Blain’s Morning Porridge, June 10 2022: Harry Hindsight, the world’s greatest trader is short Credit, Stocks, Brexit and the UK
“The men on the trading floor may not have been to school, but they have PhD’s in man’s ignorance.”
This morning: Harry Hindsight is the world’s greatest market trader – he’s circling round the opportunities presented by inflation and the risks it presents. He’s short bonds, credit, stocks, Brexit and the UK.
Harry Hindsight is the world’s greatest ever trader. If only we knew what he knows about what’s going to happen… but we don’t.. All we can do is look back and regret our stupidity.
It’s shaping up for a Frightening Friday as US inflation is expected to beat Wall Street’s 8.2% consensus. The noise around the number confirms it’s all about inflation, inflation and inflation. If you haven’t already pivoted portfolios away from the more unstable sectors of the stock and bond markets and into recessionary/inflation proof stocks where earnings are inflation proofed and products are price inelastic, out of bonds (especially corporate credit risk), and into gold and commodities… then time to get busy… (Oh, and keep some US Treasuries.. the ultimate safe haven..)
The OECD say the UK is about to suffer the slowest growth and highest inflation among G7 nations. The Governor of The Bank of England will likely be writing letters to the Chancellor to explain persistently high inflation, and probably stagflation, for at least the next two years as the domestic and global economy react and adapt to inflation. OECD see zero growth and UK inflation at a “benign” 4.7% by the end of 2023!
This morning Rishi Sunak is being castigated on the front page of the FT for casually losing $11 bln servicing UK debt. Really. You have to laugh. It reads like Boris’s dirty tricks dept wrote the article to discredit a potential rival. Of all the things the last decade of Conservative rule have given us, a notional £11 bln on interest rate costs is far down the list of bads. Rishi was in short pants when QE kicked off. Interest rates rise – debt costs rise. Wow. Who would have thought.. (More about UK debt below… )
Meanwhile in Europe…in order to address inflation, The ECB is hiking negative interest rates to less negative – which may eventually become positive, if/when the Germans insist. Recession is nailed on.
While the papers are distracted by Sunak, his wife’s billions, and whether he’s going to quit for America, the UK is about to be hit by an inflationary triple whammy: the energy and food price spike shock, galloping products and services price rises due to supply chain issues, and (soon) a series of massive wage demands likely to trigger an autumn and winter of industrial strife. Brilliant – not.
Things will be worse in the UK because a combination of ESG investment wokery, government not-policy, and a succession of bad decisions meant we suddenly woke up to find ourselves an energy insecure nation – unlike the USA. While the UK came out the pandemic with a relatively intact economy, we have far more to lose than Europe because we are now a small insular economy.
And to cap it all, the Government doesn’t seem to have a plan, because it is focused on immediate short-term survival.
It might have been oh so different.
A million years into Brexit, you’d have thought we’d not only have a plan in place, but be delivering the Brexit dividend by the spade-full. Surely trade deals with countries just desperate to trade with us would have been signed, the economy would be fixed and resilient, while casting aside the shackles of Brussels’ bureaucracy was going to trigger an explosion of inventiveness and innovation across the Economy. The stock exchange should be flat out in a blizzard of hot new Unicorn IPOs hitting the market. Our soft power would make us so desirable as the place to thrive….
Well, these were just some of the reasons I voted for Brexit..
More fool me.
Today the big news is the UK will not join Europe demanding USB-C charging on iPhones. Wow. That’ll shock em. Show Europe who’s in charge… Ant and the elephant stuff indeed.
Prior to the referendum one of my best mates posed a very simple query which we named the Webster Question: “tell me one thing that Brexit will improve in terms of the UK economy”.
I spluttered and cited all kinds of hopes and expectations about wider trade and business freedoms.. He cited cold hard facts about increasing trade friction, more red-tape, and likely political instability in its wake. He predicted the Northern Ireland border arrangements would collapse as they were a hopeless and absolute fudge.
Let’s face it… Brexit was…. Emotional.
The Webster Question is still impossible to answer, yet, there are hardened voters across the UK who think Boris deserves the premiership in perpetuity. It’s the one thing that unites the Upper Class Patricians and the Working Class voters the Tories rely on: “Boris got Brexit done.” Common sense.. went by the wayside.
And I supported it. Harry Hindsight.. as usual he is smiling.
I made the simple mistake of thinking the referendum promises would be delivered. No. Years later where are we? A small peripheral economy that’s excluded itself from European markets in order to make Boris’ career? As it implodes will his demise open our eyes to what little has been achieved?
I repeat the Webster Question: “tell me one thing that Brexit will now do to improve the UK economy”.
I am not a bitter Remainer, but a pragmatist who now admits they were wrong. Time for a rethink.
Meanwhile, the ECB has noticed something’s going on.. They will raise interest rates from less than zero to almost zero, but more significantly they just shot the Euro corporate bond market in the head. The ECB owns €341 bln of corporate debt and is described as the buyer of first and last resort. Who else will buy European government bonds if they are not?
Rising interest rates, galloping inflation, and the expectation of recession and maybe stagflation, plus central banks unwinding bond buying programmes are about as bad a backdrop for corporate bonds as one can imagine. The bond market is supposed to be smarter and more nimble than stocks, but its also wholly illiquid – especially when its biggest buyer exits.
When corporate bonds wobble, they will wobble fast. They can spread fear and panic round markets faster and more conclusively than any corporate failure. Be aware. Harry Hindsight is Short Credit, Long Treasuries, long Credit Default Swaps, Short Stocks, Long the Dollar and Long Gold and Strategic Commodities.
A quick aside on the UK Govt Bond Market
The Bank of England currently holds £895 billion of Gilts – UK government debt. If they were to try to sell them into the market, that would create the expectation of a shocking and massive supply glut that will have one consequence – pushing up the yield on gilts to astronomical levels. It will mean the UK has to pay much, much more on any future gilt borrowing, severely curtailing the ability of the Government to fund its way through any further exogenous shocks – like war, pestilence or famine – through Gilt issuance. When rates rise, bond prices fall.
Every time the UK Treasury raises debt it does so by instructing the Debt Management Office to sell new Gilts. The DMO contacts the markets and sells them the new Gilts in the morning. Let’s say it’s a £10 bln issue. The £10 bln immediately appears on the balance sheet of the UK Treasury as a liability. In the afternoon, the same banks that bought the Gilts in the morning, sell them to The Bank of England (at a small mark-up, of course), where the new Gilts show up as an £10 bln asset on the Bank’s balance sheet.
Lightbulb moment: A liability on the Treasury balance sheet and an asset on the Bank’s balance sheet…. That is an accounting issue. £10 bln new cash has been added to the economy. (That’s effectively exactly the same as what happens when you borrow £100 from a high street bank – it doesn’t have £100, it “magically” creates most of it…)
Why don’t the Treasury and the Bank simply write off the £895 bln of Gilts the Bank holds – via the simple expedient of the Treasury buying the Gilts back in return for a Zonk – a single penny sized coin bearing the Queen’s head and face value of £895 bln. It could be displayed in the Bank’s rather fine museum. It may have a notional value of £895 bln, but be worthless and priceless at the same time.
Five Things to Read This Morning
Thunderer – Borrowing Costs rise after ECB’s rates signal
Out of time and back to the day job, have a fantastic weekend
Strategist Shard Credit