Blain’s Morning Porridge – October 9th 2019
“That night, he apparently blasted the beast right between the eyes before being eaten by two one-eyed lions…”
(Sorry for the Late Porridge this morning, but trying to write while watching the Scotland vs Russia game in the office wasn’t a good idea.)
What have we got this morning? A rising threat of a no-deal Brexit? The IMF warning of global slowdown on the back of trade conflicts? Or Trump’s White House ignoring the impeachment action as treasonous? … Same as, same as… but with the added attraction of Basketball in the equation…
I received some fascinating feedback from y’day’s Morning Porridge about Central Banks and Financial Repression. Over 200 comments from readers saying they agreed with my considered thesis that central bankers are talking up their own book when they claim QE and NIRP have been screaming successes with minor side effects. I could go as far as to opine that many of the Regultariat and Central Bankingoctocracy are delusional eejits who don’t understand markets and the unintended consequences of their ill-considered market manipulations – but that would just be an opinion. And saying such a thing would be grossly unfair.
Most (not all) central bankers I’ve met are clever, intellectually curious and very focused on the disciplines of monetary policy and regulation. I would characterise them as academic and institutionally minded. They mean well. Consensus matters in the regulatory world.
But, if Central Bankers have a fault, it’s the chips on their shoulders about investment bankers. Central bankers know they are very clever, so they can’t quite understand why these under-educated street traders working at the banks are paid so much, get more respect and seem better at picking up dates at parties. There is a definite divide in mindset between central bankers and investment bankers.
The investment bankers exploit it ruthlessly. Markets are not about consensus. They are seat of the pants stuff, non-consensual and are driven by often irrational expectations and behaviours – which smart traders recognise and play. I’d repeat my earlier charge that the last 10-years of monetary experimentation achieved nothing except to utterly distort market motivations and direction – and that’s because markets don’t conform to theoretical behavioural models. Central Bankers never understood the implications and unintended consequences of their actions. Investment bankers have been arbitraging them from the get-go!
Maybe I should have applied for the Bank of England job….
However, one thing that does worry me is the lack of objective and critical reporting of central banking and policies. Although I frequently express negative opinions, and back them with examples of how and why they are wrong, it’s rare to read anything critical about Central Banks in the press. I would almost think the big news organisations have decided not to be critical…. (and yes, I’ve been confidentially told that is the case). Central Bankers are part of the deep establishment – and therefore on the Trusted list. Independently minded market commentators rank even below MPs…
Enough digressions about how to gameplay central bankers…
As trade hostilities heat up, and markets look increasingly jittery, the real issue remains just how dangerous the world is:
- It can’t help the US Fed is talking about buying up the short-end to fuel liquidity in US money markets – when money markets get sticky, the rest of the financial economy grinds to a halt.
- I’ve got my stock chartist pals telling me the major indices are poised for a tumble.
- I’ve got the stock pickers warning a correction will pull down good stocks (ie those firms with strong management, sound balance sheets, healthy cash flow and generous dividend policies) alongside the overhyped dross.
- My credit analyst buddies are concerned about how bubbly credit markets are. They see rising default rate indications, and that a possible “buyers strike” by bond market vigilantes is on the cards with risks so high and rates so low.
- A number of readers pointed out the problems of Pizza Express are largely due to its Private Equity owners leveraging it with debt to pay themselves massive dividends. No S**t Sherlock. It would appear one firm is hedged and is actively willing it towards default so it can pick up a windfall.
So where should we be investing?
About the only thing I’m pretty certain of is interest rates are unlikely to spike dramatically higher. They could rise modestly on inflation, or we’ll see a buyer-strike, which will trigger a massive number of discrete credit defaults – ie Zombie companies going bust. That means diversification is critical – and I’d plump for secured pools of assets – which is right in my Alternative Investment Area.
For instance; a pool of property assets will provide a steady stream of returns from rentals. The whole property sector may suffer a downturn if WeWork implodes (it’s the biggest office space renter in NY and London) or in recession, but its unlikely to whole pool will default. Its easy to run scenarios to work out the risk. When such a portfolio is paying close to 5% and high-yeild CCC rated bonds are paying less… well which one would you rather hold? Last week we were talking about a similar pool of diversified aviation assets.
And on that, I better finish and get back to the day job. (Scotland have the bonus point, and the score is mounting… )