Blain’s Morning Porridge – 5th December 2018
“Where does it go from here? Is it down to the lake I fear?”
In the headlines this morning: https://morningporridge.com/stuff-im-watching links to the main stories of the day in the media.
Sorry for the lack of commentary yesterday, but I was scrabbling around trying to lash down reality..
If you are struggling to understand why it all looks so financially miserable out there, one of my colleagues summed it up perfectly: “We just passed PEAK TRUMP B*LL*H*T!”
After’s Sunday’s self-delusional backslapping de-escalation of the China Trade War, its clear Trump solved nothing. His twitterstorm of subsequent denials, accusations and demands doesn’t helped. The Chinese are furious. His own administration can’t agree. He made it up! The Market has had enough. Trump came back claiming a deal with China….. And the Market ignored him. Monday’s rally lasted moments and collapsed. Yesterday felt like capitulation.
It’s highly significant – Trump has moved from being a positive market moving factor to becoming a market liability.
Helpfully, markets are closed today for George Bush’s funeral. He was a great man and a decent president. Markets now ascertain the truth about Trump – nothing to mourn there. It’s just a matter of time before American voters realise it. The markets’ affair with the plump baby is over.
We’re entering a NEW AGE OF FINANCIAL REALITY. We’ve just seen the Emperor’s New Clothes Moment for Trump. He really is in the “all-together”… swimming naked as the tide rolls out, and it ain’t a pretty sight.. (and its true what they said…)
PTBS IS REAL. ITS HAPPENED.
Where do we go from here?
I’ve said it a few times already – 2019 is likely to see the start of the New Market Reality. Although some pundits claim yesterday’s sell-off was due to automated algo’s triggering a crash because they misread the US yield curve inversion – bad programming they claim – the reality is markets are extremely nervous: of the recessionary signals the inversion shows, slowing economic numbers, the prospects for trade war accelerating recession, etc. The US economy may be a full employment and growing, but where does it go from here as the rest of the globe falters, housing collapses, Auto sales plummet and everyone worries just how they are going to pay off student loans, mortgages and credit cards?
Markets have reversed polarity on Trump.
PTBS means we just switched from positive to negative. Don’t think about what can go right as Trump forces through trade deals, tax cuts, a compliant Fed, etc. Think about Trump negatives – forget the FED put. Forget overly-optimistic valuations based on rosy global growth projections, and the belief very smart people will make bright shinny things brighter and shinier. Next year is going to be about real stuff, like how you going to sell this commodity (be it an electric car, swanky mobile phone with a fruit logo, or avacados. Why avocados…? because.. just because.) Consumption vs recession. Ouch.
Markets are being roiled by politics, soiling themselves on trade war panics, scared witless by mounting populism and its pay-off: massive policy mistakes, and waking up to the horrendous unintended consequences of the last 10-years of monetary experimentation and over-regulation, working out that every single financial asset (by which I mean listed stocks and bonds) is price-distorted. In fact; every aspect of modern finance is distorted! Sentiment is bruised which means the global economy is vulnerable to being pushed over the edge as the current fears of recession in 2019 become a self-fulfilling prophesy.
When all around are losing theirs, keep yours. Time to get your buying boots ready. There are going to be some fantastic bargains. There always are when it goes wibbly-wobbly/topsy-turvy. (The danger, of course, is there are so many people thinking it’s about to get cheap, that it never does….)
Remember Blain’s Mantra No 1: The market has but one objective: to inflict the maximum amount of pain on the maximum number of participants. Just make sure you aren’t on the wrong side. Contrarian time.
Take Thomas Cook – massive equity crash and bonds massively wider as they admit they got 2018 horribly wrong. Expected to default. The UK holiday airline really could not have done a worse job. Turned a passable holiday carrier into the proverbial plane wreck. The management should be hung, drawn and quartered for screwing up so thoroughly. But is it about to go bust? Nope. They can’t raise equity at these levels, but it’s not got a big bond redemption for 3 years, which might be time to put the broken parts back together again. Again. (They been here before!) It’s a risk, but when its trading like distressed junk and we’re about to have a great ski season.. maybe time for a punt?
And there have to be thousands of similar opportunities out there..
Financial Reality will work both ways.
How about Apple? They are my particular target at the moment. My new iPhone X developed a hairline crack on the back and started playing up. No idea how it happened because it was protected by an Apple shock box. Apple say the crack is negligent damage, and are offering to fix it for £670 6 weeks after I bought it despite a one year warranty – worth zero. I suppose it’s their new business model.. as iPhone sales fall off a cliff, charge people silly money to repair them.
Samsung here I come!
If enough people do the same.. and names like Apple sink.. then at some point they will get sensible, accept their failure to innovate, and start to deserve our custom again. Once they realise they are just a commodity maker then they either make a truly innovative product or start charging sensible money, or go the same way as Nokia…. Their call.
