Blain’s Morning Porridge – March 2nd 2021: Lochaber No More
“Take a look up the railtrack from Miami to Canada”
This morning: The Bond Market is a bully, Chinese Regulator sees it clearly, and how might the Greensill crash trigger a political moment in the UK…
Everyone thinks current market volatility is due to the bond market acting like a bully. When it lashes out the market sells off in fright. Volatility is elevated and everyone is flustered about bursting bubbles. Bond market yields rise a little, everyone screams about relative values and rising inflationary threats, and the stock markets stumbles. Then yields fall, and it’s another day of record rises in stock markets and speculative bubbles from Bitcoin to whatever bounce back higher.
This is market performance that would be familiar to any grizzled trading veteran since trade began. It’s like watching a bunch of kids playing “Who’s afraid of Mr Wolf”, enjoying themselves enormously, but absolutely terrified the wolf will suddenly turn and gobble them up. The point of the game is … the Wolf always attacks.
This kind of nervous behaviour is exactly what happens at the top of a market cycle. The next move might still be higher – on the basis of a strong Covid recovery with few inflationary signals… Or it might be accompanied by popping bubbles and mean reversion in prices. I am not a chartist, but plenty who are think the signals point lower.
As always… if you are watching the up and down of fully priced markets, you are watching the wrong thing. This is the time to bat clever – not try to second guess when the bubbles pop. There is definitely fundamental value out there – but there are never free lunches. I would suggest this article about why Warren Buffet won’t take the Reddit bait, is well worth thinking about.
I’m more impressed with the Chinese banking regulator warning about bubbles in global financial markets, and particularly the Chinese property sector. Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, and Party Secretary of the Central Bank, said he… is “very worried”, commenting sagely about how US and European market bubbles could burst under the reality of the weak economies and bubblicious markets – they will face corrections “sooner or later”.
It’s an interesting moment when the market starts to pay more attention to what a Chinese regulator is saying rather than listening to yet more “whatever it takes” nonsense from the ECB, or promises of more juice from the Fed. Something has changed.
I suspect the Chinese are more on top of the current market than we are. The same Bloomberg article notes: “China’s top financial regulator also weighed in on the fintech sector, saying platforms that offer banking services must comply with the same capital requirements as traditional lenders to curb risks.” That’s a clear reference to the decision to rein back the Ant IPO – and warning about how the regulator will use traditional regulatory tools to fine tune everything from fintech to real estate to curb bubbles.
Which makes me wonder how the Chinese would respond to the news about Greensill Capital, Sanjeev Gupta and his GFC Alliance empire this morning…
Greensill – Political Questions to be asked…
You can get the full Greensill story in the FT this morning. The collapse of the supply-chain finance firm will come as little to surprise to anyone who has looked at their deals over the past few years. When CSFB pulled its financing Greensill’s lines on the back of “uncertainties with respect to their accurate valuations”, it was clear Greensill’s trick of financing the Gupta’s empire was busted.
Greensill Capital, a new lender that got backing from Softbank, is a fascinating tale. Greensill’s trick was to use supply-chain finance, receivables, and factoring to create very complex investment instruments that looked uber-secure and boasted high returns. I know of at least two major UK institutions that became heavily involved in financing Greensill’s deals via US investment banks. One of these investors, GAM, effectively imploded when the complexity and doubts on the Greensill loans were revealed.
Much of what Greensill financed was linked to Gupta’s GFC Alliance – which is a many facetted and impenetrable network of related companies all owned by the Gupta family, including SIMEC in Singapore. I first saw the Greensill/Gupta deals a couple of years ago when a fund manager that had funded some of the Greensill deals asked me to take a look with a view to selling his large positions in them – the deals were truly extraordinary.
As I examined the docs on a number of deals, including a hydro/aluminium smelter in Scotland that had remarkably obtained a Scottish guarantee, I grew increasingly concerned. There were also aircraft ultimately owned by Russian shell companies. I wondered how anyone had ever financed them, and came to the conclusion the promised returns had trumped proper due diligence. The reality is any fund manager will light up if you show them index stomping returns.
The reality is any financing deal should boil down to simple facts. Is there going to be income to repay the debt, and are the assets secured. The Greensill deals were impenetrable in that regard, with assets apparently charged and pledged all across the complex Gupta/Simec family businesses. The same questions about security were being asked internally at the asset manager – GAM ultimately imploded on the back of deals originated by Greensill.
Yet Greensill came up smelling of roses – perhaps having former UK prime minister David Cameron on board as an advisor helped? Now it’s finally crashed after Credit Suisse froze over $10 bln of funds linked to Greensill’s exposure to Gupta’s businesses. The German regulator has expressed major concerns about Greensill’s German bank’s Gupta exposures.
Moreover, the British Business Bank has now stripped Greensill of government guarantees related to massive loans made to Gupta businesses under the Coronavirus Large Business Interruption Loan Scheme (CLBILS). A few months ago I commented that it was extraordinary how a Gupta company with a tiny number of UK based employees had secured hundreds of millions in CLBILS financing.
I suspect the Greensill blowup is going to open a whole oil-drum full of political worms. I’m under no illusions about how the Gupta’s financed their firm – no sane investor would have gone near them with a 10 mile long bargepole. Yet, politically connected Greensill grew a whole financing business on the back of it…
I’m also intrigued by the Scottish connection – at one stage I was assured by Greensill executives there would be a second Scottish Government Guarantee on the Aluminium smelter in Kinlochleven once a new wheel making business was established. The original deal was financed on the back of Scottish government guarantees on the back of payments from the Gupta owned smelter for power from the Gupta owned Hydro scheme. Does that strike you as slightly suspect?
The story of Aluminium smelters is famous in Scotland as a tale of industrial decay: “Lochaber No More” as the Proclaimers sang.
The Gupta’s bought the Kinlochleven hydro and smelters in 2016, using £300mm plus of Greensill funding and a 25 year Scottish Government guarantee. It promised of thousands of jobs from a wheel factory it promised to build. Gupta sold it in November 2020 for £150mm. Few jobs have been created. There is no wheel factory.
If questions are going to be asked about political connections and how the Gupta’s and Greensill got away with CLBILS funding, it may also be worth asking what Scotland’s government knew – I was never ever able to trace down details of how the Scottish Government guarantees were determined.
I wonder if the local MP can help – just happens to be Ian Blackford, the leader of the SNP in Westminster.
Out of time and back to the day job
Bill Blain
Shard Capital