Blain’s Morning Porridge – November 7th 2019
“To be good to you, my son, I shall be a tigress to all others…”
November 7th 2019
The news this morning is all about China and US apparently agreeing to remove certain tariffs. Whoopee! The market loves it. Meanwhile, the wires say the Chinese will purchase $10 bln of the Saudi Aramco IPO. Interesting call. If it was anyone else, you’d be wondering who their drug dealer was. But the Chinese? That’s another matter. It is not madness. It is … a measured response to an opportunity.
The opportunity is for China to fill the hole formerly filled by occidental nations that once cared about Saudi. The West has walked away – mainly because they no longer fear oil prices, and the convenient excuse of Clown Prince MBS’ behaviour (except for Trump and his family – who see MBS as “brethren”!) Now the West is waking up to a potential mistake. Too late. The Chinese are already there.
Although a $10 bln investment will give China a tiny sub 1% stake in the firm – over which it will have zero board control, a stake could prove the key to the New Silk Roads narrative under China’s Belt and Road initiatives. It boosts China owned trade routes, provides China with further oil supply certainty, the potential of upside on an oil-shock, and gives them a front door into the redevelopment of the Saudi state. While the Chinese are determined to coercively integrate their own domestic Uighur Muslim minority, they have no problem trading with Muslim states. The scale of Chinese debt-diplomacy around the globe is vastly overstated by Western propaganda, but $10 bln to buy Saudi would be money well invested.
The market may have to reset their Aramco pricing rationale in its wake. The rationale response would be that China would be mad to pay $10 bln for an 0.5% Aramaco stake when the company is clearly not worth anywhere near $2 trillion. But, if they are prepared to overpay so be it. China will be getting a bond-like income stream from Aramco, a front row seat, loads of influence and sticking it to Donald Trump – all for less than Saudi is likely to have lost investing in Softbank’s WeWork/Uber stupidity. Other global buyers may take a lead from China.
The Chinese tend not to move fast after expressing polite interest in a deal. I would imagine this proposed trade will be quickly decided in Beijing’s largest office – the one occupied by Xi himself. He will be looking at the big picture – what does it potentially mean for the Renminbi when China has a stake? The world is not going to suddenly stop consuming oil, but it’s a chance for China to reinforce the Yaun as a petrocurrency, challenging the credibility of the mighty Greenback.
The trade will not be without niggles. China already favours Iran and Qatar in the region, who cordially hate Saudi (and they all hate each other). Iran is going to be less than happy when China plays a direct role in OPEC – if it benefits the Saudis. And Iran has distinct views on what it would like to do to Saudi – which is where the new Chinese aircraft carriers might prove handy to dissuade their erstwhile ally from trashing their new assets.
There are the obvious wider geopolitical considerations to consider. Can the US really afford to let a key regional ally (remember Saudi is a top defence spender, if not a particularly effective military power), swing towards the other side a developing cold war between China and the US? More to the point – Aramco was formed from US Oil Major’s Saudi operations nationalised at book value by the House of Saud, and its effectively US troops that will be guarding China’s new assets in the sands! Hilarious!
Green Policy – a potential election winner?
Climate Change is going to be one of the key issues in the UK election. While many politicians remain in denial, the electorate get it! If you plan to win the election, the millennial vote is critical: its anti-Brexit and its Green. Which is why Jeremy Corbyn was whipping it up yesterday blaming capitalism for climate disaster, and promising a totally unrealistic, undeliverable Stalinist 10-year plan to achieve Zero Carbon emissions. (A poll in the Gruniad says 56% of the population back zero by 2030.. and most us will buy tickets hoping to win the lottery tomorrow.) The Tories are on board with solving Climate Change, but haven’t told us how – Labour scream there is no road-map to zero-emissions by 2050 – (which is a realistic date).
Aside from Corbyn’s nonsense about undoing 200 years of capitalist growth, Labour’s Green Industrial Revolution is cosmetically attractive. It spots the opportunity to build a new strong economy addressing climate issues – but its not a road map either. It’s electioneering. It’s difficult to see where the concepts, the ideas, the invention to innovation process and commercialisation of Climate Cure tech is going to come from – after the current hard-left Labour Party stifles entrepreneurship and nationalises the economy?
Climate Cure will come from market driven solutions – being able to take smart ideas from the concept stage to real economic applications. We’re looking at ideas nearly every day. I’m out talking to cornerstone investors about launching a new Climate Cure Frontier VC fund – which will not only provide financing, but academic, technical, marketing and industrial support for exactly the kind of smart ideas that are going to save the planet.
Labour is right. The potential of the Climate Cure market is enormous. I’m convinced it’s going to be a market as large as disruptive tech has been the last 20 years, and even more significant.
I’ve been thinking about how to do it. I’ve watching carefully for clues on how to do it well – and learning from just how badly Softbank got the Vision Fund wrong. Great concept, but fatally flawed from the start. The more I think about it – Softbank is/was a variation on a Ponzi scheme: become a monopoly financier of disruptive tech, set your own valuations, convince the market on these valuations and exit the investments at the level you set. The ultimate fool would be the IPO buyers. Guess what? It worked right up to the moment it didn’t – and Softbank found itself the ultimate fool holding the doo-doo of its own valuations as the myth behind the Unicorns was exposed!
5 Things to Read This Morning
FT – Wall Street Slashes forecasts for US Corporate Earnings
BBerg – Euro Emerges as a Brave Bet Against Dollar Heading Towards 2020
WSJ – The Trillion-Dollar Math of Aramco’s IPO Probably Doesn’t Add Up
Bberg – Merkel’s Fading Power Laid Bare as German Ministers Go Rogue
Torygraph – Iran is winning the war for the Middle East, and the West has no convincing response
Out of time, and back to the day job!
Bill Blain
Shard Capital