Blain’s Morning Porridge – May 11th 2020 – Bond Triggers Tumble

Blain’s Morning Porridge – May 11th2020

“When this baby hits 88 miles per hour, you’re going to see some serious…. “

After last night’s Boris announcement on not reopening the economy, it clearly doesn’t need any further explanation.. (US Readers – complex sarcasm alert.)

Over the course of the lockdown, I’ve been brushing up on Quantum Entanglement Theory and almost accidently I’ve created a time machine. I’m not quite sure how it works – so I reckon that qualifies me a job in Whitehall – but I was able to download The Morning Porridge from May 2021….. 


Blain’s Morning Porridge – May 2021

“Sell in May – oh don’t bother – you are already away…” 

It’s just over a year since 20mm Americans lost their jobs in a single month and United Airline’s failed $2 bln bond issue in the first week of May 2020 became the unstable pebble that triggered the most devasting landslide in financial market history.

All around the globe, bond investors woke up to their doubts on just how much government QE programmes, miniscule yields, and the value of their collateral of unproductive obsolete economic assets could be. Equity holders caught the whiff of panic – figuring out rising P/E’s in a crashing global economy meant nothing – even if central banks were promising to intervene. Sovereign debt buyers went on immediate strike, citing concerns on debasement, inflation, and the implausible promises being made.

The result was the most precipitious tumble in history – everyone tried to exit the markets and discovered the truth: “there are many ways to buy, but only one exit marked sell.” 

Although the Sell in May and Go Away crash was relatively short-lived, it spelled the effective end of Market driven capitalism as Global Central Banks stepped into manage key markets. That’s when Financial Asset Markets stopped, and Blackrock and the others took over. To be fair.. they’ve done a pretty good job at preserving notional stability under the notional oversight of the Fed, The BoE and the fracturing ECB.

Bond markets have re-opened, and state mandated savings and massive tax hikes ensure there is plenty of real money behind them. Fears are easing… but will free markets and the invisible hand ever return? People are saying we needed a financial market reset – perhaps that was it. There is talk of privatisation of the state equity portfolios. (The WSJ has a scoop this morning: Toyota has been inquiring about buying Tesla from Washington’s portfolio, and there were rumours they’ll go all the way to $18 a share!)

Of course, C-19 was the catalyst. Nearly 18 months since the first cases, it still dominates life. Although it never proved as immediately deadly as feared and hospitals coped, its proved impossible to tie down. We now know better testing in the early days would have given us the data to have mitigated lockdowns, and simple sampling random of populations right from the start to understand how deeply entrenched it had quickly become would have massively modified our approach.

Flattening the curve lengthened C-19’s duration, and some angry epidemiologists say that gave it the opportunity to explode as it swiftly mutates into many multiple forms. Like yearly flue, it remains one step ahead of the vaccinologists. There is limited immunity, and intervention and treatment innovations are only just ahead of the lasting organ and neurological it’s tragically causing in so many patients. The cost of care is a major drag on health programmes.

Through 2020 swift actions of governments and central banks around the globe to pump wages and loans into shuttered companies avoided utter economic destruction, but the picture out there remains dystopian. Mass unemployment caused by business retrenchment is the norm everywhere. The populations of many countries face an increasingly difficult search for anything other than basic food and water.

Although the crash was sharp and short, it was followed by what felt like a whole series of destabilising demand and supply shocks as the extent of the economic damage became evident. It felt like we were under economic siege even as the 2020 lockdowns were eased. There was nothing remotely like a v-shaped recovery. Some say we still have lower to go after global GDP crashed 8% in 2020. It will barely recover this year.

Broken supply chains have proved stubbornly resistant to repair and replacement – many just in time manufacturers across Europe and North America are still struggling to match previous production levels, while profit margins have been slashed. Few functioning companies are paying dividends. Earnings seldom surprise on the downside. Aviation remains grounded. Gatwick looks likely to remain an asylum centre for years.

On the back of soaring unemployment in 2020 and whole sectors of the workforce losing government furloughed status, consumer confidence remains chronically weak, triggering massive ongoing demand shock ripples across the economy. More than 2/3 of British workers expect their take-home pay to fall again this year.

Inflation has proved selective. The cost of new phones, computers and other tech has gone through the roof. We’re eating healthy, but the choices in supermarkets are limited. £20 for a punnet of strawberries puts them out of reach of most. But, the cost of staples have remained low – there are many delightful and nutritious ways to serve potatoes. Fortunately Europe and the EU were quickly able to open borders to pickers. Food shortages in the US remain a problem with states accusing each other of hoarding.

Central Banks are terrified that a recovery in demand will immediately trigger runaway inflation. We suspect the Bank is managing unemployment and requesting ever higher taxes to stifle demand and hold inflation at bay while keeping interest rates remain low. If rates rise now, we could suffer a further round of corporate defaults and bankruptcies and markets would absolutely fracture.

It’s even worse in the US where low rates and dollar weakness is failing to boost the economy, while its clearly losing the trade war with the resurgent China. The standoff between W-D.C. and California on the West-Coast’s demands for immediate re-engagement has eased slightly – but the solidity of the union was tested.

Business sentiment remains weak around the globe as the resource wars in Africa trigger new waves of refugees. The escalating tension in Asia following China’s land and sea grabs, Trump’s trade embargo and China sanctions have ratcheted up protectionism.

Negotiations with Europe on Brexit are ongoing, but with a very different tone as Germany and the North increasingly turn to the UK to help moderate the ongoing Euro debt crisis. Ireland has wisely become less a critic, and more a support. Aside from financing Europe, global financing has been decimated. Lower wages and the legal requirement to put money in govt run pension schemes has killed retail investment. The Chinese nationalisation of the Hong Kong Banks has left the UK high street further denuded, and further killed expectations of dividends paying for retirement.

After Trump’s overdose on a Chloro-bleach-quinine cocktail, Pence’s tenure as President was the shortest on record. President Cuomo is trying to reopen global trade, but the Chinese have made quite clear they will never trust the US again. Their threat to dump US Treasuries threatens corporate collapse if rates rise, and massive inflation if they don’t!

What’s the good news?

We haven’t had the social collapse many began to fear during the summer of 2020. The re-birth of Hippy Communes around Europe and America as many young people gave up looking for work and looked for life instead has turned into one of the most positive factors. I even recognise the music!

DeHavilland-Swopwith’s new airliner, The Comet II, has passed all its flight and passenger certifications. The UK’s new national plane maker, which recently acquired Airbus in return for a Euro 20 bln loan to France, has an order book of over 5000 (many of them from the abandoned B-737 MAX programme) – and looks certain to sell more following Boeing’s collapse last October.

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

Bill Blain

May 2021


Of course I am sure you all understand that to act on any of the above would immediately breach the time-line rules causing a fracturs into multiple alternative realities… or perhaps we are in one already…

What your need to read today:

United Airlines:

BBerg – United Air Scraps $2.25 Billion Bond Deal After Terms Disappoint

BBerg – Tesla Sues Over Shutdown as Musk Threatens California Exit

FT – WeWork’s woes cause mortgage-backed bonds to tumble

WSJ – US to Accuse China of Attempts to Hack Coronavirus Research

WSJ – Corporate Debt, Distress and More Borrowing

And for Alternative Asset buyers a great article from my Horse Trainer chum George Baker: The Trials and Tribulations of Owning Horses . Its Summer edition will be featuring more lookback from 2021 stories. Will post the link when it is published!

Out of time, and back to the day job!

Bill Blain

Shard Capital