Blain's Morning Porridge, submitted by Bill Blain of Shard Capital
“If you wake up on a Casper mattress, work out with a Peloton before breakfast, Uber to your desk at a WeWork, order DoorDash for lunch, take a Lyft home, and get dinner through Postmates, you’ve interacted with seven companies that will collectively lose nearly $14 billion this year.”
It’s a big week for markets with the ECB meeting, some critical Q3 stock numbers and a host of things to worry about in terms of economic releases and the continuing slowing of the Chinese economy. Its all critical stuff for the bond market – which I reckon is a ticking time-bomb. But more about that later… For stock markets, the quote this morning sums it up – the mood is changing: forget the disruptive tech unicorns and focus on fundamentals. But, first up we really can’t ignore the Brexit mess in the UK. Saturday’s SNAFU gives investors another chance to load up on Sterling. At some point Brexit will be fixed. It might be messy.
I am sure foreign readers are wondering how the Mother of All Parliaments is making such a Horlicks of the Brexit negotiations. It really doesn’t look good does it? On the other hand, it does show the vibrancy of our political process, and the fact individuals can force it to change. It’s just a shame so many of these individuals seen to be self-seeking egotistical numpties of the worst kind – but even Oliver Letwin has a mother that probably loves him.
The reason Brexit is so messy is simple. It boils down to weak government – which is a recent thing here in the UK. As soon as the Tories lost their working majority in Theresa May’s ill-advised and badly conceived 2017 general election, the process fell hostage to individuals thinking they could save the country from its misguided referendum decision, and political calculators cynically working out how best to way-lay and embarrass the May and now Johnson Government. (Easy for the Labour party to chop/change policies and promise Brexit one-day and a referendum the next – why? Because nobody cares about them..)
As parliament tends to attract political types who sincerely believe the Public desperately needs to know their opinions (in detail), the egotistical pond life than inhabits the green benches has taken every opportunity to frustrate, delay, push-their-own-agenda, and conflabulate the process. That’s how an idiot-savant like Oliver Letwin was able to hi-jack the vote and kill it on Saturday. The result is the massive uncertainty of Brexit – which is the real issue damaging the economy, making voters apoplectic, management uncertain and peeving everyone.
Relax – long-term it does not matter.
In a few years time, after Brexit finally happens (because even if the Remoaners get their second vote, Europe wants us out), then the effect on the UK economy will be a minor plus or minus. We will not notice. The UK and Europe will not be riven for eternity. We will adjust, we will still trade between each other. We will still scream at dirty French play in the Six Nations rugby, (yes, I am thinking of Vahaamahina on Sunday.) We will still drink German beer, eat French cheese and take holidays in Spain.
From the rhetoric, you’d think Brexit was the End of the World. It’s not. It’s political process. They do say: “Democracy is the worst form of government, except for any of the alternatives”. So get over it, get set to buy sterling and UK domestic stocks on the likelihood that speaker John Bercow will frustrate the vote today and cause sterling to tumble. Buy the dip. Boris may lose every battle, but in the long-term the Tories will win an election, and the UK will get a Brexit which will ultimately change the World by a tiny infinitesimal fraction..
We are fortunate to have a vibrant political system that questions, objects and demands answers. Would you rather be part of something more somnambulant? (As one Brexiteer explained to me: We joined a simple trade agreement with open borders to the world, but that mission-crept into a closed economy heading towards an unlikely political union bound together in common currency that shackles most countries to perpetual penury, in a system designed and promoted by the French to pursue their 400 year historical goal of European hegemony?)
Brexit is a change in our foreign relations - which happens all the time across the globe. Politicians throwing numbers plucked from no-where about how much damage it will do are just guesses. Nothing more. Lets move on..
The Ticking Time Bomb in the Debt Markets
I am more and more convinced the Debt Markets are about to blow up. It will start with a small wobble. Perhaps a small hint that anticipated global recession isn’t/won’t be so bad, or further acknowledgement Central Bank experimental monetary policy hasn’t worked and they won’t continue to slash rates and institute QE on every chill economic wind. Or maybe it will start with a trickle of investors looking to sell corporate debt, discovering just how illiquid the market is and panicking, causing a massive avalanche of bond misery.
If/when any of these happen, then bond market holders will be left holding massive losses on low yielding assets. Will it trigger crisis? Most of the risk that caused the 2008 crisis was held by banks. Over the past 10-years the bulk of that risk has been transferred out the banks into fund management – real money insurance and pension savings.
How willing will central banks be to bail the system when an immediate banking crisis, (except in Europe, because there is bound to be a banking crisis in Europe, because that’s just how it is..), is not such a threat?
And, although investors will take losses, these will largely be mark-to-market and income rather than default – meaning investors get hosed, lose money but don’t lose everything. It will hurt and it will cause retail investor fury… if they understand why! (Clue – blame central banks!)
The big stock to watch this week will be Boeing. The moment to buy will be when they sack the management. The negative thesis that Boeing had effectively “captured” the Federal Aviation Authority and pushed thru an unsafe B-737 Max has been in the market for months. Now it looks like there is truth in the rumors – with a smoking email from a test pilot about “Jedi-mind tricks on regulators”. Boeing has already demoted Dennis Muilenberg from Chair/CEO to CEO. When he’s out the door, put your buying boots on.