Blain's Morning Porridge, submitted by Bill Blain of Shard Capital
Thanks goodness for all the happy pictures of Prince George’s Birthday across the papers this morning. Not much else to celebrate here in Blighty. We’re about see a screed of cabinet ministers resign before they are pushed, while other Tories are threatening to decamp to the Liberals.. (which is likely to prove a career call ranking alongside joining Deutsche’s equity trading team..). The prospect of Boris? The Scots are going to demand immediate independence. What could possibly make the mood worse? All we really need now to complete the misery would be something scandalous from up in the Turnip growing regions.. and the country will tip into utter despair and despondency…
There is plenty of noise out there – tankers being seized in the Gulf, more demonstrations in Hong Kong and Trump digging his hole even deeper. Much talk over the weekend about how the US news about Trump’s racism is covering up the real story of the summer – who has Jeffrey Epstein been pimping for? More will no doubt be revealed. In terms of investments – passive stock funds do best, alpha funds trying to beat the market lost. The market can stay irrational longer than you can stay solvent has never been more true.
In terms of markets the coming two weeks are likely to be dominated by Central Banks. What addictive crack of lower rates and QE infinity will the ECB foist on Europe? After last week’s spat about Fed members giving poorly coordinated academic speeches to market audiences suggesting a double cut was on the way, what will Fed do at the end of the month? (The answers: i) wait, and kick the can down road, ii) 25 bp ease.)
This really is not a good time to be a central banker. For a start,
the last 10 years of stunning economic growth and shared wealth expansion across the global economy, the last 10 years of stuttering faltering growth, monetary experimentation, rising social and wealth inequality and pointlessly low interest rates is being squarely blamed on their policy responses. Their solution? More of the same… It’s not a confidence building agenda.
The dangers are about credibility – what does the increasing politicisation of Central Banking mean for markets as their credentials are increasingly strained? The theme central bankers have screwed up and governments can’t be trusted is being exploited by crypto-currency snake oil salesman, and by big business that understands the attractions of non-government fiat money – unregulated - which is why banks are flirting with crypto and Facebook dipped its Libra idea to test the waters. Others are trying to crypo-ize gold – one scheme I’ve seen is a gold crypto coin backed by a fortress-vault hidden in the Swiss alps guarded by former Mossad agents! The consequences of a fiat breakdown could be horrible.
Central banks being independent is a comparatively recent notion. Giving them tightly defined objectives was designed to stop them simply juicing Government policy – but given the last 10-years of economic mayhem its hardly surprising they “tried to help”. Just a shame it’s gone so badly.
There are variations on the problems of Central Banking. The ECB is about politics – rebuilding Europe’s moribund economy needs a political figurehead to move on from the Mario Draghi age and pull Europe towards agreement on fiscal policy. However, do the German’s get that? It really worries me when I read an in-depth report by a German bank on domestic politics, and it doesn’t mention Europe once! Without German participation and agreement on fiscal union, then Europe and the Euro remains an ongoing crisis.
The Fed is a very different matter – Trump behaves like it’s his own personal piggy bank, at his beck and call to support the illusion he’s selling to his part of the electorate: “hey look, I’ve made the stock market strong, therefore I’ve Made America Great!”. For the Fed to capitulate would be a very bad thing indeed.
Why? Oh, would you really like the last 10-years of monetary distortion on financial assets to continue, ultra-low rates, corporate leverage, income inequality and financial asset inflation? Well, lots of short-term market professionals say yes – what’s not to like about rising bond and equity prices… Oh, nothing, except the higher they go, the more distorted they become..
The result is bad financial allocations – money chasing over-expensive financial assets and pushing investors to buy impossibly tighter, less liquid and more risky junk bonds and dimly understood equity models. Paying more for lower returns and lower liquidity is not a smart investment policy. And it’s just as bad in stock markets - last week I got pages of abuse for not understanding the value of Netflix. What’s not to understand? They charge too much for a lacklustre product while customers are leaving/not signing up and going elsewhere to binge-watch, while markets will be increasingly sensitive to funding them. But people buy it on the dips because they believe?
Being a central banker today has become a matter of patronage. The IMF job – which is traditionally run by a European - will be decided by the EU Brussels Blundership, largely on the basis that since Europe’s socialists didn’t get much of a share of the Brussels Jobs for the Boys, then they will get the IMF sinecure as a consolidation prize. Which one? Doesn’t much matter… But, no offense to unoffensive Dutch Finance Minister, Jerome Dijsselbloem, whomever Europe nominates is likely a bad compromise.
The best known technocratic central banker without a seat at the new table looks to be Mark Carney. He hasn’t been everyone’s cup of tea while head of the Bank of England, but he is a proper banker, rather than a second-career politician. He’s got the technical credentials and head for detail that’s needed to build credibility – a critical role for central bankers in today’s fervid markets. If confidence in the IMF and other global institutions wanes because its seen as European sideshow (which it became under Legarde), then the next move is not a compelling one.
Back to the UK…
Rumours and counter rumours about the soon to be upon us “First 100 Days of Boris” – which will incidentally be November 1st, the day after Boris promises we leave Europe with or without a deal. Without being harsh, opinionated or balanced – I give him ZERO chance of success. But I’ll be delighted if he can pull it off.
How will his rumoured European charm offensive work? Is Europe preparing a coordinated and enticing new deal for him? Is there a solution? Does Boris think an easier Irish backstop and more open dialog with Europe will pass muster with the No-Deal Brexit hard wing? Oh what fun we have to look forward to. Still selling sterling…
My immediate bet remains an Early Election as it becomes clear i) he can’t command a majority, ii) he can’t close any deal, and then line up another Tory Leader as the UK fragments.