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Blain’s Morning Porridge

The Macro View

In the headlines this morning 

(Apologies for delay)

What a fascinating world we live in.

Amazon boss Jeff Bezos exposing himself, and exposes the National Inquirer for attempted blackmail. A young senator, Alexandria Ocasio-Cortez, snaring the headlines and proposing a preposterous New Green Deal – while further splitting the Democrats. Europe plunging back into recession. The UK no closer to a Brexit Deal (hang-on, that’s not a headline… that’s just… normal..) Deutsche Bank paying up to demonstrate it can borrow in markets. Santander facing a Euro 50 bln breach of promise lawsuit from Andreas Orcel (proving the Spanish banking adage: At Santander – you are either a Botin or a.. servant..) So much out there…

Are all these things linked? Yes – the world we live in determines the functionality of global markets. You might believe Washington Post owner Jeff Bezos was the victim of an Inquirer effort to “catch and kill” a story the paper has on Mr Trump’s activities in Moscow, or you might believe Deutsche Bank’s problems are part of a deeper malaise across European banking. Whatever… the news changes our perceptions. 

The trick is to separate the chaos of news flow from the markets. Markets are linear functions of buy/sell – they are not necessarily about common sense. To illustrate: last week I wrote about Italy, pointing out just how hopelessly its ensnared and entrapped within the straight-jacket of the Euro, with little prospect of growth, employment or upside.

Yet Italian bonds are one of the top performing assets – AND WILL REMAIN SO – because the ECB can’t afford to let Italy go, and Europe sliding back into downturn pretty much ensures they’ll continue to bailout Italy and likely resurrect QE in some form – watch out for something like long-term repos. An article in one weekend paper says the EU is now turning a blind eye to European governments spending their way out of austerity driven recession.

Therefore, smart investors might agree with my analysis of Italy as unsustainable, yet keep buying Italy, and will keep on buying right up to the moment the arbitrage cracks. (According the theory of flight bumble-bees can’t fly – but they do.) That’s why the smart hedge fund bosses are watching the succession for Draghi’s job at the ECB so carefully, and weighting populism in Germany so carefully – as it requites a complicit German electorate to keep the Euro illusion going. I suspect they care considerably less about the current spat betwixt France and Italy – entertaining as it is..

On a purely common sense Macro perspective, you should probably ignore Europe completely. Who cares about counties with sub 1% growth, demographic time-bombs ticking away, and a hopeless mish-mash of unpredictable populist politics coming to the fore? Go invest in the fast growing economies of Africa and Asia instead.. Yet, it still makes sense to arb the European game.

Such things are just facets of the six-impossible things before breakfast approach to investment.

Using the same logic, you might see US stock and bond markets as a screaming buy!

US growth remains robust – despite the FED clearly indicating its dialing back rate hikes. Essentially rates will remain flat. Is that a problem? From the market’s perspective – get out the party hats! There is no long term inflation threat because there is zero wage pressure. Despite “full employment” US companies pay as little as they can. Wages aren’t rising.

Low rates will fuel yet more share buy-backs for Bernie Sanders to fulminate against. Share buybacks are great for the market and excellent for senior executives and owners of businesses – converting equity into massively underpriced debt and handing more capital back to them. More highly levered companies don’t actually build anything more, or create new jobs… but the rich get richer – and, heck, isn’t that what capitalism is all about? In the short-run….

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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