Blain’s Mid-Morning Porridge – September 16th 2019
“My country can never again afford the luxury of another Montgomery success…”
In the headlines this morning: https://morningporridge.com/stuff-im-watching
Luxembourg? Where? Fetch the Map!
Just over 75 years ago the Allies – largely British, Canadian and US troops, destroyed the German armies in Normandy, broke out and liberated Paris, Brussels and Luxembourg. (The sole French division, lately arrived from the UK and equipped by the American’s, got to lead the parade down the Champs Elysees.)
Yesterday, Luxembourg’s premier’s calculated insults towards the UK at a loaded one-sided press conference were extraordinary. I doubt he helped win Europe any friends from here in Blighty, but at least he said out loud what Europe thinks of us today. For the benefit of Xavier Bettel et al, and his limited understanding of parliamentary democracy: the deal Theresa May “negotiated” from Europe was rejected by Parliament, which is why the UK is asking for something different.
Are we bothered about Luxembourg?
Luxembourg has been in the news before, back in the 17th Century I think. Check out this video to understand its significance re the Treaty of Westphalia.
The news this morning is all about a market braced for the next stage of the current oil-shock. I read taking out the Saudi installations was the largest single day drop in oil production ever – no wonder markets are nervous. It’s how the stand-off between Iran vs Saudi/US plays out that matters next. Normally, we’d be looking to hear how the US president justifies a retaliatory strike– this time, we’re waiting for what Trump dithers on.
Back in the real world… Last week’s ECB meeting continues to reverberate around markets – raising very pertinent questions about what the US Fed faces this week. Commentators are predicting all kinds of negatives from the ECB’s renewed QE and bond purchases, not just from the likely on-going damage to Europe’s already weakened Banking sector from continuing the same NIRP (Negative Interest Rates) policies. Draghi’s call for fiscal stimulus has also been widely criticised. But if monetary policy ain’t working – what’s the alternative to trying something different?
The doomsters say QE infinity just prolong crisis for Europe, making the already ailing banking system weaker as negative rates destroy profitability and eat away capital. Since QE has had such limited effects on the real economy – driving inflation in financial assets and rising income inequality instead – why continue? They further fear a fiscal orgy of bond issuance will leave European banks and the ECB gorging on European sovereign bonds which sets themselves up for future failure when credit concerns inevitably rise, triggering downgrades and are followed by defaults.
The usual defence is: “this time its different.” Sure, it is. Europe’s central bank already holds much of the debt and has the heft (if not the mandate) to effectively bail any nation. They could, conceivably, simply cancel the debt they hold – the money is out there in the economy (actually in the pockets of the banks and investors that coat-tailed their bond buying.)
Fiscal policy – or Keynesian mumbo-jumbo as one reader described it – is fundamentally dangerous. Leveraging up on debt when rates are artificially low, still leaves nations (and companies) indebted. And governments have a horrible record spending money – rather than critical infrastructure and social infrastructure, how much will simply pay off bloated state pensions? The doomsters see a massive supply side distortion across Europe as the public sector squanders money and inevitable collapse in confidence in the Euro. They argue govt spending seldom works, always end up in wrong places while hefty fiscal spending does not “pump-prime” economies, but simply crowds out private markets.
Sure… both arguments are based on historical reality – but there is little choice for Europe but to try something new.
What about the US? The economy is challenged by recession, politics and trade war. It is not broken. Banking has been challenged, but is thriving. The US needs infrastructure spending. Addressing the strong dollar would have as more economic effect than a pointless small cut in rates designed to fluff the President’s ego and electoral prospects. If the Fed panders to White House chaos, then the implications for markets are long-term bad. Normalisation looks a better call, but so do the prospects for rebuilding the nation through infrastructure spending – which might also stem the dollar. Dangerous game… but maybe worth a spin?
Meanwhile… as expected WeWork has postponed its IPO, triggering a whole series of what next questions. How will its fund its cash burn when it was dependent on the IPO to unlock the next $6 bln bank facility? How will the company continue its growth trajectory? As start-ups and other potential customers read the headlines, how many will look elsewhere for office space? (There’s a trade idea – look at Regis!)
However, while WeWork turns out not to be a Unicorn but just another donkey with a toilet roll glued to its forehead, the real loser might be Softbank and its investors. Maybe more on Softbank tomorrow, but I can’t but wonder at Saudi Arabia investing tens of billions into a fund now worth mere millions. If my suspicions about Softbank are correct, and its worth a fraction of what its invested, then Saudi will have lost nearly as much as it spends on defence – which as the weekend demonstrated, hasn’t proved money well spent either.
Today marks the 75thanniversary of the Battle of Arnhem – the launch of Operation Market Garden, known as the “Bridge too Far”. The plan was to charge a British Armoured Corps up a narrow road across a succession of Rhine bridges seized by a carpet of Allied airborne troops (US, British and Poles) to strike into the German industrial heartlands. It failed. The Germans rallied and the British Paratroopers were forced to retreat. It’s become a great “what-if” argument among military historians: What if it had been better planned and coordinated? What if they’d landed closer and grabbed each bridge by coup-de-main? What if the radios had worked? What if they weather had been kinder? What if the two panzer divisions had been refitting elsewhere? What if they’d listened to the Dutch…? what if.. what if..
It was an extraordinary effort to exploit opportunity – to brush aside weak, demoralised and unbalanced German forces reeling after utter defeat in Normandy just a month before. It was an incredible effort. It was also a limited risk – by that stage of the war the Allied economies were on a full war footing meaning the allied logistics chains were unbeatable, while Germany was in a state of near economic exhaustion and collapse.
The really interesting question is to consider what would we remember if Market Garden had succeeded? I suspect the battle would now be vaguely recalled as part of the 1939-44 war. Sometimes gallant failure beats success… A lesson to remember.
Out of time and back to the day job..