Blain’s Morning Porridge Aug 2 2023: WORRY ABOUT BONDS! It’s a Judder Moment as we prepare for brutal Political Risk escalation.
“Great minds think alike, but fools seldom differ…”
Fitch threw a spanner into the works last night downgrading the US – but they were right to do so. Credit and equity risks are up. Political risks in the US and UK – both are approaching peak electoral cycle crises points – are rising and the disinformation wars will ensure it gets… fruity.
I am either a great genius or a complete fool. (My wife harbours few doubts it’s the later.) Yesterday my headline was “Don’t Worry About Sovereign Bonds”, but with a curious serendipity US ratings agency Fitch downgraded the US (largely on political risk factors) to AA+ on the very same day Donald Trump was indicted over his efforts to overturn US democracy. Fuel and fire. A potent mix.
Belay what I wrote yesterday about minimal bond risk. (Belay: great word meaning “anchor” in climbing, but “reverse what I just said” in sailing and it sounds very piratey…)
Global Markets just had a major “Judder Moment” and went Risk Off. This morning its buy high-grade investment credits and sell junk/hi-yield as funds work out what the miniscule change from AAA to AA+ means for their overall credit mix and risk balances. If the US jobs number on Friday pukes, then its dump equity time. An equity and high yield bust will conspire to undermine corporate confidence globally. (Yep, and despite the downgrade, treasuries remain a safe haven.)
The main thing, the major threat I warned about y’day, most likely to destabilise government bonds was Political Risk – one of the three legs of my virtuous sovereign trinity by which the others; a stable currency and a sustainable bond market, can be overturned by incompetent political choices. Political risk is turning hot. Ignore it at your peril.
Although there are a host of well-informed market commentators and figures from Janet Yellen (Treasury Secretary) to Mohamed El-Erian (Allianz’s bond prince) questioning the timing of the Fitch downgrade in terms of recovering economic metrics and the sustainability of US bonds as the ultimate safe-haven asset [when S&P downgraded the US in 2011 US Treasury prices rose on a flight-to-quality rush!], there is absolutely no doubt political risks in the US are elevated and rising fast.
This morning, according to an NBC poll 71% of Republican Party voters believe in Trump. Only 22% of Republicans don’t think their party should back him. Forget the efforts of embarrassed republican donors trying to fund alternative candidates and turn around faltering campaigns like De Santis. Trump you see, and Trump you will get. The 35% (roughly) of US voters who adore Trump are not going to accept his indictment or believe he will receive a fair trial. I suspect it will proved America’s “Corbyn moment” – the 22% will vote against him, but that won’t solve polarisation.
The one thing I can predict with absolute certainty is political tensions and polarisation will go stratospheric into the 2024 election. The electoral news-flow will drive instability around the globe as pundits and news manipulators exploit voters fears to play the implications of a Trump victory. Separating news from speculation will become increasingly impossible. Russian trolls will play MAGA and isolationist themes urging US voters to follow Trump, while telling Europeans to hunker down and scale back their support for Ukraine on the likely withdrawl of the US from Nato. False flag campaigns will abound – expect a lot of “whatabout Biden” every time Trump is caught in the prosecutor’s sights or the polls look shabby. The mood is going to be profoundly negative.
The 2024 US election will see media manipulation on a massive scale thru fake news, false narratives and social media plants. The “cyberwarriors” fighting the election will be targeting an audience already close to Uncivil War, willing to believe any kind of narrative playing to their already distorted confirmation biases. It’s going to be brutal. (I don’t suppose it will make much difference, but I note the Twitter logo has disappeared and been replaced by the V of the Russian offensive Musk’s meaningless X.)
It won’t help that trust in media has been eviscerated. About the only news service US voters trust is the Weather Channel with 53% believing in it (64% of Democrats and 47% of Republicans) according to YouGov’s trust in media poll. 56% of Republicans trust Fox – but as Democrats distrust it, it has an overall trusts vs distrust score of just 3%! Funnily enough the BBC is third most trusted channel with 29% of all Americans believing it. Surprisingly, perhaps encouragingly, 15% of Americas trust the Guardian.
The same YouGov poll in the UK confirms the sustained Tory campaign to diminish trust in the BBC over the last decade has largely succeeded. 46% of Tory voters now trust the Daily Mail, which is more than whole population trusts the BBC (44%). (For the record I regularly follow the FT, the Torygraph and the Guardian – and I trust the BBC.)
Back in the USSA.. (See what I did there….)
The secret of good comedy is……… timing. Yesterday US stocks took a pasting from slowing indications of jobs openings (and we get the July jobs report on Friday), ISM still in negative territory, the outlook for global growth in light of China’s economic stall, and earnings letdowns. Spice up a bad first day of August with a US downgrade (making the US officially Aa+ as a result of 2/3 major ratings agencies now agreeing the outlook is slightly less than fantastic). Despite the difference in AA+ from AAA being an issue of semantics – in bond terms it means holding US Treasuries to barbell hi-yield risks just got messy. Buy hi-grade credit.
The Fitch downgrade from AAA to AA+ cited the “erosion of governance… manifested in repeated debt limit standoffs and last minute resolutions. (Read the whole report – it makes some very good points.) It went on to comment on how ineffective US political delivery of policy has become:
- Erosion of Governance: In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025. The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management. In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process. These factors, along with several economic shocks as well as tax cuts and new spending initiatives, have contributed to successive debt increases over the last decade. Additionally, there has been only limited progress in tackling medium-term challenges related to rising social security and Medicare costs due to an aging population.
As I’m running out of time, I won’t analyse in print the other very pertinent comments it makes about debt sustainability, but read it for yourselves – it would be well worth some time!
Bottom Line: I think markets just got a whole lot less stable. This Friday’s Jobs Number takes on a whole new significance. Hard Hats to the ready.
Five Things to Read This Morning
Investment Week Has the US$ peaked? Mike Hollings
FT The CoCo Pops Lawsuit revisited. (Hedge fund manager thinks CS AT1s might be worth something.)
Out of time, back to markets and the day job
Strategist, SHARD CAPITAL