Blain’s Morning Porridge, 23 Oct 2020: Confessions of a Cynic

“Scratch any cynic and you will find a disappointed idealist… ”

Do we worry about the wrong things?

Looking back on yet another extraordinary week in markets I realise I’ve been in cynic mode all week.  Is that a surprise?  Folk think I’m a cynic because I’m a grumpy old man, but I’m anything but – I’m very positive about the future. Yesterday, myself and colleagues from Shard spent a day sailing – perfect conditions with sun, wind and a little rain – and we talked through some of the big issues and opportunities in finance and investment. It was the best day I’ve had… since the last time my colleagues and I got together!

I’m a cynic because it’s difficult not to be in this environment. And… maybe I am a disappointed idealist. We live in the real world, and it’s really not very nice or fair. The upside of being a cynic is that if you are prepared to acknowledge things are broken, then at least there is a chance of fixing them.

So… let’s talk though some of the broken issues.

Politics is a big subject, so let’s just stick to immediate problem of the US.  In common with most folk in Europe, I didn’t bother to stay up to watch the presidential “debate”, imagining it would degenerate into name calling.  I just can’t bear to watch any more of it.

I did wake early though, and my first thought was – “I wonder who won?”  The papers conclude it was a draw.  However, my inbox is full of fascinating missives. Some right-wing types were gung-ho about Trump’s “success” in exposing Hunter Biden’s corrupt dealings and how “big guy” Joe is the ultimate beneficiary. Democrats sent me post-debate clips showing how Trump and his wife clearly loathe each other, (really… wow… that’s a surprise..) and a piece on how the Trump kids have exploited their “entitlement” and position. Its all distasteful, nasty, and it’s all just noise.

Some of the stuff tests common sense. I have to giggle at the belief Biden Jnr would be so stupid as to leave his laptop in some backstreet repair shop, where the owner hacks the hard drive to “shockingly” discover porn and gives it all to Rudy Giuliani to expose to the public. Ah… Giulliani… a man of such exquisite character. Check out his brilliant scenefrom the new Borat film.  Sacha Baron Cohen – Brilliant.

While we laugh at Giulliani’s furious flolloping after being caught-out as a dirty old lecher, we’re missing the real issue – What’s the likely upside for America? While Trump is not everyone’s cup of tea, and has been chaotic – how bad has he really been?  Coronavirus was a bad break for everyone, but especially Trump. What about plans to strengthen infrastructure? Identifying China as a threat is positive.

There is lots of negative comment on how Biden’s tax plans will impact growth and steepen the yield curve, triggering a negative growth feedback loop, but how much time is being spent analysing the realities of progressive taxation, and what normalising rates to kick start the creative destruction at the core of capitalism would do to create real growth and high-value jobs?

Bottom line – the election will be eventually be behind us. We can then get on with life as normal.. The opportunity is there.

Or how about the Goldman Sachs story?

Sitting by my desk is The Billion Dollar Whale, an analysis of how the Squid bribed and connived with corrupt Malaysian businessmen and politicians to fleece the 1MDB fund. Yesterday, the firm settled with the US government which bluntly stated the Squid played a central role looting the fund.

Yet the agreement falls short of Goldman admitting criminality – getting a three year deferred prosecution agreement, the equivalent of a slap on the risk (albeit a $2.3 bln slap) and promising not to do it again. It’s paid over $7 bln in fines globally on the case, and clawed back $67 mm in bonues to former senior executives. It’s also asking the 3 Goldman bankers directly involved in the case for $76 mm in bonuses to be repaid.

Although it would be Schadenfredeningly satisfying to see Goldman suffer more… the reality is they got caught – their internal controls were exposed as lacking, and the case against it is going to encourage firms to behave better from top to bottom. I doubt it will cost them much business – and Goldman’s staff will continue to rise to the surface across global institutions. Personally, taking a line of naughty bankers outside and… well let’s not go there… but I have a little list… (I have a little list who never would be missed…)

The Bottom line – They got caught. They get away with it. Move on.

Or maybe it’s the ease with which Europe was able to attract a €233 bln order book for its Social bonds, or Italy to build a €90 bln book on its latest bond deal. Negative and ultra-low yields and the bonds still fly out the window – and aside from credit certainty there is no upside to the trade. A reader asked how can deals with zero yields fly out the window, when it’s becoming almost impossible to finance attractive new businesses which will produce decent returns?

I suspect its because lending to sovereigns is easy. The number of boxes a fund manager has to tick to buy Bunds is limited. If they want to invest in something complex by generates schweet returns, then getting compliance, risk management, diversity awareness et al to agree gets too difficult. Gone are the days of smart clever fund managers meeting companies, making an assessment after starting deep into the principal managers’ eyes, and taking a punt. Today every investment decision is formalised by committee mindset. Committees don’t do hard. There are few statues of committees.

Investment decisions have been captured by wokery. As I’ve said many times: why you buy into a firm that wasn’t well managed, had a functional and effective corporate structure, understood it customers, paid its staff well, and was well prepared for issues such as climate change? Today, that simple common sense is labelled ESG compliant..

And because it’s fashionable, investors demand ESG compliant investment parameters and strategies are internalised in funds.. and since there is a severe shortage of ESG compliant financial assets that means they get more expensive and repress returns. It’s just too easy to slap a green or social label onto a bond issue to boost its likely success. I’m deeply cynical about greenwashing and ESG compliant bonds – especially when banks that treat their staff and customers with utter contempt pretend to be experts on being ESG paragons.

Rant, rant, rant.. I could go on all day.. but the sun is shining and I’ve got a great weekend coming up.. so on with the good stuff.. Who wants to buy a coal mine??

Yep… all these things need to change.. and they will..

Five Things Too Read Today

FT – Chancellor steps up efforts to avert mass unemployment

FT – The fallacy of ESG Investing

WSJ – Barbie Sales Take Off as Parents Try to Cut Down on Screen Time

WSJ – Pandemic Boom Stocks Don’t Have Earnings To Support Them

BBerg – ECB Preparing More Aidd as Spreading Virus Derails Economy

Out of time, and have a great weekend..

Bill Blain

Shard Capital