Blain’s Morning Porridge – 20th Feb – Threat Board

Blain’s Morning Porridge  – 20th February  2019

“A February Super Snow Moon? Its warmer than a Scottish Summer out there…”

In the headlines this morning:

I note with some delight Bernie Sanders plans to stand for US President. One of my US chums sent me the story of the Half-a-Bernie sign propped up against a wall. Someone had cut it neatly in two and left the wooden handle affixed to the remaining half. Attached was a note: “Dear Bernie; you had a sign and I didn’t, so I took half. I’m sure you understand.”

I did feel something of a market judder y’day – just a moment where it felt like all the negativity was on the verge of swamping markets. Whether is the cumulative effect of US rate path expectations (Fed today), China Trade Wars, Trump vs Europe, (ECB tomorrow), Brexit, and all the rest.. or the UK mid-term holidays, the whole market feels thin and rudderless. At least Wal-Mart surprised to the upside! One of my top stock technical commentators is my old buddy Steve Previs of Mint who calls it “complacent.” That’s never a good thing. His charts are telling him to look for a “corrective C wave” but for now he’s patient as “FOMO” (Fear of Missing Out) continues to drive the current trend.

I am fortunate enough to work with some very bright folk here at Shard. Yesterday we were shooting the breeze on the current market uncertainties, threats and fears. We came to the conclusion we’ll know the moment we hit the Reefs of Crisis when we hear the crashing wail of market liquidity vanishing. What’s that sound – it’s the Macro Liquidity Storm! Coming to a market near you. Maybe Very Soon!

As always, we try to find positives in all the bad stuff. We found ourselves wondering why EM markets are higher when the Global Growth outlook looks to be slowing, uncertainty is rising, and the potential risk opportunities could be multiple. Why? Maybe things are only so bad because they are going to get better?

One of the places we started was Venezuela – basket case or what? What can possibly get better? Some say it’s a powder keg with a lit fuse sitting next to a truck full of av-gas. Well, my colleague Carlos Ramirez disagrees. And he probably knows better than most. He’s from the country! He told me: “What did anyone expect? Before Chavez died, he appointed an uneducated bus driver called Nicolas Maduro to run the country with the largest oil reserves in the world.” 

Carlos went on to explain that political failure is not exactly new in Venezuela – how populism has fuelled corruption, the occasional dictatorship, and state kleptocracy through the last 60 years. What makes the Chaves/Maduro era different and even more destructive has been the genocide of private industry in pursuit of their nonsense vision of Venezuelan/Latino 21st Century socialism.

Now we are caught in a stand-off. Over 50 countries recognise Juan Guaido, a virtually unknown lawmaker who’s assumed leadership of the National Assembly, as the interim president. The country desperately needs aid, but Maduro is unwilling to contemplate it as a direct criticism of his regime. The army supports him and is not going to stand aside – senior officers are as guilty as Maduro of drug-trafficking and corruption.

Venezuela is not a strong investment thesis. But, efforts to take Aid across the border with aid later this week will be critical. If they succeed, and the army melts away, then its game over for Maduro. We think there’s a high chance it could happen – perhaps “greased” with a political amnesty announcement.  With Venezuela likely to rejoin the human race, is it time to support the new regime and buy? The oil is still there. Government bonds should stand better in a restructuring, and an IMF bailout will be on the cards. Oil company PDVSA bonds are more complex – and not for the faint of heart! Give Carlos or I a shout for ideas!

The point is that Venezuela might be uninvestible today, but will be a screaming buy at some point in this Jam-Tomorrow cycle. (Before anyone calls – yes, we are aware Hedge funds are already in buying!)

We started wondering about all the other real threats…

China – how long can “The People’s Party” delay a trade-war resolution and survive the looming tech war? The recent data highlights the Chinese economy may be slowing faster than XI can maintain his grip – he’s weaker than ever before. (Raising one scenario threat of a long-drawn out period of uncertainty if he is marginalised/deposed and a power struggle follows. That could be very destabilising and disruptive for the Occidental economies desperate to sell the China!)

We reckon XI knows he’s out of time and has to settle – handing Trump a critical victory. Long-term the US-China tech-war is difficult to call. Trump is determined to garner payback for China IP theft, and its difficult to imagine the rest of Asia adopting Chinese tech systems if they lose the current trade war to the US. However, you can’t just undo years of China tech development. My techy contacts tell me Huawai’s boasts about the US’ inability to close them is partial bluff and bluster – it’s not as advanced or robust as it claims, plus the US is going to insist on wrecking it – which could prove another long-term friction point.

And don’t discount crisis elsewhere in Asia as Thailand struggles with the constitution, while India worries about Modi and its inability to monetise its demographics. And since we mention it – what about crisis elsewhere as South Africa continues down the pan, Nigeria seems set for self-immolation, and the Arab Spring has left North Africa looking hopeless from Yemen to the Atlantic. Last year saw the African refugee/economic migrant crisis ease a little – but rising tensions across Africa means it’s more likely to accelerate this year and give Europeans something more they can really disagree about…

Europe remains deeply problematical. Economic slowdown means an imperative for the ECB to re-launch QE(2), but we all know there are no statues of committees, 27 different national interests can’t agree anything quick, while Mario Draghi is looking forward to retirement and his next job (clue: anything that isn’t Europe.) France is in a mess. Northern Europe is dreading Brexit. (Ireland has good reason to panic if a wall goes up… “nae wan to blame but themselves”.) Spain is consumed internally. Italy is a complete mess. It’s a race between Poland and Hungary to do the wrong thing and do it worst. May EU elections are looming and are likely to result in a populist goulash of ungovernable demands. Germany is certainly not supplying leadership as it goes nowhere, the Trade surplus swells and Merkel dithers about walking away.

Darn.. I’m beginning to scare myself…

What’s the solution…? I’m thinking buy real assets and avoid distorted financial ones. I have a list.. I have a list. As for the liquidity storm… I can hear it buzzing in the wires…

Out of time and back to the day job..

Bill Blain

Shard Capital

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