Blain: "The High-Yield Market Is Where The Bond Supernova Will Erupt"

Blain's Morning Porridge, submitted by Bill Blain of Mint Partners

It’s a US holiday and markets will be thin through today. To show my solidarity with our American cousins, I’m off for a proper lunch with clients in the West End and Malbec rules* will probably apply.

What happened in China this morning? Stocks down sharply (the steepest decline this year), on the back of rising inflation worries. Dong! – that strikes a chord. It seems yesterday’s Porridge – dealing with the threat of an inflation shock – was perfectly timed. Suddenly everyone is waking up to the I-threat. 

China is in sharp focus – bond yields keep climbing despite the PBOC injecting liquidity. My colleague Ara Levonian downstairs on the BGC floor points out we’ve got over $1 trillion of Chinese corporate debt coming up for refinancing next year. Put all the clues together: an inflationary environment, supply-side policies driving up wages and inflation, rising rates, and a large number of highly geared companies facing rate risk?

Do you think it might end up messy? (Messy? Yes, but terminal probably not.. the Chinese can press the money spigot again and again.)

And how different is the US? That’s why I’m watching the high-yield market – that’s where the bond supernova is going to erupt. Just like the next Icelandic volcano we can feel the high-yield market spluttering beneath our feet as an ominous cloud of steam rises above the glacier….

I wonder if I should send the Fed a “No-S*it Sherlock” award for pointing out in the FOMC minutes that signals confirmed a “potential build-up of financial imbalances”. A December hike is pretty much nailed on.

On the inflation theme, I got an absolutely classic email y’day from a reader whom I don’t actually know, but had picked up my comments on some financial wire. Thank’s Geoff! His thesis is the global authorities have been spinning us a line when it comes to inflation – pointing out in 1971 it would have taken a low wage worker 2 hours and 10 mins to afford a ticket to the then new Disneyland. Disney prices have experienced 8% y-o-y inflation since the park opened. The same ticket will now require 7 hours and 20 mins work – and they are still playing that damn tune. (The lyrics would almost be profound if the tune wasn’t so inane!)

Geoff went on to point out: “The Indians shamefacedly admit their inflation is 9-13% - they are the only honest country on the planet!”

Meanwhile, in a galaxy far far away…

The big talking point on the UK budget was housing – and the laudable efforts of the government to try to solve the housing problem. There are actually a whole series of problems including supply and affordability.

I suspect cutting stamp duty to help first time buyers will simply drive up prices in the starter home sector. And £300k is still a hell-of-an-ask for millennials looking to get on the housing ladder. Unless Daddy is very successful banker or you just inherited some dosh – where is average millennial going to find a £60k deposit?

Alongside the “Help to Buy” schemes, is it time to tweak property lending rules at the banks perhaps? Some of the decision making in property lending defies belief. I have a chum who has been paying her mortgage off without any stress after she and her partner split a few years back. After completing all the legals and getting everything signed, she’s gone to her bank to put the mortgage in her sole name. The bank told her she had to remortgage –so she applied and guess what – despite having no arrears and a good credit score, the bank have turned her down. What is she now supposed to do? It’s just stoopid.

We speak to a large number of property professionals. Knight Frank is part of our parent company group. Developers, specialised commercial and resi lenders, real money property teams, housing associations and builders are all on our regular call list. The real issue most of them reference when discussing the UK housing market and the dearth of new builds are the blockages in the system – especially the planning process.

Every single professional I’ve spoken to in the UK housing sector complains about the planning process – not necessarily that it’s too restrictive, but that it’s just too damn slow and not-fit-for-purpose.

I’ve some experience in this – we submitted plans to our council for pre-planning advice three months ago, and our architect got told this week the team still hadn’t had time to consider them. We’re hoping to develop our home because the stamp duty we’d have to pay to buy a step-up property is just stupid money!

No comment tomorrow – I’m speaking at a breakfast organised by Heriot-Watt University – which spent the early 80’s attempting to educate me. I’m looking forward to it immensely. I shall be reminding the audience of the very first thing Professor Keith Lumsden said at my very first economics lecture in 1980: “Economics is the study of horror comics, switchblade knives and pornographic literature.”  Dang, but he was right!


Hillarys Server Thu, 11/23/2017 - 08:19 Permalink

I've been holding cash and some humble pieces of silver for the past ten years just waiting and waiting.

I'll have one bond supernova please with a side of wailing and gnashing of teeth.

And for desert I'd like a stock market crash, if that's not too much.

