Blain’s Morning Porridge – October 11th 2019
“The more that you read, the more things you’ll know, the more that you learn, the more places you’ll go”
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Book: The Fifth Horseman – How to Destroy the Global Economy, is on Amazon in Kindle or book format.
So much in the news to worry about this morning, but its Friday and the Sun will come out tomorrow! Actually.. it won’t because it’s going to rain – but I’m still going to go for a walk in the New Forest. And it will still be raining on Monday morning when no doubt the wrong sort of rain will be blamed for delaying my train back to London. How I look forward to Mondays… we get to worry about the headlines all over again…..
Today we can ponder the headlines with our usual sense of disbelief:
- What are the probabilities of a Brexit deal? (Clue – anything earlier than the last second of the last minute would be very Un-Boris. I am still hopeful and long sterling!)
- What will Trump and Chinese Vice-Premier Liu He talk about when the meet later today? Market anticipates a deal… (Clue – there is a whole list of topics to settle, but it’s unclear if Trump intends to address em.)
- Should webe concerned with the glut of new bond issuance? (Clue – yes!)
- Will you buy into the Aramco IPO valuation in light of the increasing political risk swirling around the desert kingdom and the Syria situation? (Clue – when the Crown Prince decides what that valuation is, probably not.)
My big short this morning would be We Work – it’s a clusterf*ck FUBAR with zero discernible future. Sorry to be harsh, but the firm is flolopping around like a mackerel in the bucket as it tries to replace the $6 bln financing they lost as a result of the pulled IPO. Wee is now rated CCC – and described by Fitch as “precarious”. I reckon they have to offer a coupon significantly above where its distressed bonds are trading (12.5%), which would just make already miserable refinancing numbers even more impossible to ever balance. The alternative is for Softbank to pile in the money – but Misayoshi Son isn’t as liquid as he likes to tell us he is.
Let’s assume Wee is effectively toast – the consequences for global property markets are significant, especially in office space in London and New York, where it’s the largest office occupier! Who steps in? Its another commoditised market, and a number of firms will be there. And it offers opportunity in terms of removing some of the froth from commercial real estate and allowing property lenders the opportunity to lend at more realistic levels. (There is more to CRE than just office space around Silicon Roundabout!)
Education Spending
But rather than dwell on the issues in the papers, lets talk about one of the strongest laws in the universe – the Power of Compound Interest. (Flashing lights and echoing reverb.) Compound Interest works both ways – which is very relevant this morning.
As I was getting ready to come into the office, I was distracted by a car-crash interview on the BBC’s Brek Drek with the UK’s Secretary of State for Education, some forgettable Tory, who demonstrated his knowledge of education with the caveat his wife was a teacher and that he “understands”. He promised investment. Well, he didn’t. He said the government will spend more – papering over the cracks in Teacher pensions and buildings. But education itself… that’s not going to change for the better.
That is a problem.
Education is possibly THE CRITICAL FACTOR likely to enhance any nation’s competitive advantage at this stage in economic cycle. The UK desperately needs better education. We are going through a massive new 4th industrial revolution with AI, Robotics, Nano-Tech, Virtual Reality and the rest likely to generate incredible opportunities for new jobs and services. To grab these opportunities we will need a superbly educated and motivated work force.
Instead…. Education is far down the priority list, and we value it so little we’ve actually weaponised Education to effectively trap our young people in indentured slavery via student loans for inadequate and useless degrees. The government actually boasts about the 50% plus of young people going to university – aka saddling themselves in killer debt. And that keeps them off the housing ladder – which means everyone gets poorer. (Yeah, that’s a lecture for another day..)
This where Compound Interest comes in.
For the past 10-years of austerity – the government has underspent on Education. Its underspent on lots of things; the common goods Government is supposed to run on our behalf – Defence, Policing, the Environment, Infrastructure and the NHS. The simple rule of compound interest means if you cut spending by 5% for 10-years, then after 10-years, the amount the government would have to spend is around 65% of the total budget just to get back to where they were!
To simply get government services back in line with 2009, the UK would need to spend around $220 bln extra in a single year on Defence, Education and the NHS. Even the Gilts office would struggle to magic up that amount of money. Education would need an extra £60 bln next year to get back to the levels of 2008. The latest spending round offers a £2.6 bln increase, some money to rebuild decaying schools, and a further £1.5 bln to cover teachers’ pensions. Tell me Mr Gavin Williamson – what kind of Education do we need and which is a bigger number: £4.1 bln or £60 bln?
Basically, it means government services are going to remain basic at best. (And then we have to focus on the second law of government spending – keeping it relevant: evolving spending to a changing nation. But that simply doesn’t happen – you can’t spend less under bureaucracy. No government is willing to commission a “root and branch” review of the NHS in case it is perceived to be an exercise to cut spending or privatise. As a result the NHS is the biggest consumer of government spending (after pensions) but is essentially unchanged since inception. Its internal bureaucrats measure their success in terms of what they administer, while the crying need to modernise and direct services to care of the elderly, modern diagnostics, etc is largely ignored. So nothing changes except the quantum of money available to keep doing the same thing gets smaller.
The bottom line is that Government Austerity might have made sense briefly in 2008, but its effectively destroyed our futures as much a climate change unless we find a way to reflate. I wish we could press the reset button.. does anyone know where it is?
Meanwhile…
Today’s Financial Ogre No 1 is Ken Fisher, billionaire money manager, who spoke off the cuff at a private invite-only event in San Francisco and said it as he sees it – describing markets with maybe too much allusion to the mechanics of procreation. “Absolutely Horrifying” screams offended of wherever, “disgusted” says another, and he’s called a misogynist says someone else. Terrible stuff, I am sure you will agree. 2 ways to think about this – as a “Pale, Male and Stale” ageing investment banker I’ve described a number of former colleagues as body parts. (I still do.)_ On the other hand – it’s really not acceptable any more. Fraid it just isn’t.
Out of time, back to the day-job.. and have a great weekend!
Bill Blain
Shard Capital
Things you probably should have read yesterday:
FT – ECB’s Draghi ignored in-house advice on decision to restart QE
WSJ – Greece, Once in Crisis, Joins Negative-Rates Club
Bberg – Edrogan Threatens Europe With New Wave of Refugees: Syria Update
WSJ – Signs Point to Increase in Corporate Bond Sales
ZH – Debt Market Suffering “Quiet Meltdown” As Billion In Loans Are Suddenly Crashing
Forbes – Billionaire Ken Fisher Blasted Online After Offensive Comments at Closed-Door Chat
The Asset – Something is seriously wrong in European Banking