This could get messy.

Blain’s Morning Porridge – May 15th, 2023: This could get messy.

“What do you mean you can’t swim?”

This morning: Markets feel directionless, demotivated and listless as we wait for the next impetus to emerge – problem is, it might be a shocker.

Apologies for late porridge, but I might have to rethink weekends.

Friday ended up a kitchen-disco in Blain Manor. On Saturday my eyeballs were removed with blunted knitting needles while my eardrums were burnt out with red-hot piano wire as She-who-is and her chums got raucous about Eurovision (appalling, boring and basically cack in most respects, but you have to smile). On Sunday I tried very hard to be good going for a nice long swim and then racing dinghies, but someone pressed the Barbi-Q button and now the pink section of the wine cellar is empty. There is nothing more wonderful than friends happy round the garden table.. (which is large and made from reclaimed ship’s timbers), but this morning I am drinking a large glass of water with lemon squeezed into it.

It’s not really helping.

As I gaze a gazely stare at markets I can only wonder where, when and why? Big questions for a Monday morning…

We await clarity on Turkish elections, and words of wisdom from the G7 Meeting. What should I be worrying about? Not just US banks. Bond markets? Junk? Inflation? Growth stocks? Commercial property has got everyone worried. Let’s see.. no one needs offices, no one wants more factory space, and governments have decided we can only work in buildings with the highest environmental credentials, therefore pushing the price of the top 10% of the market through the roof, while ensuring insolvency for the rest..

Maybe I am worrying about all the wrong things.

Last year I spotted Tuna in the Western Approaches to the English Channel off Cornwall. This year I am told they can be seen off the Isle of Wight. That is significant – it means the water is getting warmer. Hurricanes are triggered when sea temps hit 27 degrees. We currently have the fastest cycle of rising sea-temps on record. Between the polar circles (between 60 degrees North and South), we now have average sea temperatures above 21 degrees – unprecedented. A rising number of more powerful storms will have clear economic consequences, Meanwhile, a new and potentially stronger than ever El Nino-Southern Oscillation event threatens drought across Africa, Asia and South America.

Weather is something markets talk about – but don’t invest around. Yet. More on this later this week.

As I look around markets, there is a pall hanging over them. Make me think of one of my favourite poems:

The best lack all conviction, while the worst   

Are full of passionate intensity.

Try not to think about political choices as you digest that line…. I am assured there is nothing to worry about when it comes to the US debt-ceiling impasse, but that’s from Republicans who told me Trump was an aberration that was over, but now say “we should listen to him.”

Here’s a thought to spoil the day. If, if, the US does go into a technical default, then the $4 trillion of Treasury debt held by US banks – the very ones struggling with deposit flight vulnerabilities – might be forced to crystalise the losses on the bonds. Whether they do or don’t is immaterial – what matter is what the market fears they might do. Bank runs are not about complex maths, derivatives or failed hedging strategies, or even simple bad management – they are about confidence. When confidence collapses… all bets are off the table.

If.. again if, the US does technically default folk will panic about T-Bonds and banks. The troubled banks currently hold US debt on “held to maturity” basis, meaning they don’t have to mark-to-market the actual declines in prices – on the basis US T-Bonds can’t possibly default. Oh dear. If they do, then the fear will be the Fed being deluged by banks seeing to repo (basically banks borrowing ready cash against the bonds) – representing a massive obligations balance sheet spike for the Fed, breaching every single thing the Democrats and Republicans claim to be addressing in the debt standoff..

I read much about how the West’s addiction to debt spells the end of civilisation, but I disagree. Debt is good. Debt oils the economy. Properly managed it enables. . I see little problem with economies borrowing to grow prosperity. The issue is how its spent. When I read about payday lenders persuading broke nurses to take payday loands to pay for the weekly shop, that’s a problem. When the entire basis of capitalist wealth creation is held hostage to political pride.. then I am more than mildly concerned.

On the other hand: No point worrying today about stuff we are going to have to worry about tomorrow.

The big event of the week will actually be UK sausage roll and high-street pie seller Greggs results – giving us an insight on just how badly the UK economy is stumbling. When Greggs is busy, the economy is not. When we drive to Wales to see the wife’s parents we stop in service stations that boast a Greggs… what’s not to like about a Steak or Beans and Cheese slice?

Meanwhile, my twitter feed is being drowned in unsolicited poop telling me how to get rich in stock markets by signing up to their “guaranteed-success” subscription services.. please stop…

Fortunately I think I have cracked British politics. I’ve figured out how the Conservatives intend to guarantee electoral success: basically by spouting nonsense in the hope so of might stick. I have to smile when I read Jacob Rees-Hatstand claiming Ukaine is only winning because of Boris. Of course they are…

What I did listen to is Sir James Dyson, proper entrepreneur who made billions by reinventing the vacuum cleaner,  pointing out the “crippling shortage” of engineers means government pronouncements on the UK becoming a science and technology superpower sound as thin as Soviet propaganda. Ireland, tiny little Ireland, now produces most of Europe’s semiconductors and has a per capita GDP about double the UKs. How did that happen?

Meanwhile, Rishi Sunak spent Saturday watching his team, Southampton, get booted out the premier league… much as the UK is about to be booted out of G7. There is a lesson in that somewhere: maybe in the frequency with which Saints have switched management.. just saying. Jacobi Rees-Manicstreetpreacher reckons we need Boris back. I think I need another coffee.

Full service tomorrow.

WSJ                  Investors are Nervous – and that Could Support Stocks

FT                     Investors predict “imminent” US high-yield bond sell off

BBerg               Goldman Sees More Japan Upside as TOPIX Approaches 33-year high

WSJ                  British Pound Rally May be Winding Down

Guardian          The UK’s Industrial Strategy: Where is it?

Out of time, and back to the day job..

Bill Blain

Strategist – Shard Capital