Blain: "When Markets Grasp That Lower Rates Won't Be Supported By Growth, Get Your Hard Hats Ready"

Blain's Morning Porridge, submitted by Bill Blain

“The Sky is not the limit – there are footprints on the Moon.”

So many choices for this morning’s quote. The classic Armstrong “One Step” was too obvious. I did think about “To infinity and beyond”. But the one I chose is perhaps the best. Points if you can name who said it. Only four of the 12 men who walked on the Moon are still with us. It was a long time ago, but last night my wife, son and I were out to dinner in the West End. As we walked back past the Lego Store inn Leicester Square – look what was in the window! I’m going back to buy it later today!  

It took me back 50 years - July 11 1969. I was in the back garden in Fox Covert, Edinburgh, staring excited at the moon, asking Dad where the spaceship was. He tried to explain how far away it was and since it was only the size of a car, I’d not be able to see it. It was a terribly exciting day – the BBC showed the film of HG Well’s First Men on the Moon. Then came the iconic music; Also Sprach Zarathustra, which defined the whole Apollo era. Patrick Moore and James Burke explained what was going on. James Burke is still making sense today! We waited and waited and then the words. At some point I must have fallen asleep because I woke up in bed with my Action man lying on the floor in his (Gemini) spacesuit.

It would be a terrible pity if we don’t go back to the Moon. Does it make commercial sense for us to go further? I’d like to think so, but the scale, the sheer immensity of space, the rules of orbital gravity and radiation mean we’re not going to travel to Jupiter in a few hours any time soon. A few years perhaps, and few years to come back with what? Minerals, raw materials? Or maybe not – 200 years ago it took a year to get to Australia and back. Today I’ve been there and back in a week. It took Magellan’s fleet 3 years to circumnavigate the globe – 18 men out of 270 made it.  

Back to the present…

The big theme this morning is Jerome Powell’s comments y’day – 25-50 bp ease from the Fed looks nailed on for later this month. We’re expecting similar directional guidance from the ECB and Bank of England today. The markets will breathe a sigh of relief – and party on. The Fed dismissed the strong jobs report, reckons inflation is easy, and is willing to pander to Trump ease rates to counter signs of a slowing global economy and ongoing trade risks.  Dollar took a bit of a spanking – but that’s another thing El Presidente will love.

Yesterday I was talking about how Boeing might be the canary in the coal mine that crushes the on-going stock optimism. Folk generally agreed with my analysis the company management has made serious mistakes that aren’t reflected in a lower stock price, and that price has been artificially held up by dint of the plane-maker being the largest component of the Dow-Jones. Everyone has to hold Boeing to match the index – that could change dramatically if the market shifts and everyone wants to go short!

Another new factor my chums in aviation finance have noted is potential stress in the aircraft finance market when the Boeing 737 Max finally gets recertified. We reckon there are about 150 undelivered unpaid MAXes sitting at Boeing – including some parked in the employee car parking spaces!! They cost about $2000 each per month – and nots just the parking tickets! They are adding about 10 planes each week. When the aircraft are recertified Boeing will be in rush to deliver – but financing what could be up 370 new aircraft in November (if that is when they get permission to fly) could be a nightmare. It could be a shock to markets. (And I’m trying to think how we arb it! A chat with Boeing might be on the cards – if some of the big funds wants to lend me $10 bln I can promise a very asset based secured attractive return!)

Boeing is a crisis because of the mistakes its management have made. (And they won’t like me saying it.)

Potentially even more dangerous for Markets is BASF, the German Chemical giant. Earlier this week it missed expected numbers massively and has shocked complacent markets. BASF confirms the genuine damage US / China trade has had on the global economy. This is a company that has seen its stock whapped, and EBITDA expected to plummet down 30%, because of the global economy rather than management cluster-failure. If it’s happened at BASF, it is going to happen elsewhere else. BASF is down 21% since April and crashed 7.5% on the news before wobbling back up a bit y’day.

All this should get investors thinking about what’s really going on in the corridors of power. We’ve got Central Banks around the world being overly accommodative, pumping money into Financial Assets on the hope and a prayer of avoiding a massive and destabilising stock market crash. If it happens global sentiment will be crushed, and you can bet the next stage will be folk talking about over-indebted Sovereigns and slide in bonds as well. I’ve been warning for so long about the scale of bubbles in Financial Assets – bonds and stocks – I’m beginning to bore even myself.

The first reality is BASF. It shows corporate earnings in a global supply-chain based economy are critical. If the next couple of weeks US Earnings confirm spreading pain, then the optimism to buy the FED crack-ease is going to flop.

The second reality is China. Forget what anyone is telling you about the USA being the most important Economy. Its not. Its been China and its’ associated growth that’s been driving global growth for the last 10 years. When the Chinese economy was growing 7-8% annually, it was a rising tide lifting all boats.

Now the Chinese are transforming their economy. The plan is a consumer led and consumption based  happy state-loving economy – and it sure has problems. Which country doesn’t? But its also engaged in a cut-throat political/trade war with its biggest market – The USA. Look at the news of China graduates now struggling to find good jobs, the clampdown on conspicuous consumption by the wealthy, unsold houses, a domestic debt crisis, companies defaulting. Welcome to a China we recognise from our own experience.

China Growth is likely to slow to more like 4% as it continues to mature. And if China is 4%, the shocking global reality is global growth is much much lower than the Central Bank geniuses expected. They’ve been juicing asset markets for the last 8 years with lower-for-longer rates and QE – with the effect of creating massive asset bubbles in both. They’ve been hoping rising growth (fuelled by China) will justify the levels financial assets have reached. But it won’t – global growth is slowing because China is maturing. Which means financial assets are, and will remain, a bubble.

Pop.

When the market finally grasps the fact lower interest rates are not going to be supported by growth, that’s when you really want your hard hat handy.