Blain’s Morning Porridge (1) May Day 2020: Boeing – Marx Wins

Blain’s Morning Porridge – May Day 2020

“I fly because it releases my mind from the tyranny of petty things.”

There are going to be two porridge this morning… This is the ANGRY one.

Later I am going to post something on Sovereign Debt.. I thought I ought to separate them.. you will understand as you read on.

May 1st is the day we associate with the Workers of the World. Originally is was the Spring Festival: Maypole dancing and new life springing from hedgerow and field. Karl Marx and Communism tried to rebrand it as a Workers’ Holiday. That might actually be apt: how many of us were out on our balconies or streets last night clapping Our NHS (The UK’s Health Service), thanking the key workers and the services keeping us safe through this pandemic?

I’m writing two porridges this morning because I am deeply uneasy about what’s happening in financial markets. The Coronavirus has completely turned the global economy on its head. It will create the most profound changes to the way we live and our future prospects – we are all beginning to realise that. There is not going to be a V-Shaped recovery. Many lives will be shattered and ruined in its wake.

Yes, what I saw yesterday confirms two terrible truth we’ve long denied:

1) The system was already rotten to its very core before Coronavirus triggered the coming depression. This was coming and is overdue.

2) Those responsible for that rotten core will likely walk away richer, while the poor working men and women that struggle, scrimp and suffer spending their lives working for them will inevitably get poorer.

What has made me so angry?


Boeing has launched an extremely successful multi-tranche $25 billion bond deal. The issue solves all its immediate funding needs. It enables the company to walk away from difficult bailout discussions. It claims its access to market capital demonstrates it’s soundness – which is utter bollchocks – and that it doesn’t need a government rescue. The issue of moral hazard for government is avoided. Boeing will survive – for time being – as is.

It’s a crock of s**t.

The bond deal was snapped up by investors. It does offer a small increase in yield if its downgraded to junk, and an 5.15% yield on the 10-year tranche. Buyers are unconcerned the company is haemorrhaging money, has been downgraded to the cusp of junk, faces massive lawsuits over the B-737 Max, has comprised on quality and safety, is laying staff off in droves, and is seeing orders cancelled around the globe.

Nope… Investors love it.

They wanted to buy – even though it looks to be priced very aggressively for a company with such obvious crisis emblazoned across it. The brutal reality is investors know Boeing is such a central part of the US Military-Industrial-Aerospace complex, with so many other contractors and jobs dependent upon it, that the US government has no choice but to backstop it. It’s the industrial equivalent of Too-Big-To-Fail.

The get-out-of-jail-card is there in plain sight – The Fed’s QE Infinity programme can buy as much toxic Boeing bonds as the market cares to lob at them. As we know from the Taper-Tantrum a few years back, bond holders have an infinite put back to the Fed. As long as it was investment grade back in March it qualifies for the Fed… No one cares about the economic reality facing the company.

It fills me with great sadness.

What happened to the concept of the free hand of markets ensuring the efficient allocation of capital to good companies? This deal screams MORAL HAZARD –yet the whole street has bought it.

So much for ESG and the importance of socially aware investment and good governance. The Street should hang our heads in shame….

Boeing illustrates everything that was once great but is now rotten about our Western economy:

It was once a good solid plane maker. It built the aircraft that allowed global airlines to develop, grow and innovate new routes and services. Regional travel, tourism and business travel all exploded in the wake of the Boeing aircraft that enabled it. The B-737 regional jet and the B-747 Jumbo really did make the world smaller and brought it to everyone’s door.

Then it bought McDonnell-Douglas. The rival smaller planemaker pulled off the coup of the century, buying Boeing with Boeing’s money as the joke went. Its executives took over. The brilliant Boeing engineers were ousted by McD cost accountants. Cost cutting trumped engineering every time. The company moved to Chicago – away from its Seattle roots.

The last decent plane Boeing made was the innovative, fuel-efficient, composite Dreamliner. It cost $25 bln plus to develop – and it will take decades to recoup the money through clever accounting. (It may never make a real profit.) The plan had then been to develop a successor for the venerable B-737 which airlines and the environmental lobby would have loved: a fuel efficient lightweight city-to-city hopper. It never happened.

Instead the C-Suite cut costs and saved money. Their market was secure, a duopoly with Airbus and 3-4 year order books, happy that airlines had little choice but keep buying whatever crud they offered.

As interest rates fell Boeing borrowed more and more from market, using it to buyback stock. The stock soared. Executives received enormous bonuses and stock option packages. Workers saw salary and conditions cut. Quality fell. The C-Suite decided not to invest in new aircraft development – they simply further extended the B-737, making the once slim thoroughbred of the skies into a fat, bloated unstable and unsafe lump of flying metal. 346 people paid the ultimate price for Boeing compromising safety.

Today Boeing has no aircraft on its books any airline really wants. Its new B-777x is years late and utterly pointless in this new environment. There have been very few new Dreamliner orders – the whole programme may have lost money. Across the globe airlines are retrenching. It could be years before air travel recovers.

Boeing is textbook corporate failure.

Yet because of the perception Governments will now intervene freely in “free markets”, it’s been able to snub a “strings-attached” government rescue, take market money, and is still backstopped.

This really is the end of Capitalism..  The rolling raucus sound you hear from the hills in North London is the sound of Karl Marx laughing his head off in Highgate Cemetery.

FT- Boeing taps bond market for $25 bn to weather cash drain

WSJ – Boeing Launches $25 Billion Bond Sales

I shall be back with a second helping of Morning Porridge later this morning..

Bill Blain

Shard Capital.