If you want something to cheer you up this morning.. try Saxo Bank’s Outrageous Predictions 2019. Some great ideas in it – and some of them not so stupid. I hope they will forgive me if I print this link: https://www.home.saxo/-/media/documents/campaigns/outrageous-predictions/outrageouspredictions2019.pdf
A digression: Saudi vs Iran?
I had a number of comments about Monday’s porridge on the significance of Qatar pulling out of Opec, and what next for Saudi. What is the relevance for markets they asked?
That’s interesting question. Donald Trump recently told us that his successful negotiations and personal relationship with Mohammed bin Salman attracted planned investment of $450 bln into the US, including $110 bln in defence orders, from Saudi Arabia. He warned all that could be undone if we don’t turn a blind eye to the Khashoggi murder.
Do these numbers stack up? Not remotely. The $110 bln Trump says will be spent with US defence contractors boils down to a mere $14.5 bln in actual signed defence deals. The $450 bln number is Fake News. There is also British Aerospace’s $12.5 bln deal to sell Saudi 48 Typhoon fighters. It’s not a deal either. It’s a statement of intent BAE has been trying to firm up for years. It could be renounced anytime.. especially if the Saudi’s decide the West is not deferential enough and continue their pivot to Russia to buy much cheaper (but pretty darn effective) MIGs!
It doesn’t really matter what the Saudi’s buy. They proved unprepared and less than competent in their war against Yemen’s Houthi insurgents. Cheap MIGs drop just as murderous bombs on civilians as expensive Typhoons.
Saudi is probably already spending more with the Russians – the UK’s Spectator magazine speculates they have struck a deal to buy Russia’s very effective S-400 anti-aircraft missiles. To defend themselves from what? Of course, we sell Saudi the most modern fighters because they need them to defend themselves against the Iranians. It should be noted, after years of sanctions, Iran flys F4 Phantoms built in the 1960s and some Russian Su-22s from the 1990s.
But shoring up Saudi is a direct way to combat the Iranians…
Why is that important? Oh yes, President Trump, and his son-in-law, don’t like Iran and have renounced all the agreements with them on the basis they are bad people. After all, the Iranians embarrassed America in 1979, hate the West and sponsor Shia terror? And Shia terror is much worse than Sunni Terror – apparently. Confused? The Shia’s are the ones behind Hezbollah and the Houthi’s – considered Iranian stooges. The Sunnis are the Wahabi maniacs who killed thousands in the Twin Towers atrocity, (the terrorists were largely Saudi citizens), and have spawned ISIS, Boko Haram etc. That the Saudi state is effectively and formally tied to Wahhabism to support the Royal Family isn’t apparently an issue for the West.
While no single US senator or congressman has ever been elected on the basis of their support for Saudi, the importance of the pro-Israel vote (which is anti-Iran) is quite properly important for many representatives. But, in recent months the scale of revulsion and questioning of supporting Saudi has reached a level where Trump looks like he’s increasingly standing alone in his support for MbS.
When I was younger, one of the most fascinating books I read was the Arab Conquests by General John “Pasha” Glubb, commander of the Elite Arab Legion. The success of a relatively small band of motivated desert nomads inspired by the vision of the Prophet is unparalleled. They created an unstoppable military paradigm shift, and the speed they overcame first the Persian empire, then everyone else from India to the Pyrenees was astonishing. Arab learning from the 7th Century onwards was phenomenal – they named and mapped the stars and measured the globe. I can’t help but admire them.
But it’s difficult to reconcile the Arab conquests’ and assimilation of cultures across the near east and Africa, the beauty of Islamic Art, and the palaces of El-Andalus with a Saudi ruling family that remains in the dark ages or a kleptocratic crown prince who’s read too much yet understands so little Machiavelli.
What is Saudi today? Home to 20mm young, bored and unemployed youths living in sink-estates on the edge of the big cities, targeted by the competing forces of Islamic radicalisation or Western Social Media? An education system that produces more Koranic scholars than engineers, medics and scientists? An economy hopelessly linked to oil, which the rest of the world decreasingly wants?
Are we backing the wrong rider in the Saud vs Iran steeplechase?
To be fair – my own experience meeting Iranians was they are charming but unabashedly on the make – every meeting started with requests for introductory “expenses” and “facilitation fees”. But give them credit for inventing chess.
To be blunt.. if you are investing in US and European defence companies on the basis they will make fortunes out of over-priced Saudi defence spending.. you are likely to lose. It’s unlikely MbS will be replaced in a coup – his control of the apparatus of state is as absolute as his rule. More likely is decreasing connectivity to the West, and a pivot to Russia. Ultimately, Saudi will lose if it can’t reinvent its economy away from oil, and without access to modernisation, western influence and technology, and education outside of narrow-minded madrassas. It shows little sign of happening. For the moment – Saudi is a massive short.
Out of time…