Blain’s Morning Porridge, 26 Oct 2020: Looking the wrong way?

“All that glitters is not gold.. ”

What’s the recipe for this week then? All eyes will be focused on the US: What are the polls telling us? How right/wrong are the odds? What are individual states hinting at?  Will Trump lose the plebicite in terms of a couple of million votes, but still hold on the presidency via the maths of the electoral college?  Who will control the senate?  If Trump loses will he go quietly?  And then you get to the interesting stuff – what’s likely to happen to the US economy? Taxed into oblivion by a new Biden presidency, take off on new or renewed leadership, or carry on as before down the road to nowhere?

One interesting thing has been the failure to agree a new stimulus package – “moving goal-posts” apparently.. Surprisingly, in the absence of more government largesse, the Economy has not collapsed and markets have not cratered.  Is that because the markets think a new package is nailed on post-vote? Worth thinking about perhaps… it could be new year!

Plenty of other stuff to think about… Back on Planet Earth the madness continues.

You can’t buy books or clothes in Welsh Supermarkets – the happiness police say these are non-essential items.  I suppose it will stop shoppers lingering in stores thus marginally cutting infection rates. Some government idiot added the bans make it fair on other retail stores that have been forced to close completely. Jeff Bezos will be clapping his hands in extasy as another win is handed to Amazon and high streets are consigned to the dustbin of history.

It’s become increasingly clear the UK is turning anti-Covid. Objections to petty and confusing lockdown rules are multiplying. There is a growing sense of outrage at the petty callousness of the authorities splitting families and the horror of patients dying alone. A compelling series of articles by the Sunday Times Insight Team told us what we all suspected: the protect itself the NHS stopped doing its’ job – around the country thousands of elderly Covid sufferers were “triaged”, given limited treatment and allowed to die even as ICU wards had places. The much-lauded Nightingale hospitals sit unused and un-staffable.  GP (local doctors) were apparently instructed to draw up lists of frail, infirm and elderly patients who would not be prioritised – many of them refused.

There will be a political reckoning…

As pandemic infections rise, Spain has declared a state of Emergency that could last through to May 2021. The whole of Europe is plunging towards a deeper second Covid crash. Confidence is in scarce supply.


I read the drugs so favoured by President Trump have been dismissed as ineffective – but it’s not all bad news: new therapies, oxygen and other simple drug treatments to stem the virus are clearly improving outcomes. Deaths are rising on a far flatter curve than had been feared. The news on vaccines is promising. The big risk remains hospitals being swamped as the infection wave peaks – if that can be avoided maybe we still have Christmas? The latest numbers suggest that wave may have peaked – and that could prove a massive positive in coming weeks for markets.

And there is also the positive news the UK and EU are still talking about the access rules following the divorce agreement. It’s all about fish. Both sides are screaming “more for us – less for them”, but the fish have voted and are on our side of the Channel!

BUT! By and large, the US Election, the Pandemic and the Brexit game of chicken are all distractions.

Real issues like growth, employment and markets remain bound up in surging sovereign and corporate debt fuelled by ultra-low and negative interest rates.  Global markets remain utterly distorted.  Financial Asset Stagflation – bonds and equities getting more and more expensive as the economy deflates is a consequence of the monetary policy decision sof the last few years.

The thing about the pandemic that has proved true across every aspect of life and markets has been the way that it has accelerated change – the early adoption of new technologies and acceptance of change. I’m wondering if the Pandemic is also accelerating a collapse in confidence in Democracy and causing us to question the inconsistencies in markets more closely? It feels like our faith in governments has never been so tested and found wanting? The number of articles questioning the basis of markets is rising.

Clearly Governments in the West are making a right hash of the Pandemic. Meanwhile, our markets seem to be marching down the proverbial rabbit hole. When you read anguished articles about how PIK bonds are making a resurgence, the scale of demand for negative yielding bonds, or why more and more corporates are tumbling into Zombiedom insolvency, blame it on policy and ask how governments can save us with yet more distorting Fiscal policy interventions. It’s a terrible mess. Consequences. Consequences.

As a result of our fixation on the Election, The Pandemic, the surreal madness of markets and the pace of change, perhaps we’re maybe missing the real issues…

I think Ray Dalio of Bridgewater might have got it right. Think not about the way the West is in trouble, but how China is emerging from this crisis. In a fascinating comment in the FT he argues: “Don’t be blind to China’s rise in a changing world.”

At the risk of saying some very unpopular things Dalio questions what we all accept to be true of the Chinese communist state.. it can’t work.. capitalism is better than communism. Authoritarianism can’t succeed. And then wonder why China is proving so successful. We believe it lies, cheats and doesn’t play by the rules. Our rules.

Much of the current ESG and Woke agendas skewing investment decisions in Western asset management are incompatible with investments into China – whether it’s the surveillance state or the treatment of minorities, or Hong Kong.  Yet I also read about how HSBC’s CEO was gladhanding Chinese officials at a Shanghai conference it sponsored last week, trying to undo the damage its done to its China franchise through its collusion with US authorities on Huawei. HSBC promotes itself as the best bank for ESG advice and sustainability. (Take a look at all the awards it’s won in the space. I wonder how much it paid for them?) Yet, it’s the same bank that’s been there kow-towing in Shanghai.

At least Dalio’s piece in the FT says it honestly – China’s economy is growing, it’s going to be massive, and you can’t afford to ignore the fundamentals of price and the effects of anti-Chinese bias in investment decisions. You can’t ignore how what happens in China impacts markets – for instance Xi planning to make China carbon neutral by 2060 and how that impacted renewable energy stocks.

After spending the last few months focused on the West and the Pandemic… it’s maybe time to be looking East. A different set of risks and a whole series of moral questions to ask.

Five Things Too Read This Morning

FT – Global Bond markets have turned topsy-turvy

FT – What the shift on austerity means for markets

BBerg – The 40 in 60/40 Portfolios is Getting Wilder and Wilder

WSJ – Facebook Prepares Measures for Possible Election Unrest

City AM – Congratulations Brussels for capturing EU states financial sovereignty

Out of time, and back to the day job.. .

Bill Blain

Shard Capital