Submitted by Bill Blain of Mint Partners
“With the liquor and drugs, and a flesh machine, he’s gonna do another strip tease...”
After the trade war wobbles earlier this week, it feels like we’re on more or less an even keel this morning. What can possibly go wrong next? (Form an orderly queue to the right please..)
The consensus on Trumps next $200 bln of tariffs is its just negotiation… phew.. we thought it might be getting serious. Look elsewhere for the next ticking box. According to Goldman’s CEO, Lloyd Blankfein, the next big risk and driver of global uncertainty is Italy. Combined with the current dither on European immigration policy, he perceives “big risks” for Europe. (Italy might provide some cover as Theresa May faces yet another Brexit crunch vote here in Blighty.) Fear not for Europe - even as it wobbles, Macron and Merkel are planning a proper Euro budget and rejigged crisis fund. (So… the only real issue is whether the gruesome twosome will they get it passed in time?)
Great story about European corporate debt from Bloomberg’s Marcus Ashworth caught my eye this morning. He notes that Bayer AG is funding the acquisition of Monsanto in the global debt markets. On Monday pulled off a massive three times oversubscribed $15 bln multi-tranche new issue in dollars at a spread close to secondary notes – a very tight new issue premium. But, when the German chemical giant tried to repeat the exercise through a 5 bln Euro issue the next day, it struggled paying a substantial new issue premium.
Part of the dearth of demand can be explained by European bond buyers staying shy the very low interest rates in Europe. Why buy Euros today when dollars are more rewarding, and we expect the ECB to start hiking rates next year. However, the EBC’s corporate bond buy programme has been the dominant factor for years in Euros. Deals are listed in Europe to ensure they qualify for the programme – resulting in much tighter Euro spreads relative to dollar.
As the ECB programme prepares to wind down, buyers are not longer so convinced. Demand is falling as the big buyer is perceived to step away. Prices are dropping, spreads are rising, and European bond issuers can expect to pay more.
Meanwhile, y’day I spent an excellent afternoon at the Euromoney Global Borrowers and Investors Conference y’day. Myself and Eric Lonergan of M&G debated the motion: “This house believes every security is overvalued.”
I was proposing the motion. My thesis was simple: its’ not the ongoing instability caused by the almost daily deluge of bad news in terms of geopolitical factors, potential trade wars, oil prices or populism that makes markets overpriced. Its’ the underlying structure of the market that’s developed over the last 10-years of monetary experimentation and post-crisis regulation. QE has dramatically distorted prices through artificial interest rates, spawned yield tourism and inflated stock markets through buy-backs, while regulation has cut liquidity and changed risk perspectives.
I came out with some classic Blain gems – including the inevitable we’re doomed to repeat the mistakes of the past because the market has No Memory.
I’m afraid Eric absolutely demolished me.
He focused his opposition to the motion on some very simple fundamental truths. Markets are about behaviours, and the reason markets are scared is a fear of volatility. Don’t be scared of volatility. Look for volatility as opportunity. Buy assets that are cheap, and sell them higher. If there is anything wrong with markets, it’s the insidious fear that volatility is dangerous, an attitude that’s been foisted on us by pro-forma risk-management cultures and regulation.
I may have marginally won the vote – but effectively Eric reminded the audience of why markets exist. He presented a tour de force.