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Blain’s Morning Porridge

The Macro View

“Dydd Gwyl Dewi Hapus”

In the headlines this morning…

A moment of frostiness in the Blain household this morning after I failed to provide my very Welsh “She-Who-Is-Now-Mrs-Blain” with Daffodils for St David’s Day. Cup of tea sorted it and she smiled. Limited Porridge next week I’m afraid – the clouds gathering over the Alps promise a big dump of fresh powder. Have skis.. will travel..

Yesterday was an eye opener. Trump and Kim Jong Un walked out their love-fest. A billion reasons why, but what happens next? Watch that space.

Back in the real world – and for once I actually mean the real world, a proper functioning part of the UK economy! Yesterday, I was asked to give an economic outlook to a gathering of some 50 CFOs and Treasurers from a major UK services sector. It was fascinating – their main issue is uncertainty, so I pitched in terms of why markets are likely to remain plagued by a lack of reason.  Funnily enough, Brexit isn’t their main threat. They are more concerned about UK politics.

Regular porridge readers will know my simple thesis:

The Global Financial Crisis of 2007-2017 was a pretty standard correction – triggered by unwise lending and improvident borrowing – but the subsequent political, regulatory and central bank responses have magnified the damage, are still shaking market fundamentals to the core, and have driven political populism, creating today’s unstable uncertainty.

It goes like this:

Central banks slumbered as short-term financing markets dried up in 2007. We saw the vivid illustrations such as the Run on Northern Rock. It triggered a major crisis of confidence in the banking system. Something had to give – leading to the collapse of Lehman and the bailout of banks across the globe. Politicians were furious – and looking stupid. Regulators had dropped the ball. Central Banks struggled to catch up.

The response was reactive. Politicians demanded banks were disciplined and never again too big to fail, while declaring war on borrowing. Regulators went into overdrive to reform the behaviours they believed caused the crisis – regulating new capital measurers which effectively reduced bank risk-taking, killing market liquidity and putting risk avoidance rather than risk management at the centre of finance. Central banks sought to stimulate economic activity through QE – designed to flood markets with cash to encourage bank lending and keep interest rates low. It was sloppy stew of conflicting measures. 

The results have been… unhelpful:

  • Governments adopted austerity measures to rein back borrowing and cut services, inflicting pain on the lowest classes in society, the rise of the low paid gig economy, and massive unemployment across Europe.
  • Zero interest rates did not create new jobs, infrastructure or build new factories. Corporates levered the equity into debt, rewarding shareholders thru buybacks, and increased executive bonuses.
  • Financial assets – bonds and stocks – became massively price distorted by QE (financial asset inflation).
  • Markets have become more risky and less liquid, while risk has simply been transferred from the banking sector to the investment sector.
  • The rich got richer, the poor got poorer as income inequality has widened.

The result was inevitable. The GFC of 2007/17 spawned political populism. You can blame it all on the Crisis. BREXIT! TRUMP! CORBYN! Italy, Spain, what’s going to happen in May’s European elections…  etc. Trump was elected by the same voters who elected Obama – he won the vote because by breaking the moulds, he offered the electorate some hope of something better…  Ya get what ya pay for!

The Macro View

About Bill Blain

Bill Blain

Bill Blain is Strategist for Shard Capital, a leading investment firm. Bill is a well known broadcaster and commentator, with over 30-years experience working for leading investment banks and brokerages at senior levels. He's been closely involved in the growth and development of the global fixed income markets, and pioneered complex financial products including capital, asset-backed securities and private placements. Increasingly, he's involved in the Real and Alternative Assets sector seeking to explain their complexity, how to generate decorrelated returns, and create liquidity in non-listed assets. Bill is a passionate sailor, talentless painter, plays guitar badly, is learning the bagpipes, and built a train-set in his attic.

Articles by Bill Blain

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