Blain’s Morning Porridge – 20th May 2019 – What’s not to like?

Blain’s Morning Porridge  – May 20th 2019

“Nudge, nudge, nod’s as good as a wink to a blind bat.”

In the headlines this morning:

I must have missed the Indian railway company acquiring the South West Rail franchise. Fewer trains and pack more folk in! I started the week standing for an hour on a railway platform after all early trains to London were cancelled.  They crushed a number of trainloads onto one, broadcast a message across the tannoy wishing us a happy trip, before stopping in Basing-grad to pack on even more. Too crowded to breathe and it’s a long trip. I’m losing the will… In future Nicky and I are coming in late on Monday, and if there is a problem we will just go back home and come in much later. Inefficient, wasteful, but better than the nonsense this morning…

Later this week it’s the big European Elections – which will determine who gets the top EU jobs when Junker retires as President of the Commission, Tusk as President of the Council, and who as ECB chief. Aside from that it could be another risk off week.

One big negative driver should be the US factory spending data – which showed slower spending on factories, equipment and capital goods. The numbers analyse regulatory filings from 356 US companies. Same quarter last year capital spending rose over 20%, this year it’s only up 3%, highlighting companies fretting about global trade and future orders. It’s a strong sentiment indicator – and suggests US business planners are getting set for contraction. (On the other hand, much of the slide seems due to slowing tech spend – Apple spending in particular was down.)

No doubt Trump will be tweeting this is damning evidence that the Fed is late with a rate cut boost to the ailing US economy – despite the fact its fears of trade pullback holding back corporate spending..

How should the market play poor economic indicator..?

Obviously, a slowing US capital spending is great news for stocks! Buy, Buy, and Buy some more! First; it will help push the Fed to cut rates. Second; lower rates will enable corporates to borrow more money for less. Third, cheap money means more stock buybacks on the basis slowing activity means no need for capital spending, and free money is just begging to be used for stock buybacks which is great for stock-holders…

Buy, Buy and Buy some more… Forget about long-term productivity or future proofing business, what’s not to like about a slowing economy in terms of immediate returns! If it means more free wonga to push up stock prices? (US Readers – obvious sarcasm alert.)

Of course, it makes no real economic sense, but that’s not the way markets work. In a sane world, why buy companies that are increasingly over-levered, less productive and are so limited in their business vision to perceive their optimal financial choice to be buying back stock rather than actually producing stuff…? Yet it will make absolute sense for the market.

All of which made for a rather frightening discussion this weekend over drinks with a senior investment manager with a great track record in credit markets. My chum was scared. Not by the markets – that’s their job. They are scared by their own firm.

Over the past few months the firm has cut a swathe through its real assets – its staff, the ones who’ve managed to keep it performing in the top quartile for the last few years. It’s been a mix of simple sackings, but also creating such a toxic atmosphere of fear, slavish form filling, and managerial incompetence that many staff have walked – despite the difficulty of finding other roles in the fund management industry. Naturally, the cuts have hit hardest on older, most experienced and expensive managers.

My contact complained to the board level about how dangerous the loss of expertise was in terms of the firm’s investment DNA and investment style, and how destructive the perceived managerial failings were in terms of retention. Hardly whistleblowing, but they still got THE VISIT from HR, were told they were under-skilled in comparison with younger members of the team with degrees in investment management and finance – apparently a double Cambridge first and 20 years at the top of the investment game is immaterial when a newly minted BA with a 2:1 in Investment Management counts for more. My contact was effectively threatened with being sent on a HR mandated career ending Skills-Improvement course.

The monkeys are playing the organ grinder… or something like that…

Why is the deskilling of investment management so critical? 12 years ago if you wanted a corporate loan you went to a bank, where a rigorous corporate lending process analysed the risk and decided whether to lend you money. If the loan went south, the bank had a team specialising in corporate work outs, a structured credit desk to slice and dice the loan, and a NPL team to manage if it went really pear shaped.

Today, there are NO banks. Just brokers. The banks have no interest in retaining expensive capital risk assets. They’ve sold them all – to institutional investors. The result has been a massive transfer of risk from the banking sector to fund managers. Some of the smarter real money accounts have good risk management teams, but few have teams of specialists ready and able to manage a debt crisis and the associated number of failing positions that will create. Few have the capacity to manage risks to the same degree as banks once did. Too many risk management desks still rely, essentially, on rating agencies.

The transfer of risk from banks to investment companies gives a very clear hint where the pain of the next financial crisis will be felt first.

Meanwhile… last week I managed to miss something extraordinary last week.

The Asian Infrastructure Investment Bank – AIIB – launched its $2.25 bln debut bond issue.  I had to laugh. My financial social media feeds were jammed with self-congratulatory, hyped-up nonsense about the AIIB’s lending mission, extraordinary credit quality, green credentials, ESG oversight and all the other buzz words that usually accompany something well-dodgy..

To cap it all were the photo ops and interviews with “Investment Banker”; Sir Danny Alexander, now Vice President of the Asian Infrastructure Development Bank, officially opening trading in the AIIB’s new $2.5 bln Eurobond. (It was actually launched the week before – just days before China/US trade hostilites broke out.) To be honest I wasn’t listening to what “Beaker” Alexander was saying… but it immediately occurred to me as somewhat curious that such a staunch Liberal is now a front man for China’s Global Infrastructure Domination strategy – just saying y’know.

So that’s what happens to failed politicians? Most folk will remember Danny, the muppetesque heavy-metal-loving carrot-impersonator, as the Liberal Party’s Secretary to the Treasury in the Coalition Government. When it fell in 2015 Danny was turfed out his seat by the SNP, picked up a knighthood, and morphed into a Corporate Secretary and VP of the AIIB. Curious.

His boss, Nick Clegg, winner of the most whingey MP ever, (and in Liberal society, that’s a competitive field), is now an extremely well-paid talking head for Facebook. In case you are wondering, the other stunningly successful politician of the period, David Cameron, is set up with Greensill, the somewhat whoosh Australian finance house that “supposedly” broke GAM financing an Indian entrepreneur’s steel empire, and has now attracted investment from SoftBank. There are more things in Heaven and Earth than we can possibly understand..

But, let’s not dwell on dodgy politicians. Getting back to the AIIB – the Chinese state’s very own supranational is designed to fund Chinese debt diplomacy.. Most of the media posts were from bankers and other financial parasites looking to congratulate the AIIB on its successful deal – effectively begging: “Please, please, can I get the mandate for your next deal..” Because that is what gets bankers paid.. winning nice big mandates for Sovereigns, Supernationals and Agencies bringing prestige to their firms and bigger bonus. They pretty much sell themselves… half the AIIB deal was sold in Asia, a third to central banks, and some into EMEA and America. AAA is AAA.

Of course, Donald Trump is not a supporter of the AIIB. Japan and the US have refused to join. The US neo-coms complain it’s an instrument of Chinese debt diplomacy – deliberately trapping innocent locals into debt and enslaved to the Chinese masterplan.. It’s not a normal supranational – China provided 33% of the funding and has an effective veto. Although the AIIB has embraced the same regulations as the World Bank, and countries like the UK and Germany signed up, (its AGM is in Luxembourg this year – que??) the fear remains it’s an instrument of Chinese debt-projection.

Not sure if I particulary care.. if you want to invest on an ethical, ESG or green basis, I reckon staying away from political constructs would be a good start.

Out of time, back to the day job!

Bill Blain

Shard Capital