Blain's Morning Porridge, submitted by Bill Blain of Shard Capital
"There is a time to every purpose under heaven…"
It feels like Autumn has arrived. There is a chill in the air and cold rain, and that’s a real shame as I’m taking some very important clients out for a day’s sailing. The sun never shines on the righteous! Not only will they get cold and wet, but will have to listen to me blather on all day..
Is the changing of the seasons the theme for the coming week? Could be. Step back and look past the noise, and the global picture is all about long-term change.
In the US I’d argue the numbers show an economy slightly wobbled by the global trade ructions, but broadly on course. Trump may scream at the Fed to for ease – but is it needed? There are bigger long-term issues to address: themes such as income inequality, infrastructure, social programmes and education to resolve – but these have all been identified. If it wasn’t the partisan division in Washington and the chaotic leadership, they’d probably get addressed. They will in the future.
Is the US economy going to collapse on the back of trade war with China? No. There will be manageable inflation, some supply chain uncertainty and long-term the US will suffer a slowing effect from the Chinese economy no longer driving global growth. Addressing the long-term bubbles that have developed in equity markets, corporate and zombie debt, are going to be challenges. A turn around in the bond market will really hurt! A stock market reversal – they happen, and the sun comes up the next day.
China is in a more difficult position. Attitudes against it are polarising. Trump picked his moment to declare a trade war – just a time when poorly managed debt diplomacy was exposing the inequity of China’s plans to create its own global trade ecosystem. The fact China is now perceived as a global power makes it easier for the US to contain them – it’s not some poor third world nation they are looking to corral! The next few years will be as much about how China is increasingly contained, as about slowing growth. What the US really wants now is a Great Wall of China to keep them in as trade war morphs to cold-war.
China isn’t going to suffer and economic collapse on US tariffs, but it is sub-optimal and likely to push China growth lower earlier than the party strategists hoped, reducing the likelihood the nation can get rich before it gets old. The implications of a slowing China will be felt across whole globe. If China isn’t growing 6%, then that’s going to slow global growth. It will be felt most obviously in nations like Australia and other primary suppliers, but also elsewhere.
I’m tempted to say political risks may rise in China as it attempts to become increasingly self-reliant behind the walls the US will try to erect around them – the issues of the party delivering wealth, prosperity and critically, a clean environment, will be challenging, and could result in more aggressive China moves externally. Does that mean its time to invest in the US military industrial complex? Maybe.
What about Europe? This week the market is expecting big things from the ECB – I can’t imagine what they think they are going to change by further juicing the market? Sure, another boost to bonds, and infinity buying appetite? Whatever the ECB does in terms of a) cutting rates, b) reopening buy programmes, or c) promising to do (a) and (b) next month, will have precisely zero effect on European growth prospects. On the basis doing the same thing and expecting different results is just daft – the ECB needs to try something new.
Just how different will be the new Legarde regime at the ECB? Draghi must be thanking the gods he did a good job holding the Euro together – but didn’t face the impossibility of moving it forward politically with some form of fiscal agreement on how to genuinely reflate Europe. If they don’t then Europe sinks into increasing economic irrelevance. Speaking to a US hedge fund last week they told me they see Zero opportunities in Europe worth chasing.. they are waiting for a new crisis to buy it cheap.
And then there is the UK…
There is nothing more I can usefully add about the parliamentary Brexit shambles. Who resigns next? What will Boris surprise us with? Which Ditch? (Best suggestion on that one so far is HMP Ford (the open prison). Jeremy Corbyn anyone? Or the end of UK Politics?
What is more worrying is the long-term effect on the investibility of the UK as a result of the current shambles. I was speaking to a good chum who is a very successful real economist at a proper University last week. He asked about the risks of the UK losing its quasi-reserve/hedge status. That’s actually a really scary thought. At the moment the UK is perceived to be a reserve asset far out of proportion to our small population and low productivity economy.
The UK’s position in the global economy is boosted by factors such as London being the global centre of finance, our mercantile history, the fact English is the basis of contract and business law, the UK winning more than its fair share of Nobel prizes and our reputation for invention, and the fact the UK still owns the keys to money printing presses. (Europe does not – the ECB does.)
What happens to the UK’s above market weight if the currency continues to collapse on the back of the Brexit stramash, and the government starts to borrow heavily to cover the costs? Currency tumbles and deficits rise – not attractive. Could it ultimately result in the UK being seen as a failing state, and cost Sterling its reserve status? That could get very nasty….
It’s worth thinking about.