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
FT – Bridgewater bets against US and European corporate bonds on slowdown fears
BBerg – BOE Says UK Biggest Lenders Are No Longer Too Big To Fail
WSJ – Stock Losses Accelerate Ahead of Friday Inflation Report
ZH – Market Panics on hot CPI expectations
Out of time and back to the day job, have a fantastic weekend
Bill Blain
Strategist Shard Credit
9 Comments
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“Let’s face it… Brexit was…. Emotional.”
Exactly – a big up yours Delors to both Brussels AND Westminster.
100% increase in GDP in UK over 35 years – 10% increase in median earnings (100% & 0% in US).
For normal voters earnings do not correlate with the Economy of GDP so who cares about economic factors?
Hi Bill,
I voted to Remain so maybe slightly biased. In your article you say “I made the simple mistake of thinking the referendum promises would be delivered. No. Years later where are we?” ….. there weren’t any promises made in the referendum … the govt of the day supported ‘Remaining’ and the only folk making promises weren’t in a position to deliver on them so not sure why anyone would believe there was some kind of plan if ‘Leave’ won. If you remember, the ‘Leave’ campaign also didn’t not correlate to the demands of the Brexiteers post the referendum win. The whole debate got twisted into ‘we must leave the Single Market’ and ‘we must leave the Customs Union’. Leaving the Customs Union was expressly ruled out by some of the main players. As for Northern Ireland, that was a bear trap waiting for the Brexiteers to walk into. It’s all fairly dull and I think we are all bored of talking about it, but if you couldn’t answer the ‘Webster Question’ pre-referendum then why vote for something where the upside was almost impossible to articulate?
As an American, I couldn’t understand Brexit. The UK had the best of both worlds, economic union with Europe but your own currency. So it seemed like a good deal to me. It should have given the UK an advantage in Europe.
Methinks your Mr Webster has not seen the Life of Brian sketch asking “What have the Romans ever done for us?”
The answer to his question is so long, time and space do not permit all of the answers. Let’s start with the treaty/constitutional aspects. Most are either unaware or choose to ignore the fact the collective Treaties in place and we were signatory to until Brexit, committed us to “an ever increasing union”. This means the limited freedom we had on tax, fiscal and montetary policy would disappear. The existence of sterling, thankfully a major defence against our total subjugation into the EU, can not be tolerated over time were we to continue to be members of the EU. So if Mr Webster thinks our economy would benefit as a full member of the euro subject to centralized fiscal and monetary policy, then so be it. So the first answer to his question is retention of control over our economy.
Now, we can debate whether any of the current political actors have the ability to do the best with the freedoms they have been granted from Brexit, but the fact is with expertise, imagination and purpose, we have a full armoury at our disposal.
Given the left and eco leanings of this blog, let’s then focus on the ability to direct state intervention where it is necessary (something theoretically prohibited as a member of the EU). The recent subsidy to Nissan to establish a EV battery gigafactory in the NE is one tangible example to answer Mr Webster’s question.
But apart from the gigafctories, what has Brexit done for us?
Well, creating a better environment for the digital economy and businesses driving it. The heavy hand of the EU is in danger of both legislating these fast growing industries too much and of treating them as both a political pawn and cash cow to further its own political agenda (see constitutional issues above where the ECJ is a promulgater of political aims unanswerable to the democractic process). Several firms have come to the UK BECAUSE of Brexit not in spite of it.
But apart from the gigafactories and the digital revolution, what has Brexit done for us?
I suspect your Mr Webster is more familiar with that other Monty Python sketch – The Argument one, where despite the best constructed arguments made, John Cleese’s character simply refutes each statement by gainsaying.
What he might be right in saying that the Brexit referendum should have been about the issue we are discussing – that is do we want to be a fully fledged member of the EU, subjecting ourselves to the euro and the full gamut of the unitary state that the EU aspires to, or not. The problem is Remainers are either unable to articulate the benefits of so doing or unwilling to admit that that was the direction of travel had Brexit not happened.
I certainly defer to your analysis on Brexit. But the EU has one glaring fault. Note how the Brussels office folks have dragged the entire continent into a war with Russia. Into a war whose sanctions are going to destroy the social fabric of the entire EU. Did anyone get a vote on this? Did any of the countries have a choice? They are going to crucify Hungary for merely pointing out the reality that Hungary does not survive without Russian oil and gas. Yes, the British establishment has truly and well mucked up Brexit. But freedom gives you options. Otherwise, it is lemmings all over the cliff together. Fix the system. Fix your country. And be independent. Of course, with the nitwits running my country I should not judge.
I cannot believe someone as seemingly intelligent as you would have voted for Brexit.
Fraid so. Seemed like a logical thing at the time.
We had high hopes about how it would be delivered. And now many of us accept it was a mistake.
The problem is – few are willing to be honest about it.
There is still a large number of Brexit and any cost..
As italian victim of the EU envious of you position I’d like to point out that there is a huge difference between a bad use of your freedom and the absence of it!
For the benefit of Mr Webster
https://www.briefingsforbritain.co.uk/what-remainers-are-saying-now-and-getting-their-facts-wrong/