Blain: "It Feels Like A Shooting Match Is Imminent"

Blain’s Morning Porridge, submitted by Bill Blain of Shard Capital

“He knew everything about literature, except how to enjoy it…”

Waves of negative news headlines battering markets. Might have to wear a hat..

Huawei – Trade War Threat Level Rises

The Huawei embargo raises the trade war threat from undeclared to imminent shooting match. While it’s not quite “bullets fired at Archduke’s car”, it’s getting close. It feels like there is something of a tedious inevitability developing – a bellicose Trump realizes his political future depends on winning, and the Chinese refuse to lose face. Is it already too late to rein back? 

Huawei being effectively barred from Occidental markets has triggered all kinds of market fears: a “digital iron-curtain”, the threat of an economic cold tech war, broken global supply chains, and knock-on effects we can only begin to imagine. It’s the End of Globalisation – scream the media. The Chinese hint at reprisals. The “temporary exemptions” granted last night by the US are just that – temporary: they won’t undo the sudden need of millennials to dump their Huawei phones. The damage has been done.  Who will the Chinese punish in return?

Markets are now rife with speculation about “ripple” effects damaging tech dependent initiatives from autonomous cars, streaming, digitisation, and booking apps, triggering all kinds of real-world economic pain in sectors like tourism and luxury goods. While the market is fretting about how America will shod itself as tariffs are slammed on shoes made in China, it might be time to reassess market sectors where we expected long-term and ongoing China expansion, rising domestic consumption and demand to drive growth – I’m thinking areas from aviation, autos, machinery and plant, and energy. And, what are the implications for the UK – where the Chinese are building our nuclear power stations?

This doesn’t end well.

Powell wonders about Corporate Debt

In a fascinating Wall Street Journal article reporting Jerome Powell’s comments on the dangers of rising corporate debt to the US economy, he says he doesn’t rank the danger alongside what sub-prime mortgages did in 2007. Fair enough – but I think he may be underestimating the chain of consequences that could occur.

No matter how hard the trade war recession is, or how much the Fed raises rates, most corporates will not default. Sure, there will be pain, downgrades and re-trenchment. However, the "unintended consequences” of QE, low rates, hasty regulation and the transfer of risk from banks to the investment sector could magnify the scale of pain – and cause ructions in the corporate credit markets to trigger much wider financial pain, the next major crash.

  • Consider how much Junk and Near Junk Tech debt is out there – WeWork, Tesla, Uber and the rest. If the Tech bubble bursts, their bonds won’t be trading in the 80s, but in single digits.
  • Look at how much paper is BBB and the cusp of Junk. A small wobble could trigger massive enforced sales from holders unable to hold sub-prime, triggering further fixed income.
  • Read some of the nonsense written about how liquid Fixed Income ETFs are. If the crunch comes – I don’t see how they can retain value.
  • Don’t assume the investment sector will respond well if/when risk explodes. See yesterday’s porridge for more on this – the skills to manage and work out risk simply aren’t there…
  • 10-years of monetising equity through debt fuelled buy-backs has made corporates weaker, not stronger, and created falsely valued stock markets. That realisation will trigger not ripples, but a Tsunami across all markets on a corporate debt shock.

Moving on.

Deutsche Bank

As the stock hits a new low, do I really need to ask? How much longer? Apparently a group of core investors have had enough are pushing for the exit of Chairman Achleitner. Meanwhile, the FT suggests Goldman should buy the bank  - how amusing.

Jaguar Land Rover. Oh dear..

What does it say about Brexit Britain when our national car company is in serious need of reinvention? Jaguar Land Rover may have posted a small profit for this first few months of this year, but their $3.6 bln loss for the year after write-downs looks disastrous. There is little to suggest the company can turn itself around as Diesel cars remain almost unsellable, and Jaguars fail to excite buyers. Its failed to crack China, and car experts I’ve spoken with doubt the Indian owners have any real vision for the group. Its only decent selling the cars, the I-Pace and E-Pace are actually made by a separate firm and simply badged as Jags!

I have a simple solution for them: Cut prices and customer costs. I went into to look at a new Range Rover last year. A model essentially exactly the same as my current one, came with a £25k price hike from 3 years previously. More to the point, when I asked for financing options, they wanted to charge me a ridiculous usurious level – which I was quickly able to beat by calling another firm, but by then I was so peeved I decided just to keep my current car instead.

I probably don’t ever need to buy another new car – our current fleet of a 4-year old Rangey and a Roller Skate (Fiat 500) is pretty perfect for our purposes. She-Who-Is-Now-Mrs-Blain suggests there is room on the drive for something sporty, but I’m thinking an old Defender might be in order…