Blain’s Morning Porridge, 16th October 2018

Blain’s Morning Porridge – October 16th 2018

“And here’s one I made earlier, but please make sure you have an adult present to help with the sticky-backed plastic.”

There were a couple of moments I started to worry y’day. A slew of headlines chased across the screens about wobbly AIM and small business stock markets, IPO speculation being denied by a car maker (and after Aston Martin, hardly a surprise), and a run of bad news about small cap firms. And then its Sears in the US filing for bankruptcy. To cap it all I had a very unhopeful chat with a “chap in the know” about Brexity stuff. A sluff of depression hung over my head this morning… As a result, whatever the markets think, I was feeling very Risk-Off this morning.

But then my colleague Ron brought round a coffee from Manon (which includes a rather nice free chocolate Florentine…) and suddenly the world seems much better. So negative head off and lets find Reasons to be Cheerful.. Part 3.

In the headlights this morning: 

Saudi Arabia: It wasn’t me. It was someone else who, not under my instructions, chopped someone I didn’t like into very small pieces. Messy, but not me at all. 

Two possible outcomes: i) denying there is a problem dealing with MbS will not create long term regional stability but likely lead to an increasingly hostile Western relationship with SA and a geopolitical shift to Russia, or ii) an internal coup orchestrated by Royal Family rivals sees MbS relegated to a minor role. Number of market players watching for right moment to step into cheap Saudi bonds and market.

Italy and Europe: Last 10-years teaches us never to write off Europe. We might even look for upside in apparent disaster. The collision course plotted by the Italian budget is likely to further draw fault lines betwixt it and Europe. But that might be good thing – perversely making non-Italy Europe stronger (by which I mean more easily managed by Brussels). Next year’s challenges will include a hostile populist EU parliament, new immigration tensions in the East, plus recession in Club Med. Outlook for Yoorp? Same as.. same as..

Global Retail: Sears bankruptcy says it all about retail.. its more than just internet competition.

Brexit: that sound you hear is Brussels laughing…

Thought for the day: “It’s never ever as bad as you think it will be.. until its worse..”


I was up in Edinburgh over the weekend. Princess Street used to be the most “beautiful shopping boulevard” in Europe, but now it’s just a strip of the same old retail cack. Dirty, faded stores selling tat at knock down prices. At each end stand old fashioned department stores: Frazers (or Binns as I knew it) used to be a premier store, but it now being given a mercy killing. Jenners was once the Harrods of Scotland, but is now a sad decaying shadow of what it once was and will likely also close.

In the US, Sears is going into Administration. And Trump has it right again – saying Sears has been “mismanaged for years”. We’ve also seen cake shop Patisserie Valerie hit the skids as a result of accounting shenanigans. Again management failure as it expanded from 6 shops to 220 and the bosses took the eye off the proverbial ball. Very hard to make money.

It’s easy to blame high street failure on competition from the internet, high business rates, the lack of staff, or whatever.. but in each of the above cases management have failed. Sure, tastes are changing.. shopping centers in the UK and malls in the US are empty because management fail to keep up with retail tastes.. not just the internet. There are retail models that work. Where are the management to enforce change and make it happen?

What’s the most profitable retail space on the planet? Not withstanding their current allergy travails, Pret’s branch in Terminal 5 Heathrow, takes the biscuit. (Sorry.. sells us the biscuit!)

UK property market… 

If I was to say Germany’s leading bank I am sure most folk would understand to which entity I referred. One of their top analysts wrote back in September a very interesting comment about UK property:

“UK house prices (longest asset price series we have) took 649 years for nominal prices to rise 887% up until 1939 (0.4% annualised). However in the last 79 years, prices have risen 41,363% (8% annualised). As the real adjusted series shows, this is not simply an inflation story.”

Wow.. On one hand, property has been a great investment. But what if the UK property market was to catch a major cold? That’s End of the World stuff. That really would put the kybosh on everything. But of course UK property can’t tumble. Can it? The sanctity of UK house prices is an electoral promise to home owners – a holy pact with voters whose parents’ house is their mid-life windfall and their own house a pension piggy bank that’s going to see them through retirement. If that dream was to shatter… then heaven help us?

What would happen if UK house prices were to correct to levels where the bulk of UK workers (especially young people) could afford to buy? Realistically, that will mean at least a 75% crash in London. If the masses are rioting in China because of falling house prices, think how the good people of Wimbledon might react if they lost 75% of their capital overnight! (It also asks a question about just how different UK democracy and China’s pol are in terms of the political compact that underlies both..)

What would trigger such a property collapse? The dominos of Tower Blocks I can see from the office window remaining unsold? An absence of foreign buyers? A technological revolution in house provision?

I doubt there will ever be an absence of foreign money. There are – no matter how you play this – only two great Cities on this planet. New York is one, and London is the other. Some say Tokyo, Singapore or HK also matter. Not convinced – yet. Other conurbations may be wonderful, beautiful, etc, but they are mere also-rans when it comes to London. At least, that is true today. For it to remain true tomorrow – is another matter.

Then there is the shift from generation X home owners to millennial renters. I know from my own spawn they want to own, but are happy enough to rent. Where it would get really difficult – and this stage is approaching – is when young professionals simply can’t afford to rent. Is that the real cap on property markets?

There is enough anecdotal evidence, ie colleagues who can’t sell, to suggest problems are coming, but I suspect any correction in the medium term in UK property will be opportunity.. folk will step in and buy. But when I read of major UK firms divesting their property portfolios… it worth taking note.

And when UK property slides, confidence collapses.. dragging stocks down with it..

On that happy note, back to day job!

Bill Blain