Blain’s Morning Porridge – 18 Feb 2020 Enlightenment and Positive

Blain’s Morning Porridge – 18th February 2020

“Someone’s got it in for me, they’re planting stories in the press..”

I am going to be relentlessly upbeat this morning. I am going to write lots of positive things. One of my very good friends, an old market colleague, wrote to me yesterday and said reading the Morning Porridge was getting a bit like reading the Daily Mail – frightening and unsettling. It is so muddling his fragile state, he’s thinking about retiring to his Garden Shed and whittling spoons. (And after the HSBC results this morning and 35,000 job cuts – well maybe that’s coming his way anyway… ouch!)

You will need to read all the way to the bottom to understand the connection between positivity and the home of Adam Smith in this morning’s photo – The Edinburgh Enlightment in the 1780s spurred the greatest boost ever. Can it happen again?

Of course, there are some minor market niggles to worry about before I turn Uber-Positive.

Apple warned that iPhone sales will be down because of the supply chain disruptions has spooked markets. Big Deal! Get over it. It shouldn’t impact the price much. The fact the Coronavirus leaves Foxconn straining to meet production quotas simply delays delivery of new bright shiny aspirational smart-phones. Demand for iPhones isn’t lost – its just pushed back a bit, and might even be a positive (there.. I’ve just used “positive” in the Porridge.. might be first time this year). If consumers delay replacing their phones with the current model and wait for the next, more expensive, iteration of the phone – that’s a win for Apple.

(To be fair.. not every company has the cash mountain Apple has, and therefore can’t weather a virus storm as long as Apple might.. but, let’s not spoil the positive vibes!)

This is what I was talking to clients about yesterday – we were discussing the likelihood of global stocks effectively flat-lining through Spring and into Summer before the economic downturn effects of Covid19 are fully understood, shrugged off, and the growth path is renewed. I suggested the trick will be to be selective now – discriminate between stocks that will suffer permanent lost business; like airlines, cruise-ships, commodities and oil, verus those where it’s simply a matter of delay – which could even include names like autos. Layer on top of that some balance sheet resilience test to withstand a 6 month shock. Effectively the Coronavirus is not the end of the world.. its just a destabilising red light delay.

I am however, struggling to put much positivity on an article I read in the FT about “Yield hunt turns Greek and Italian debt into “bunds on steroids.” Steady. We’ve talked about this before. Rule 3 in Blain’s Bond Market Mantras is that: “The Market Had No Memory”. The article describes how all European sovereign bond spreads have converged – which has been great for holders of Greek debt who have seen the yield on Hellas bonds tumble from 16% plus 8-years ago to less than 1% today. Italian and Greek bonds are described by an analyst like bunds: “safe bonds but with a bit more yield.”


How quickly we forget these days when Italy and Greece looked likely to bust and exit the Euro. Back then we came to understand that far from the Euro putting all European sovereign credits on an equal footing with Germany… they simply exist as variable credits within the Euro. Sure, it helps the ECB will do “whateva it takes” to ensure the whole wobbly Euro construct doesn’t fold, which basically means filling its boots with dodgy European Sov debt. Let’s not forget the ECB is currently hosing the Euro bond market with Euro 20 bln per month of QE bond purchases – and look how effective that is proving in stimulating the European economy. (US Readers – profound sarcasm alert laced with ennui.)

The positive message? Er.. don’t be fooled that European bonds are compressing. Be wise. Smile politely when the 28 year-old head of Sovereign Debt trading at some European investment bank tells you what a great investment European peripheral sovereign debt is. And walk away.

Of course, you could always buy bonds issued by a Country that still actually owns its own money printing press. (That’s the real problem with Euro Sovereign debt – all of them are basically versions of Argentina: borrowing in someone else’s currency! And that someone is an unhelpful Germany.) The benefit of buying Treasuries, JCB and Gilts is the issuer can always repay you – turning on the money presses might trigger some FX and inflation issues.. but hey-ho.. factor that into your buy-analysis.

I’m thinking about Gilts. Why would I buy them?

Following the new government, I had been feeling relatively positive about the potential for exponential UK growth. There was a definite can-do feel to the underlying mood. The political uncertainty that characterised the previous 3 years of shilly-shallying was over, replaced by a strong and empowered government, apparently all signed on to a single ambition: Get Brexit Done and move the Country forward.Sure, the problems agreeing a trade deal look challenging… but what could possibly go wrong?

How quickly we are disabused of our hopes and dreams…

Last week’s Cabinet reshuffle suggest the UK looks headed back for uncertainty as the Tories resume war with their worst enemies – themselves. That’s a profound disappointment. Creative tension between Treasury and the Spending Departments is a good thing – except when you know better. Like Dominic obviously does.

