Blain’s Morning Porridge – 19th Feb 2019 – Storm Clounds gather

Blain’s Morning Porridge  – 19th February  2019

“Any customer can have a car painted any colour they want, so long as it is black.”

In the headlines this morning:

Reasons to be cheerful….? Can’t really think of anything this morning. Just more snapshots on why we should remain nervous. Nervous is good. Happy would make us complacent.

First up are some very interesting headlines out the otherwise lacklustre HSBC full-year results. CEO John Flint said a number of thing about trade, China and global uncertainty, noting the bank’s lending in Asia has clearly slowed, reflecting not only trade uncertainty, but also real reduction in the rate of growth as he warned how much disruption tariff hikes will cause to global supply chains. China slowdown makes one wonder if Flint’s hackneyed “Pivot to Asia” makes him the man who bet on Red and it came out Black?

Next up are Global auto sales. China numbers y’day were Dismal! Down 18% year on year. If China is driving global auto demand… Oh oh.. we’re in trouble. 2018 saw sales decline for the first time in 20-years. A number of factors are conspiring to make it worse: ongoing trade tensions damaging consumer sentiment is now a long-term discouragement, the Chinese government has pulled subsidies and is pushing domestic, and the threat of tariffs is discouraging any efforts to turn it around by importers.

The effect on global producers is all-too visible. GM China sales are down 10% yoy. Ford has seen an even bigger decline in 2018. Even sales of VW – which the Chinese love – are down 3% in January. Jaguar Land Rover is on the cusp of melt-down as it’s took a £3 bln impairment, a substantial chunk of which is due to weak market conditions in China. Imagine how much better Global Car prospects will get when Trump opens up his second front and declares 25% tariffs on European car makers?

The Trump threat and Land Rover’s travails highlight there is more to the Auto crisis than just China. Everyone has probably read the articles about how 1 in 7 US auto-loans are in default. In Land Rover’s case, and visible in recent retrenchment by Nissan and others, is the uncertainty over Diesel – slain by regulatory fiat! Watch the car ads on TV for the next clue – last night I clocked the new Electric Audi Quattro ad – and upteen other electric car ads (can’t say I noted which brand was which..) Smell the coffee – the fact car companies are selling electric says it all…  As one of my colleagues just suggested – perhaps Jaguar should consider building cars people want to buy?

In terms of Micro detail, the corporate debt market is watching Jaguar Land Rover’s cash position with a morbid fascination – can it turn it around and avoid hitting its standby revolving loan facilities. (Sorry – can’t help out.. I decided to keep my current 3year old Range Rover on the basis nothing’s changed to justify financing a new one, and they wanted to hit me with 11% interest charges on the package! I’ve told them to call me back when its zero.) If Jag does draw down on the facility, it signals a company in severe cashflow crisis – and is likely to precipitate further declines on its bonds.

And last night we get the news Honda is closing its Swindon factory – supposedly on global demand issues. I was watching Brekdrek this morning where a very interesting expert pointed out how Honda’s just-in-time production means it’s only got a couple of hours production parts at any time. If Brexit were to slow deliveries by just a day, then Swindon goes from the state of the art production centre to closed in the time it takes me to write the porridge.

Just where are we on Brexit? Who knows? 317 Tory MPs. 7 less Labour MPs. Over 600 different solutions in Parliament and no one agreeing anything. Less than six weeks till Brexit. Joy. The black hole of the inevitable No Deal is sucking us all in. I suspect it ends in a game of poker between May and the Irish chap – which one of them is going to take the blame for a hard border. Who blinks first…

Cheer up.. might not happen.. but it probably will. (My money is actually still on a deal!)

Finally, I must share some comment from a reader who couldn’t believe my temerity in writing about Amazon, US politics and the Economy y’day. How dare I!

He accused me of missing the real issue – why was Donald Trump’s daughter, Ivanka Trump representing the US at the critical NATO Security Summit in Munich over the weekend? Why was Vice President Pense on different wavelength from former VP Joe Biden? My chum’s read on the Trump administration was fascinating – but not for the tender ears of the porridge readership! Basically, his read on current markets is Global Political leaderships are speechless and so shocked, traumatised by Trump, his antics and his “Posse” of ner’do’well appointees, that a breakdown and global trade crisis has become almost inevitable. Those of us who waste time writing about Trump strategy and likely positive scenarios are missing the brutal truth… When it collapses it will collapse BIG and market liquidity will evaporate! And provide massive opportunity!

On that happy thought, back to the day job…

Bill Blain

Shard Capital