Blain’s Morning Porridge – August 7th 2019
“Well, what can possibly go wrong now? ”
In the headlines this morning: https://morningporridge.com/stuff-im-watching
First, a question for my chum Charlie Corbett, author of the excellent The Art of Plain Speaking: How to Write and Speak in a Way that Will Impress the People that Matter.(Seriously, buy a copy and keep it by your desk.) Charlie: Please explain to me what new HSBC CEO meant by “We need to be more granular in the execution plan to deliver.”It sounds incisive, cerebral and utterly brilliant. But wtf does it actually mean?
The morning after the days before…
Was yesterday’s modest stabilisation the start of a new buying window? Probably not – it’s still too early to clarify exactly where this market is going. Trade war or a settlement? I doubt the latter. The Chinese stabilised the Renminbi – largely to demonstrate they can, and that they hold the cards – while Trump blustered about resuming negotiations as if he hadn’t called China
lying fatherless sons currency manipulators just few days before.
Stocks recovered, largely, I suspect, on the fact investors can’t think of anything else to do with money. I don’t think anyone seriously believes a trade agreement is now likely. Remember: stocks are about optimism and hope things will turn out better than you think. But, Hope is never a Strategy.
If you are looking for market truth, then look at corporate credit, and especially the Junk Bond market – it ballooned wider on the trade ructions and shows no sign of coming back in yet. Government bond markets may be rallying on the flight to safety and expectations of low rates for longer, but corporate debt looks likely to wobble. In Debt Markets there is simple truth.
What’s driving the hiatus in corporate debt? There is a mix of genuine signals of a trade driven recession, and the fear corporate debt/junk will prove a chronic illiquidity trap. There is a growing realisation Junk Bond yields this tight simply don’t justify their risk-return profile. And that’s true across the credit curve. We’re likely to see increasingly thin illiquid bond markets – so if you have positions to shift, now is a good time to try. (Although summer markets are never an easy time to shift portfolios…)
The other issue to consider is the Global Economy near the top of the cycle. The evidence points to slowing Occidental activity. Some recent German numbers have been vaguely positive, others miserable. Across Europe data remains very weak. In the US, the inverted yield curve has been a fixation for many economist – who confidently say inversion predicts a slow-down. Yet, the numbers remain resolutely strong in terms of employment, wages and many other factors. The outliers are issues like declining capital spending and future investment plans – and boards focused on stock buybacks rather than beating the competition. Debt investors are looking at the ability of heavily indebted Junk and near-Junk companies to repay debt – and don’t like their prospects!
Do stocks justify such high valuations if the whole Occidental economy is heading down and Trump is cutting off the Orient? Probably not, but the distortion of insanely low interest rates does not help.
The big question is portfolio allocations – where would you want to be when stocks are looking so distorted and overpriced, government bonds are in negative yield territory and corporate debt looks unsustainable and likely to prove illiquid? I have ideas like long-term alternatives, but I asked the question to a leading investment manager yesterday and his answer may surprise you: “Cash and a raft of derivative plays to benefit from further market corrections.” Makes sense.
And what if the market becomes even less stable? What about a big No-See-Em shock?
Some think the current flare-up in Kashmir could go, well, literally ballistic. Nothing is more guaranteed to run out of control than a passionate Pakistan/India punch up.
Kashmir is divided three-ways following wars and landgrabs since Partition in 1947. India and Pakistan each hold territory, while China also grabbed chunks. The story of the region is viciously complex – with innumerable sub-stories that make the roots of the divisions incredibly difficult to address. The one thing that is certain is just how deeply the passion for the region is ingrained across both Hindu and Muslim society. You can’t possibly expect any Indian or Pakistani to discuss the topic rationally – the other side is invariably the bad guy.
It boils down to religious intolerance. (Religious intolerance is just a marginally politer way of calling it racism – and don’t think it’s just India. The problems in Norn Iron boil down to similar intolerances for people who are different.) It’s difficult for Westerners to understand just how bloody, murderous and destructive Partition became as rival populations slaughtered each other. Has much really changed since then? (It’s too easy to blame the UK as the departing colonial power, they gave Indian and Pakistani politicians what they demanded.)
India and Pakistan have fought over Kashmir and remained on a war footing since partition over 70 years ago. They’ve been duking it out over a high-altitude glacier for years. The posturing has created a pustulating sore across one of the most beautiful places on the planet. They are both Nuclear capable Nations.
Kashmir was the only Muslim state that joined India. During partition, and after much tribal violence, the Hindu Maharaja of Kashmir and Jammu joined his state with India. Effectively it remained a separate state within India, ceding only key areas like Defence and Communications to India. It received special privileges – including the critical right to deny land sales to Indians from other states, thus ensuring the state would not be swamped by non-Muslims. For 72 years Kashmir remained a state within the Indian State. Despite the special treatment there has been a festering terror campaign and repeated border wars – each side claiming to be protecting their citizens from the other.
The Indians undid Kashmir on Monday – effectively ending its quasi-statehood and subsuming it into the rest of India, triggering fury in Pakistan. Former cricketer and president Imran Khan is fulminating about ethnic cleansing. Pakistan has previously made clear its nuclear “first strike” strategy if India was to successfully invade. India aren’t saying what they will do – they’ve demonstrated their intent many times.
Itchy triggers and religious hatred don’t sit well together.
Watch very closly to see how this plays out. Pakistan benefits from both US and Chinese support, but the Chinese want border resolution with India and may see this as an interesting strategic opportunity, especially how the Trump administration plays it. Its’ unlikely Trump will perceive any electoral gains from supporting Pakistan, which Americans equate with Islamic terrorism.
Blain’s Brexit Watch
Not much to add today except the stakes get higher. The Tories are blaming Europe for intransigence. Europe asks what’s the point in dealing with Boris since he’s already decided on no-deal. Come-on chaps, play nice and talk to each other! Europe declaring nothing will change plays rights into the arms of the Hard Brexit Camp.
October 31st Brexit Mayhem, here we come.
Sorry for late porridge, but computer problems and an interview to film this morning. Out of time, well behind schedule, and what else does the day hold… ?