Blain’s Morning Porridge, 22nd Oct 2020: Why the Worry?

“ Giving elected representatives the keys to the printing press is the equivalent of giving a gambling addict the keys to the casino. ”

Equity Markets feel kind of lacklustre and dull at the moment. Despite a host of corporate news and developments (including the delicious threat of trust and monopoly action against Tech), there is an awful lot of negative noise out there holding back investors.

On the plus side there are lots of reasons to be positive!

The first thing to cheer about is there is absolutely nothing to worry about in terms of the trillions of additional sovereign debt being raised to fight the effects of the Coronavirus Pandemic.

The extraordinary success of the EU’s SURE bond issue on Tuesday highlights how the rules on Sovereign Debt have changed. Governments worried about how they pay the costs of pandemic support measures and furloughs should take a good look and rip up their rules on balanced budgets and prudence! (Yes… I am writing this for Rishi Sunak et al to consider…)

The EU was looking to raise €17 bln for its debut bond off the €100 bln programme. They received over €233 billion in orders. The bonds were placed at a negative yield on the 10-year tranche! The investors who didn’t get allocated are furious the EU doesn’t want their money….

It’s been a truly extraordinary bond issue. But I don’t pull back on anything I said about the programme on Tuesday. The deal was a success because investors want somewhere “safe” to park money, and they absolutely value the ECB Put: the ECB can buy up to 50% of the deal via its QE programmes, therefore guaranteeing liquidity.

The fact the ECB is now tied into guaranteeing that liquidity in perpetuity is nailed on. Should the ECB ever try to raise European rates or scale back on QE, then the price of all bonds will demonstrate the effects of financial gravity – and destroy the reputation of the EU as an issuer. (Except, that’s not quite true: Blain’s Market Mantra No 8 states: “The Market Has No Memory”… which explains why investors keep buying names like Argentina time and time again.)

The thing is…. the EU that just got offered a quarter of a trillion Euros from investors desperate to accept a negative yields to lend them money!!! The borrower was The European Union, an unelected creeping Autocracy of Brussels Bureaucrats who haven’t had their budgets signed off in years. Moody’s might rate them Aaa, but they rated a lot of stuff similar. The member of states of the EU signed off on the SURE lending programme and a further €750 bln of recovery lending, yet still can’t agree on banking union, or closer political tie up. They haven’t agreed how to budget. (The assumption Germany pays is understood by everyone – except the Germans.) Yet the EU still managed to get a quarter of trillion euros in demand in the blink of an eye…

Just think of how much real countries using their own real money could go out and raise… ?Our problems are solved. Yay!

(No seriously… the EU deal highlights the opportunities to go borrow money today to rebuild Western Economies… We can worry about paying it back later…. Coming next.. a German 100-year zero-coupon negative-yield bond priced at -1%: meaning investors give Germany €100 today and Germany gives them back zero in 2120. And everyone is smiling…?)

Meanwhile, The Pandemic and what to buy!

Back in the real world, the pandemic is still the dominant threat to growth and future prosperity. As new waves of infection raise new lockdowns across Europe (1 million cases in Spain), and numbers in the US rise, the outlook looks bleak. However, while sectors like hospitality and travel are struggling, many other sectors are demonstrating considerable resilience – they are not only thriving, but are set to remain strong when – not if – a more sustained recovery sets in. That is going to happen either as we get better at “crushing the curve” to keep hospitals open, or a vaccine changes the equation.

I also detect a change in investment approach. Recently I’ve written about Tech stocks – asking if this the time to shift from the Tech Darlings that have driven stock price recovery since March, into more “Fundamentally-Driven” stocks: companies that are dull, boring, and predictable, making profits and paying dividends by doing effectively the same thing they’ve been doing for years.

Wow… what a novel investment concept: investing in the proven results of dull, boring, predictable companies that do what it says on the tin, rather than the hopes and promises of whoosh Tech Unicorns. Fundamentals include the old economy, stuff like mining, manufacturing, trade, selling or whatever. Successful companies thrive because they have the skills and experience to do so.

At present, ultra-low interest rates and negative yields favour equity upside over bonds’ negative returns. Stock prices have also been inflated by the effects of zero and negative interest rate policy. Because of the pandemic recession, companies and industries aren’t doing particularly well making and selling more stuff – but are seeing their stock price remain high because equities look a better investment relative to other financial assets. As the pandemic fades and profits expectations grow, they are going to look even more attractive – driving further upside.

At the moment we have a curious situation: stocks are pricing in recovery despite the pandemic, but are already overpriced because of ultra-low rates. Which factor do you favour? Rates are likely to remain lower for longer (central banks have already said so), so despite the apparent stock price stagflation and bubble threat, it feels and looks like there is plenty of room for a further leg up for equities.

What is going to trigger upside?

And, talking of the Elephant or Donkey in the Room: US Elections…

I will go with resumed growth… but it’s only 12 days till the US election and it’s the other dominant theme overhanging markets. The two sides continue to pump vitriol at each other; headlines are dominated on clearly bogus fake news about how awful the respective candidates are. There is an excellent John Authers piece this morning on BBerg: Investors Surfing the Blue Wave Trade Need a Hedge.

The real issues underlying the election are getting buried in the noise: tax and stimulus policy, job creation, competition, pandemic recovery, equality of opportunity, strengthening the western alliance and democracy, trade, rebuilding US infrastructure, and how to really make America great again while not turning into a cesspool of polarized hatreds. These would all seem more important issues – but I guess we will find out more in tonight’s “Presidential” debate.

What’s most depressing about the US election? Watching and listening to otherwise smart intelligent well-meaning people taking up cudgels and making insane compromises on candidates. It looks more like ancient Rome at times – as wanna-be emperors compete to buy the empire.

What’s good about the Election.. it will be over. (quite when we don’t know…)

Who will win? The polls show a small-tick up for Biden yesterday. Of course, both sides say they are winning. Rule 1 of any Election is to always, always, always present yourself as Winning. 

People like to be on the winning side as campaigns build momentum. If the campaign is knocked back, or suddenly the polls are much closer than they thought, and voters can be convinced their candidate is no longer the favourite and is actually losing… then they don’t show up at the polls. Not for one moment would I suggest the simultaneous plethora of stories saying Trump is actually leading in mail-in votes, or why the polls are wrong and his lead is being underestimated, all appearing at the same time, are connected in any way. But, to win an election you need to control and direct the narrative – see Rule 1 above.

It may well be the polling firms have still not figured out why they got it so wrong in the past and are still getting it even more wrong today.  If these stories are right and mail-in votes and social-media sentiment are all going Trump’s way, then yet again we have the remarkable situation of US pollsters – clever, well paid professionals – being substantially wrong and not having learnt from the mistakes of the past.

However – it’s worth remembering that in 2019 the polls in the UK – which are run by essentially the same organisations and use the same methods by which US polls are run – tracked the election outcome almost exactly after getting the numbers massively wrong in 2016. Since then they refined their methods and got it right. UK Polls predicted the Tories to win 43.8% and they got 45% of the vote. They nailed Labour at 33% which is exactly what they got. They called the number of seats each party nearly perfect.

And on that happy note…

Five Things too Read This Morning

BBerg – Tesla Beats on Profit, Reaffirms Goal of 500k Deliveries

FT – Asset managers in $300 bln drive to build private lending funds

FT – The case against Modern Monetary Theory

WSJ – Why Central Banks Want To Create Their Own Digital Currencies Like Bitcoin

WSJ – The Businesses Where Google Is Biggest (and the Ones Where it Isn’t)

Out of time, but not back to the day job… off sailing with colleagues!

Bill Blain

Shard Capital