Escrava Isaura Stuck on Zero Thu, 11/23/2017 - 09:41 Permalink

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Supernova Will Erupt…….. When the oil goes to $150 dollars a barrel. It’s all downhill from that point.  

In reply to by Stuck on Zero

ForWhomTheTollBuilds Hillarys Server Thu, 11/23/2017 - 10:28 Permalink

"I've been holding cash and some humble pieces of silver for the past ten years just waiting and waiting." Blain: "The High-Yield Market Is Where The Bond Supernova Will Erupt" All Bill has done here is proved why "High yield debt" will be the asset of choice for central banks at the first whiff of panic.  There will be minor "corrections" in the markets but the time spent waiting for reversion to the mean in any significant market will be measured in generations. 

In reply to by Hillarys Server

lasvegaspersona Hillarys Server Thu, 11/23/2017 - 11:43 Permalink

Everything that can be treated with more cheap lending will be so treated.Saving the system is more important than saving the dollar. When it comes time they will let it inflate to hyperinflation. New currencies are easy (ask Zimbabwe) new systems are tough to put together.Look for saving pension plans, banks, insurance companies, bond holders, allies of all sorts and anyone big enough to count.When the dust settles if Bitcoin won't buy gold then you will know which one won.

In reply to by Hillarys Server

Bondosaurus Rex Thu, 11/23/2017 - 08:20 Permalink

When the banks realized the kleptomaniac Barry Sotero was stealing profits and using the federal government as a criminal strong arm.....finish the statement as thou wish.Happy Turkey Day!

Jtrillian Thu, 11/23/2017 - 08:24 Permalink

Also keep an eye on the reinsurance sector.  This years historic hurricane season combined with the record wildfires on the West coast are more than enough to set off the next crisis. 

Global Douche Thu, 11/23/2017 - 09:40 Permalink

I like some fiat ca$h and keep silver outside the bank$ter's control. Bitcoin and related alts have a place at my table, too.I remain short San Fran, Manhattan, especially Baltimore & Chicago!Give it time, y'all. Zimbabwe's dollar price on Bitcoin shall arrive in the Land of the Don't Say, Don't Tell in due course.

AbbeBrel Thu, 11/23/2017 - 10:02 Permalink

"Shaken, not stirred" said Bond. Draghi pours 15 parts of junk to one part Bund, and adds a slice of obbligazione. He shakes the Counfounded Liquor Object (CLO) and pours it into a slipper. Alienz says: "Pensions up", then a counterparty clumsily drops the drink. It smashes to bits creating a nasty mess, and releasing toxic finance fumes.

CRM114 Thu, 11/23/2017 - 10:17 Permalink

UK housing.You're so far from reality, that you are now playing their mad game.What's wrong with building your own house, designed by yourself?I just did that. The house is perfectly sound and stands up to worse weather than the UK.Of course, I had to emigrate to do it.There is no logical, moral or safety justification for 95% of UK planning, safety or building regulations. Period.

wdg Thu, 11/23/2017 - 10:31 Permalink

Geoff went on to point out: “The Indians shamefacedly admit their inflation is 9-13% - they are the only honest country on the planet!”The true inflation rate in the US is 8-10% (source: And when the nominal GDP is correctd for the true inflation, the true GDP has been negative, except for one year, since 2000. The Bureau of Labour Statistics (better known as BS) has been putting out fraudulent numbers for decades with the full support of the corrupt US government and the propaganda and corporate-owned MSM. With the rigged inflation numbers and suppressed (i.e.rigged) interest rates on savings, pensioners and workers are literaally being robbed blind. Their standard of living is in free fall and propped up by more debt. The American middle class is being economically raped on a scale that is almost unique in the annals of mankind. And the fact there are not million person marches on Capital Hill, the Federel Reserve and Wall Street to bring the thieves, criminals and gangsters to justice is a measure of the level of indoctrination of the US population.

wdg Fahq Yuhaad Thu, 11/23/2017 - 12:12 Permalink

Of course it can be negative. For example, the GDP is negative during every recession and during the Great Depression, it fell by 15% between 1929 and 1932. This may be hard for most people to believe but we are in a depression now that will be much worse than the GReat Depression of 1929-1939 before it is over.

In reply to by Fahq Yuhaad

Dragon HAwk Thu, 11/23/2017 - 11:50 Permalink

I think the conversation revolves around   How are we going to get the taxpayers to pay for all this damn Bond Debt. the one Donkey just can't haul all this Straw.