Stock Market Dips and The ECB’s Power Play

Global Stock markets seem to be living the dream, but under the surface there are serious concerns. In Yoorp the ECB makes its power play this week to confirm its place within the political trinity of States, EU and ECB by effectively handing itself control of the fiscal and industrial policy levers that could power up Europe. No one tell the Germans…

Blain’s Morning Porridge – July 6th 2021: Stock Market Dips and The ECB’s Power Play

“The enemy is anybody who’s going to get you killed, not matter which side he is on…”

This morning – Global Stock markets seem to be living the dream, but under the surface there are serious concerns. In Yoorp the ECB makes its power play this week to confirm its place within the political trinity of States, EU and ECB by effectively handing itself control of the fiscal and industrial policy levers that could power up Europe. No one tell the Germans…

Apologies for the lack of Morning Porridge yesterday. I was going to write a rational Porridge about terribly important stuff, but the gods intervened… She-Who-Is-Mrs-Blain and I spent the weekend moving back into our house. Yesterday was supposed to be the day I fired up my new state-of-the-art home office for the first time.

Instead, the Virgin Broadband decided to not to work. Richard Branson must have read my comments about his personal embarrassment at having a couple of zeros less on his account balance than Musk or Bezos as the reason he’s so keen to launch into Space this week. Virgin has been a litany of disasters after they installed a broken cable, dug up our new drive to replace it, and then assured us it was foolproof.

Foolproof, but not Bill proof.

Virgin is the kind of company that does not like to make it easy for customers. The kind of company that tells you how much quicker it would be to complain about a fault on your internet when your internet is at fault. Eventually I found a phone number and got through to a lovely helpful lady who spent 30 minutes checking we were who we said we were, and then determined it needed an Engineer. Who called hours later and also spent ages determining if we were who we think we are. After much cognization he determined it was likely a broken cable !!!! and promised to send a team out later this month/year/decade.

Suffice to say.. this morning’s Morning Porridge is brought to you by the power of a Vodaphone iPhone…. Which works as well as Virgin ever did. We are calling Sky later today.

If our hirsute beardy chum Branson does launch himself up into space later this week – adding about one trillion tonnes of ultra-fast acting Co2 to the upper atmosphere to crisp up Canadians – I shall be thinking about Yossarian’s plane curse, which only the very bored and over-read English lit majors among us will get..

Back in the real world

Fascinating numbers coming out the USA about the $28 bln of new money that pumped up the stock market in June – read all about it in the WSJ: “Retail Investors Power the Trading Wave with Record Cash Inflows”.

10 million new brokerage accounts and over 70% of US retail investors are convinced the market rally has further to go, the Fed will stand stead-fast behind the market – keeping the money spigot open, and meme stocks and cryptos are cheap. They are buying – buying dips in the really classy financial assets they know and love.. like Gamestop and Buttcon. When a stock tumbles like that, it must be because the market has got it wrong surely… it’s what Wall Street calls a buy the dip opportunity, a window to make lots of money.

If you think so…

Only 44% of professional fund managers share the retail bullish view. They are far more concerned about the way in which certain tech stock movements look very 2000 crash familiar. They are concerned about IPOs, SPACs and valuations. They are concerned about rates, central banks and recovery.

Meanwhile things are getting interesting in Europe.

The ECB’s governing council will sit down in Finanzplatz Frankenfurt later this week to discuss and approve President Christine Lagarde’s grande plan – an all-encompassing strategic policy rejig of its remit – the first review in nearly 20 years! It’s the usual European thing – an opportunity for the 25 voting and vetoing members to trade naked and not-so-naked domestic self-interest and political advancement, versus the objectives of the Eurocracy in Brussels.

It’s a fascinating thing the ECB.

Christine Lagarde has proved herself an effective leader of financial institutions – but she is not a classical central banker. She is very much part of the French political master class, which is why she was parachuted in over the heads of many well qualified bankers. Her role within the ECB was always to build political unity and steer it in the correct direction. Which direction? France’s or the Brussels Eurocracy?

Which ever suits. France is unfazed by monetary debate. The number of angels holding €500 notes on a pinhead required to spike inflation bothers them not. How much debt-addled Southern Nations are borrowing under the ECB’s skirts – is not an issue. France has been bust many times, and is still France. And, if the ECB leads ends up leading European climate change policy, that’s just another thing you can’t blame the Elysée Palace for. Lagarde will make a great President of the Republic when she retires…

It’s a very un-Germanic approach. The Germans, as we all know, fear nothing but tremble at inflation above 2%. Curiously they still sincerely believe that German workers should not be paying the inflated pensions of Club Med workers. They have even broken ranks with the rest of Europe by showing remorse about Brexit, and heaven forbid, letting the perfidious English beat them at Football.

Bundesbank chief Jens Weidmann is earnestly dull and boring, warning about inflation and bond buying dangers, while the new crop of German politicians are all trying to attach themselves to demands Europe reverts back to strong enforcement of debt/GDP rules. The rest of Europe is resolutely looking the other direction. Everyone promises to consider German fears and then does the opposite…. Because they know the Germans will complain, but will never act for fear of discovering how unpopular they remain in Yoorp for the crime of bring wealthy and successful.

Lagarde’s plan is to boost the ECB’s political relevance by effectively placing it at the centre of European Climate Change policy. She will direct ECB bond purchases to qualifying assets, ie Green bonds that suit her environmental objectives. Corporate Bond QE has proved a very effective central banking control tool – limiting access to capital and funding for perceived bad actors.

The ECB’s powers to direct fiscal aid via the EU’s de-facto mutualised European €800 bln bond recovery programme, and to set industrial policy via its climate change mandate will give it unprecedented power.

Which is .. dangerous. The idea an essentially bureaucratic, unelected – but subject to domestic political patronage, independent (well, notionally) financial body should be setting European climate change policy will concern many Northern nations who may conclude Southern Europe’s willingness to pay climate-change costs and externalities will prove as unenthusiastic as their efforts to rein back spending.

Let’s see what emerges…

If there is one thing you must read this morning its Markus Ashworth’s piece on BBerg: “Rishi Sunak is a realist in Financial Dealings with Europe.” As the UK gives up looking for equivalence with Europe’s prehistoric markets and the bureaucratic quagmire of Mifid, the future looks bright for UK finance.

I can sum the story up with two French bankers who came down to see me last summer. Both were senior executives for a French bank, but had just been told they were moving back to Paris in more senior roles. They were desperate to stay – and were asking if I could craft a role for them at my firm, Shard. I didn’t need to – they were snapped up by an American firm in days. The Shermans resolutely promised the pair they would never be expected to move to its new Paris HQ.

They two will remain as French as champagne, and proudly support their nation… but they know their financial futures are better in London than Paris. (And for the record.. if I wasn’t a Scot, my second choice would to be French!)

Five Things To Read This Morning

FT – Oil Hits three-years high after OPEC+ abandons meeting

BBerg – The UK Belatedly Escalates Its Green Gilt Ambitions

FT – Didi Chuxing: China raises red flag over New York Listings

Bberg – Tesla’s Fall From Grace in China Shows Perils of Betting on Beijing

WSJ – Investors in Chinese Stocks Hope For Better Second Half After Weak Showing

Out of time and back to the day job…

Bill Blain

Shard Capital