Blain: "Apple Is The Only Thing That Matters Today"

Blain’s Morning Porridge, submitted by Bill Blain

“Every night we smash their Mercedes-Benz, first we run, then we laugh till we cry. We’re flat broke, but, hey, we do it in style..”

I am reliably informed Apple is the only thing that matters today. Matters today and will be forgotten next week. I am sure they will be fine cause I just bot a new Mac-Pro… “Sweet-spot pricing” (which seems to mean about 50% more expensive than the same thing made by another tech company) means they are on course for killer numbers. With PE at 20x I can’t help the world’s most profitable company that actually makes stuff we want to buy looks value (compared to much of the questionable stuff at crazy valuations out there..) But…

I also need to catch up on the new ECB stress tests – no surprise to read on BBerg that Deutsche Bank is likely to struggle in terms of potential losses from complex assets. As for the resilience of Italian banks to a severe downturn and a widening of Italian govt spreads... No S*it Sherlock award on its way to the ECB HQ.

I’ve been focused on non-market stuff the last few days – which gave me a change to step back and think. I get a sense and feel there is change in the air.  

  • Looking at the Tech sector and some of the noise about Facebook numbers, the ongoing doubts on Tesla, and the queue of IPOs, I can’t but help wonder if we are about to get a reassessment moment. When Apple’s Tim Cook is warning about data collection you have to wonder; a) is Apple about to launch its own Facebook, or b) what does he know we don’t!
  • Brexit continues to dominate UK headlines – but Theresa May is still there. The Europeans know a deal is required. And the real world is never is bad as we think – which explains GBP on a run.
  • Short-term we’re all focused on next week’s US mid-term elections – will it force Trump to mellow (doubt it), but what are the key issues determining where rates are going and the value of future corporate earnings?

Same as always: growth and consumption. What’s driving growth? The US and Occidental  economies in recovery. What are the dangers that could lead to slowdown or a new recession? Clearly its trade tensions.  Step back and figure what’s really going on. I reckon we might just be approaching a critical moment in the global economy.

At the centre lies Trump vs China. Trump picked this fight deliberately as part of his populist agenda, and he must sense he’s punching Xi towards the ropes. Further escalation of the trade war will cause significant collateral damage in the US, but hit much harder at core China in terms of slowdown, jobs and the prosperity myth. It comes at a dangerous time for China as secondary dangers lurk in the domestic debt bubble, the banking system, demographics and rising internal dissatisfaction with issues such as housing prices, the damaged environment and the growing evidence of widespread corruption. Look at yesterday’s China numbers – weak PMIs.

More importantly the Trade War is damaging Xi’s domestic credibility, forcing him on the defensive – kneejerk reaction forces him to double up on the anti-corruption drive, but from a position of political weakness rather than strength. Xi has been assiduously cultivating his “heir to Mao” strong dear leader persona in recent years, but perhaps it’s just a hollow facade. Perhaps he’s not as strong or as ensconced as he pretends.

I doubt China is heading for economic meltdown or disaster – but it faces challenge. Hey, that’s what happens to grown-up economies. Trade weakness could trigger recession and rising internal dissent, and the country will be forced to reassess its economic future direction and economic relationships. It’s also entirely possible we’ll see some major domestic changes and shifts in response to the Trump trade challenge. Perhaps even change at the top?

Moreover, its not just a China issue. Its potentially global. The trade spat twixt Xi and Trump is deliberate, and it’s going to change the global economy. My good chum, the Mad Mint Economist Martin Malone, reckons global corporates see the writing on the wall and are preparing by switching supply chains – which is set to benefit the rest of South East Asia (and sure, since its fashionable, lets put North Korea on the list of likely beneficiaries)!

The potential effects are wide-ranging and ripe with potential opportunity – the FT this morning carries a tale about EM assets being at all time lows, and interviews with analysts suggesting its time to buy. Changes in supply chains and China demand are bound to impact global commodity flows. A global supply chain revolution has all kind of implications for everything in terms of China demand for occidental goods (witness Land Rover sales decline y’day, and Apple about to publish $100 bln result.)