Blain’s Morning Porridge – April 25th 2019

Blain’s Morning Porridge  – April 25th  2019

“Jonny Turk he was ready, he’d primed himself well.. ”

In the headlines this morning:

Lots of immediate stuff going on out there this morning! Are the German discount chains, Aldi and Lidl, the winners of the banned Asda/Sainsbury merger? Is the proposed Commerzbank Deutsche Bank merger dead – and where does that leave the two German banking dinosaurs with “for sale” signs round their necks?  Apparently Deutsche is now considering launching a bad bank.. What do they need a second one for? (US Readers – Humour alert!)) US stocks are what US stocks are… Looking ahead, there are a number of bigger long-term issues out there.

China and Swine Fever:

I’ve posted a number of stories about African Swine Feverin China on the Morning Porridge website. After my comments about Australia’s links to the health of the Chinese economy, a host of readers raised Swine Flu as a possible China weakness. (One even suggested it might be a deliberate Trump-sanctioned bio-attack – it’s likely to hugely benefit US pork belly and soya prices! I do love conspiracy theories for breakfast..)

The pandemic has already triggered the slaughter of 1/3rd of China’s pigs, leaving a massive protein shortfall and domestic pork prices likely to hike 70% plus. Some say it bears much in common with the SARs “bird flu” pandemic that triggered an Asian downturn in the early 2000s. I doubt it will so direct  – SARS was a direct threat to human health, although the collateral effects of global travel outages triggered all kinds of economic pain. Instead, I suspect the current Swine Fever will heighten awareness of China’s vulnerabilities; environment, urban vs country wealth, the party’s ongoing ability to autocorrect, and massive inflation on China’s primary protein source. While some analysts are looking for links to justify fundamental weakness in the Chinese economy, I suspect Swine Fever will become part of the ongoing transformation of the Chinese economy.

China has matured from ultra-growth 10-20 years ago, through the current hi-moderate growth stage, towards a more normal growth profile. The OECD estimates growth is likely to fall towards occidental levels as the economy shakes out the wild expansion days and become more “normal” and balanced. Swine fever will prove a current and immediate cost. However, it’s also a learning experience: triggering further reform in agriculture, more efficient and healthy farms, and a further immigration from the country to city raising the need for more industrial jobs. That’s a tough one for the Party to balance when the environment is a critical concern.

Political Leadership

What’s been the big theme through 2019? Stock market rallies? Bond market upside and lower for longer continuing into infinity? I’d like to nominate the deepening Failures of Leadership we are seeing across the globe. Success is a by-product of effective strong leadership – not just in politics, but across finance and business. We’re also aware politics is a major factor on markets. Weak politics equates with questionable economies. Begging the question why the dollar is so strong? (US readers – mild sarcasm alert.)

The Political Leadership failure is best illustrated here in the UK. The mother of all parliaments is utterly failing to agree on Brexit. Why? Because Theresa May proved such a stunningly poor leader? Because party discipline broke down? Because MPs sincerely ranked their own views over the party collective? Whomever succeeds May will discover that once the magic of leadership is broken you can’t go back. May should have immediately slung dissenters out the party – but of course, she couldn’t. My Grandfather’s favourite mantra was: “There are no monuments to committees”. The only exception I can think of is Rodin’s “Burghers of Calais” – and that’s about sacrifice, not self-promotion.

Yet, the Brexit farrago pales into insignificance compared to the Failure of Politics to solve the glaring problems facing the US economy – the breakdown of the American dream that kids would do at least as well as their parents, a dream shattered by burgeoning income inequality, the stretched middle classes, workers having insufficient living wages to consume, and failures to address education, health care, tax policy etc. These are particularly relevant as the summer approaches – there is a definite sense of revolution in the air..

Yet, instead of fighting for political change in the US, in the US we have a divided Democratic Party braying for Trump’s impeachment which is a negative waste of time and pointless distraction most likely to ease The Orange Man into a second term. Far better is Bernie Sauders recent comment: “What is most important to me is to see that Donald Trump is not re-elected President, and I intend to do everything I can to make sure that doesn’t happen.”Rather than waste Congressional time on Impeachment and Mueller, he’s calling for discussion about living wages, health care and the rest of the real issues that voters care about – he’s aware non-core Trump voters can be persuaded to vote for non-Trump policies. “Focus on what Trump policies do, rather than who Trump is” worked for Pelosi in the mid-terms.

Or is the biggest political leadership failure in the US the preserve of the Republicans?

Could be. They let Trump represent them.  The good news is they now seem to realise it. I’m hearing more and more discussion of tax, health, income equality and fair society from my Republican sources than I am from the angry Democrat media. If they can solve these questions and stand a proper candidate against Democrats wasting their energies trying to impeach Trump….

Republican’s leading social reform and new big society in the US? Well, that could be truly interesting… Watch this space for what happens next… although I still think Trump is a shoe-in for a second term.

Central Banks

Perhaps the biggest leadership failure is yet to come – when Draghi leaves the ECB? Who else will be able to deliver on the “do-whatever-it-takes” promises, and hold the fractious states together? Without strong and consistent management Draghi’s retirement is a recipe for potential disaster.  Again watch that space.

Or what about here in the UK where the book is now open on Carney’s successor. £480k salary for the most awful job in banking? There are guys with MD titles who count pens in the larger investment banks earning more than that! I’m told the head-hunters have been promised a 20% bonus is they can find female candidates from Ethnic Minorities for the short-list. Apparently, Andrew Bailey, currently getting by at the FCA, is top of the bookie list, with the Indian former central bank chap also mentioned. Any inside information welcome!

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

Bill Blain

Shard Capital