bit…

One headline that caught my attention y’day is Brexit has cost the City of London 1000 investment banking jobs that have move to Yoorp.  Really? To be frank, that’s another bogus story.   Jobs may have gone, but I bet the bankers are still here.  And most of the new window-dressing roles that have supposedly gone from London, are going to Dublin.. which is certainly more satisfying than hearing they went to Paris.  (I still giggle about the two French bankers I interviewed last year – they were desperate for jobs because the French bank they worked had offered to send them home!!!)

But, at least the news re Brexit is getting better.  (Really???)

Sterling has taken a leg up on the number of stories suggesting Europe may be willing to agree a face-saving non MAD Brexit compromise Boris can take to Parliament.  Junker and Merkel made encouraging noises, and even Leo sounds positive agreeing to catch up with Boris for a pint in NY.  Does that mean a deal is done?  Nope – still lots of hurdles to cross, and the risk hardline ESG Brexiteer and the Farage extremists rock the boat.. but it’s the most hopeful noise we’ve heard for a while.

Let’s assume it happens.  Brexit happens and we can all get on with our lives.  Phew!   The world will then focus on how the UK sets up new trade deals and how it struggles as a newly divorced single country…

Or maybe not.. the attention is more likely to return to Europe.  I suspect the focus will return to how deeply recession will bite in an already slow Europe. A global slowdown, trade wars and recession fears will hit hard across the region.  The fairly strong recovery in Spain is already slowing and could be overturned.  France is likely to stumble again on the back of downturn and a renewal of the Gilet Jaune protests (I suspect a spent force).  Italy is and will remain Italy.  

Germany is the economy that frightens everyone, because everyone thought the Germans were the grownups at the Euro table. Instead the economy is slowing, their domestic politics look tired, the nation is at boot-end of a likely trade war with the US, and they aren’t demonstrating much imagination in reforming their utterly perfect precision-engineering and automotive brilliance year-2000 economy to make it work for the modern age.

 The EU leadership has reacted to the challenge – appointing a whole new series of leaders to Brussels, the Union and the ECB, all politicians aiming to steer the EU through a new crisis while charting a path back towards growth.  The new leadership team are acutely aware Mario Draghi saved the Euro at the critical moment, but nothing the ECB is currently doing – like cutting rates, or buying bonds is actually working to rebuild the broken European economies. 

They know it needs a new approach – which is why Fiscal Spending! (Flashing lightning, very very frightening, and clashing minor chords..) is getting so many column inches these days..

The key unresolved problem with Europe is very simple. 20 years after the birth of the Euro, it remains a loose collective of very different countries trying to adapt to being members of their shared currency.  That’s why the political imperative for Fiscal and Banking Union is so critical, and it’s so worrying that nations show little willingness to pursue these goals.

Economically,  the key problem is the Euro is effectively the currency of Germany.  The others play catch-up to be competitive.  For Europe’s smaller states to evolve and thrive in the common currency, they need to reform their economies and broadly match German productivity, consumption and spending, and be prepared to stick to rules.  That’s when currency unions work!  (To short-circuit the next part of the argument, they work in the US and UK because of broadly aligned culture and values means sticking to the rules is not an issue.)

If reform and alignment happens, then Europe should grow into an economic wunderkid.  Over the last 20-years, there are few signs structural reform or realignment has happened, except to confirm the differences in terms of massive Target imbalances in Europe, distorted trade power, and massive unemployment in the South while Germany sits smuggly recovered from the reunification with the East. 

There are some itzy-bitzy problems with the simplistic approach that Europe could swiftly become a union of closely aligned nations.  The Germans like to save, don’t particularly consume much, work hard, are precision engineers, and believe rules are there to be followed. As I noted above, it’s all about culture. None of these standout Germanic characteristics occur naturally together across the rest of the Eurozone.

Therefore, it’s going to get really interesting when it comes down to agreeing on how the Eurozone is going to agree on fiscal stimulus policies.  The Eurozone member states all agree they want to pursue structural reforms, control debt, and carry out public investments – but there is absolutely no agreement or alignment on when or how.  I suspect it will take a very long time…. The wheels of agreement turn slowly in Frankfurt and Brussels.

Perhaps readers might find the following snapshots defining how Europe views fiscal stimulus to be useful:

The Germans regard a “wildly outrageous and potentially de-stablising financial stimulus” to be new party hat spending for the Carnival season – but only if these can be paid for out of retained budget under-runs. (Yesterday, Olaf Scholtz, German Finance Minister, said Germany already has an expansive fiscal policy. Excellent. Please show us.)

 A “mild financial stimulus” in Italy promises everyone a new Ferrari, a general tax amnesty, and a sweeping allocation of cash for a complete rebuild of the country’s entire infrastructure (none of which actually happens because it will be spent on “incidental deal expenses” to contractors in the South of the Country).

 A “carefully balance financial stimulus” in Luxembourg means upping the rents they charge the resident Eurocrats and institutions, dropping their own taxes, and spending some money on glossy new brochures explaining why Luxembourg is such a great place for San Francisco start-ups to base their tax-advantaged new tech businesses.

A “Strategy for Growth financial stimulus” in France means employing 10,000 highly-trained bureaucrats from the elite schools to determine how to prise more money out of Brussels to prop up French farmers, or at least keep them busy enough to stop trying to burn down Paris.

A “barely adequate financial stimulus” in Greece will go.. well no one really knows where, but everyone will complain about how inadequate it was, how it’s all the fault of the Germans anyway, and Vanis Varoufakis will write a book about how he explained it years ago to Christine Legarde while they were quaffing ouzo in the sauna together.

There won’t be any “financial stimulus” in Belgium because no one will actually get round to agreeing on which language to propose it in.

The Spanish will stare daggers at each over “regionally targeted financial stimulus”. They Catalans will offer to be less obnoxious if they get most of it, while the rest of the country gets all emotional about how they deserve it. 

The Irish “Brexit Financial Stimulus” package will basically be an insurance policy to give all young people tickets to somewhere else if the “what if Europe throws us under the bus after a no-deal Brexit” scenario plays out. Most young Irish will opt for County Kilburn – its worked for previous generations.

I do hope the above explains why European Fiscal Agreement might be a problem..