Blain’s Morning Porridge – October 29th 2019
“Italy? Don’t be silly.. its fixed, nothing can go wrong with the plan now….”
October 29th 2019
My telly lives a precarious life. It was nearly shot this morning as two political numpties whittered on about the necessity to prevent Brexit, how untrustworthy Boris is, how the best interests of the country are served by their diligence in endlessly debating the placement of a comma in the withdrawl agreement, and how its important the UK waits till it’s safe for pensioners to go to the polls when the weather is better, and students are back in their residencies. Argg.. Do these people ever stop to listen to themselves? Please make them stop! None of these things actually matter! Tis far better to get democracy done roughly, than to strangle and devalue it through pointless political posturing – but that’s what most MPs are determined to show off about…
Despite the Brexit gloom there is something curious going on in the UK. Parliament may be engaged in some curious self-flagellation game, but elsewhere the confidence level of the country is much better. Companies and Consumers see past the eejits being interviewed on College Green, and are getting on with it. They see a bright future once we’re through the present gloom. They are largely ready. The UK will face adversity as we usually do.. a frown, a shrug and get on with it.
Despite being a Scotsman, (which means I am genetically inclined to support whomever is playing England), the likelihood England are going to win the Rugby World Cup could actually confirm a sea change in the UK’s outlook. I was reading a very insightful article by my chum David Murrin yesterday – Brexit Lessons From The England Rugby World Cup Team. He draws parallels between England Coach Eddie Jones’ and the Brexit team’s goal driven approach. They are prone to reversals through the process, but in the long-term, they get there. Interesting stuff! Give it a read.. (And yes, I will be supporting England on Saturday! And singing a well known Spitting Image song..)
Meanwhile, back in the real world.
Stocks hit a record high! I am unconvinced by the arguments its due to greater confidence about a trade deal – its more likely about the Fed easing later this week. The sudden rise in any Chinese stocks with any connection, however tenuous, to Blockchain yesterday was funny – shows how close China is to US. Just a few years ago putting crypto in any business plan was a guarantee of success!
I am slightly worried much of the recent upside has come from Tech stocks. Some, like Apple and Microsoft are now establishment stocks – and key components of the Blain Pension plan, but so is Alphabet which took a slight tumble y’day. They all pass my fundamental test – stocks I see value in. Others, like Facebook and even Amazon (which I have formed an intense hatred of because of a delivery problem), have too much regulatory risk for my tastes. Despite the experience of the failed Unicorn IPOs this year, parts of the Tech market are still playing to a suspension of rational investing – and I am concerned a further tumble in unicorns could destabilise solid tech.
One of the big gainers was Spotify on the back of great numbers. I made a schoolboy error last year when I switched my streaming music service from Spotify to Apple. Spotify is simply a much much better service – I regret my switch. It’s now got 115 million paying subscribers and is growing faster than any of its rivals – but it still isn’t profitable, which at some point will impact the value. It is close to profit – and will likely get there.
The key issue about Spotify is how great it and streaming has been for the music industry – reinvigorating artist revenues, and driving more opportunities to monetise and get music out there. Streaming is important, but its Content that’s King!
It’s one of the key concepts behind a new music deal we’re putting together: the content value of music: 40 years ago, as CDs started to replace vinyl, the average music listener was limited to the radio, and personal and expensive music collections – and would have had access to less than 5% of recorded music. The streaming revolution has opened up immediate access to maybe 90% of recorded music- which not only has opened diversity and choice, but spawned greater value monetising music in films, advertising and wider markets. It’s created a Content Revolution. It’s happening, and its massively valuable.. but to the content providers rather than the streamers. (If you want to hear about our deal – join the queue.)
Bond Market worries
The Bond Market is causing me much more concern. After we get this week’s rate cut out the way, the downside momentum on bonds is likely to increase: less appetite for central bank easing and asset-purchase distortion, rising doubts about the long-term wisdom of ultra-low rates, rising concerns about credit quality and massive doubts about just how liquid bond markets will be in a changed outlook.
The reason bonds have performed so strongly through 2019 has largely been on the back of recession expectations and that central banks would continue to bail out markets. Recession can still happen, downturn is certainly a risk. China growth has been driving markets for the last 10-years and its clearly slowing on trade rifts and the economy internalising. Unfortunately, the corporate bond markets got well ahead of the curve:
- Issuance has been massive – cheap rates stimulating a massive borrowing binge which wasn’t used to create new capacity, but largely spent on buyback stocks. Result: Overleverage.
- Credit Quality has decreased – the hunt for yield has pushed investors down the credit curve to the point most corporate debt is poised a notch or two above junk. Easy money led to cuts in investor protections. Portfolio managers can kid themselves it’s still investment grade. Result: Increased Credit Risks.
- Global economic downturn, or even a small rise in interest rates will create a shift in the credit threshold line – pushing many near junk issuers into junk territory as their credit outlook declines and interest rate costs accelerate. Result: Firesales of junk assets from IG holders.
- Exit path – everyone is very aware there is no market making. It’s an agency market, and without buyers in a credit downturn there is no capacity to slow falling prices if everyone tries to exit. Result: Chronic Illiquidity risk.
FT carries a story this morning about bond giant PIMCO: Pimco shuns US Corporate Bonds, backing away from the US corporate bond market due to “concerns they could be a rapid decline in prices during an economic downturn”. There is one of my coveted No Sh*t Sherlock awards winging its way towards their California offices.
Great article on Green Bonds from Bloomberg’s Mark Gilbert y’day: The Explosion in Green Bonds Comes Without a Premium – pointing out the market to fund green projects has a puzzling price feature: if they are so virtuous, why don’t they trade at a premium? I suspect he was being rhetorical – and a highly experienced market journalist is well aware Green Bonds are largely a marketing gimmick. Although they have slightly outperformed the overall credit market, they are pretty much in line with Investment Grade Credits – so precious little price reward for investing in Green stuff. Yet. He predicts they will tighten. I predict a rise in company’s Greenwashing – using green labels to spend on not so green things!
Five things to Read this Morning:
Bloomberg – Italy’s Matteo Salvini Is Back With a Vengeance
Video worth watching
Out of time, and back to the day job..