There is no doubt Dominic Cummings is right about many things. I really do want him to shake the country up from top to bottom. The UK suffers from excessive and entrenched bureaucracies and a sacred cow mentality towards sorting them.

· To even suggest reforming the NHS is political suicide. Yet we need to find a way to sort out its bloated and inefficient management, its 1950’s mentality and unaffordable pension liabilities in order to improve patient outcomes, properly reward and incentivise staff, and create a strong, functional empowered Heath service incorporating the latest in AI tools to manage modern diseases of old age, obesity and life-quality.

· Likewise, addressing the BBC is a must. It was once the most widely admired public service broadcaster. Today it is an empowered liberal elite bureaucracy that’s been captured by the forces of Wokery. Its not even making great TV. Its another area where dramatic action would not go amiss.

· And then there are the railways – where the government neglects the mess they created through privatisation. It is causing misery for millions of passengers. Apparently 60% of delays are caused by track problems – which is the responsibility of Network Rail. But there is not a single official within the Department of Transport whose job it is to scream at the track operator to fix it. Instead government thinks the Rail Companies should discipline Notwork Rail – and they would rather use them as an excuse for their passenger ripoff games.

How I would love for Dominic to apply his planet sized brain to fixing the railways. I would even help him..

But, I promised you positivity this morning. So let me talk about how the UK might be, by talking about the past…

Panmure House

Ten days ago I was up in Edinburgh for a series of University meetings, and I went to visit Adam Smith’s home just off the Royal Mile; Panmure House.

Adam Smith is rightly regarded as the father of Modern Economics. He sat at the epicentre of the Edinburgh Enlightenment – a remarkable period from 1750 onwards that saw Scotland’s capital granted the title “the Athens of the North”, becoming the hub of an all-encompassing artistic, inventive and literary revolution that dwarfs the effects Silicon Valley has had in recent years.

The greatest minds of the age came together in Edinburgh, driving a sudden and dramatic evolution in Economics, Philosophy, Engineering, Maths, Medicine, Geology, the Sciences, and Medicine. Their insights and discoveries changed society, triggering the industrial age, and establishing the UK at the centre of the modern merchantile global economy. The roots of today’s global society and financial industry germinated on Edinburgh’s Royal Mile.

It all happened within a mile of Smith’s residence on Edinburgh’s Cannongate – Panmure House. I was given the full guided tour of the restored building from Dr Caroline Howitt, the project’s Programme Director.

She showed me a first edition of The Wealth of Nations on display in the entrance hall, a text that was honed into its final editions by Smith in the library a floor above. Today, Smith is best known for coining the “Invisible Hand” that guides markets, but he also used the book to trigger thinking about the division of labour, the means of production, trade and competitive advantage , the importance of free enterprise, and was the first to identify modern capitalism, entrepreneurship, speculation and risk, and the potential consequences of imperfect banking systems.

Smith’s other great work was The Theory of Moral Sentiments – identifying the nature of social psychology as the driver of economic activity. Self-interest and sympathy, prudence and empathy, justice and morality, lie at the centre of the work. Although Smith has now attracted something of a libertarian following, The Theory of Moral Sentiments is more grounded in the basic fairness that seems a core characteristic of all Scotsmen. Although Smith and Robert Burns apparently never met (although they corresponded with each other), we know Scotland’s great working man’s poet read Smith’s book.

12 years ago, the man who first introduced me to the dismal science, Economics Professor Keith Lumsden, spotted the opportunity for Heriot-Watt’s Business School to acquire the dilapidated Panmure House for restoration. It’s now complete. Dr Howitt and her team now run a number of outreach and educational initiatives from the House – all of which have relevance to modern finance. And, yes, they are still looking for sponsors and support. If you would like to learn more, let me know and I will put you in touch with Dr Howitt.

One idea we’re thinking about is doing the Morning Porridge Live from Panmure House for a week during the Festival Fringe in August. I’m thinking it will be a one hour morning show and webcast, perhaps with myself in period costume! I might just channel Adam Smith’s reaction to current financial events and how in line with his thinking they might be. I’m going to be looking for guests for the show – so if you fancy a day at the Fringe, then book your slot early.

Five things to Read Today

FT – Hedge Fund Renaissance built stake ahead of Tesla Share Surge

FT – Drama in corporate bonds could be closer than you think

WSJ – Jeff Bezos Pledges $10 billion To Tackle Climate Change

Bloomberg – Musk Calls Gates Underwhelming After Billionaire Buys a Porsche

Grauniad – Dominic Cumming Does His Master’s Bidding…

Out of time, and doing the day job while ferrying Ski-damaged wife to hospital appointments..

Bill Blain

Shard Capital