Blain’s Morning Porridge – May 19 2020 – Yoorp Kicks The Can

Blain’s Morning Porridge – May 19th 2020 – Yoorp kicks the can! 

“I don’t think I could stand another ten years of this fighting…”

Yesterday afternoon I set out to cure Coronavirus. I set up a new company, Splurgeldrug.Com, issuing our first press release about promising new drug trials, followed by another reporting how lab rats responded favourably to the first press release, and how confident of a vaccine in the near future we are. stock went to $600 by teatime, and I currently negotiating the leveraged acquisition of a drug major…

It’s that kind of market. Rumour and sigh abounds..

As a wiser heads than I have noted… most drugs take years to get to market, and less than 1% are ever approved. We still don’t have an effective vaccine for the constantly evolving and mutating annual flu. To bet the farm on a successful vaccine would seem reckless…

Let’s be honest.. if we get a successful vaccine it will help speed global recovery, but it won’t undo the brutal economic damage that’s already been done. A vaccine will simply flatten the depth of the recession – not reverse it, and certainly not magically convert Q2 Earnings into positive numbers…

Markets are not thriving because they expect a vaccine miracle. They are simply arbing governments and central banks. When Powell says he’s “not out of ammunition by a long-shot”, that’s a massive buy signal. Any positive news helps.. and as the central banks have got out backs, just ignore the bad stuff…

(Oh dear… I suspect this will end badly…)

Yoorp – The Decline of the West, part 5826

Thankfully, I have something more significant and real(ish) to write about this morning… Yet again, for all the wrong reasons, it’s time to buy European distressed European Sovereign bonds. Wait for the them to tighten. Sell, then wait for the next crisis.

First, I have to say how hilarious I find it that Bloomberg insists on calling yesterday’s BIG EUROPEAN DEAL a $546 bln rescue package. Apparently, their American readers won’t have a clue what Euro 500 bln means. (Confirmation that Yankee Cultural Imperialism doesn’t make them any smarter perhaps?)

Yesterday’s big moment was France and Germany announcing plans for a European Union Euro 500 bln Recovery Fund… Yawn… I struggled to contain my excitement… What is it?

· Yet another solution that isn’t!

· Yet again, we have the grand launch of more political mumbleswerve, cobbled together to extend the illusion Europe is a functional polity.

· Yet again, a fudge allows Merkel to look like Germany gives a fig for the crisis across the rest of Europe, while simultaneously allowing Macron to look like the statesman he imagines himself to be.

· Yet again, Europe remains a case of Eat, Sleep, Repeat…

All the above sound like bad things, but from a market perspective, they are good enough to put on your buying boots for peripheral European Sovereign Debt…

The latest Franco-German grand construction, announced with such Fanfare, is so embarrassingly trite the Europhile FT kept it off the front page and buried it in the international news section.

The proposal manages to neatly fly-tip the concepts of joint and several liability Eurobonds or Coronabonds. The fund, to be run by the EU – which has limited background of borrowing massive amounts – will borrow massive amounts to directly lend to stressed economies despite its dismal past lending record, failure to get its’ accounts signed off, and lack of agreement on a new post Brexit budget.

The whole thing screams…. FUDGE!

But this is Europe.. Fudge works… it comes in conveniently sized cans that are easily and repeatedly kicked down the road…

This can of fudge will allow Ms Merkel to grandstand to her electorate… telling them that backstopping an EU Euro 500 bln lending programme to struggling EU members is so obviously not the same as joint and several lending to struggling EU members. She will be able to tell German workers and savers that Euro 500 bln is a trifling matter compared to the importance of Germany remaining at the top part of Europe.. (It also conveniently glosses over the current ructions about the German constitutional court declaring itself superior to the European Court of Justice, but that’s a story for another day.)

What the agreement is…. is a commitment by France and Germany to allocate the European Union budget in the form of grants to the “worst-hit regions and sectors.” What Euro 500 bln of budget looks like – is a significant underspend. If the US is spending upwards of $3 trillion, then the years of austerity damage to Europe’s soft underbelly require a similar, if not greater amount.

The embattled new girl at the helm of the EU, Ursula von der Leyen, is a key figure behind the plan. She hasn’t been having an easy time of it in Brussels. She’s not an insider and she is a German. If the plan is unanimously approved, it will see the role of the EU elevated to effectively setting European industrial and regional policy as it distributes what amounts to a sticky-plaster aid fund.

Its bureaucracy cubed. The aim is to drive growth to countries devasted by the Coronavirus crisis. That requires money yesterday… not at some point in the future after all 27 member states have agreed the programme (which, incidentally, also requires them to approve the contentious post Brexit (no UK money) budget). (One could almost suspect the EU’s nomenklatura of bureaucrats have hatched up the whole thing to ensure their long-term security…?)

The last thing Europe needs is yet another round of EU infrastructure spending and motorways-to-nowhere proudly announcing they were paid for by the EU. Certain Italians will love it. Yet another EU grants package they can…. game and milk.

The very last way for Europe to recover from 10-years of misguided monetary policy and austerity budgets is through yet more centralised lending from Brussels. The best solution would be to magically undo the whole Euro construct, let countries run their own regional and industrial policy, and determine their own social polices within the single market of Europe. That would encourage nations to compete and optimise their economies within the single market. At some point – when nations were aligned – a common currency might even work. Instead, locking them into the Euro too early ensured European nations are increasingly beholden to Brussels.

European unity is no bad thing – but it’s how you arrive there that matters. The problem with the Euro is coercion – it traps and forces weaker members into increasingly onerous deals to remain members. Is there a workable solution for Europe? One that would allow Italy to restructure, reform and relaunch? Probably not.. which is why the next crisis is already coming just down the road (when are the next Italian elections?)

There are still risks with the Recovery Fund concept. It might not happen. Most commentators are looking at the Austrians or the Dutch throwing a spanner in the works. I’m wondering about the Italians themselves.. Why support a scheme that clearly demotes them to client state dependent on Brussels charity, and means Italy isn’t solving Italy’s problems itself, but has to beg the EU?

Whatever.. it has a long way to go, but today it’s a buy signal for Italian bonds.. (Just make sure you get short before the EU actually votes on it… )

Five Things to Read Today

BBerg – ECB’s Lagarde Says QE to Continue Despite German Court Ruling

Bberg – Eleven Hedge Fund Traders Scored Big During Worst of the Crisis

ZH – Majority on Wall Street Expects Stocks Lower in 3 Months, Braces for Second Virus Wave

WSJ – President Trump Says He is Taking Hydroxychloroquine as Preventative

Grauniad – Young workers most likely to have lost jobs during COVID 19 crisis

Finally, if you are looking for a good read on the not-the-train-home tonight, try The Property Chronical Summer Special!

Out of time, and back to the day job

Bill Blain

Shard Capital