Blain’s Morning Porridge – Feb 6 2019 – Too much money?

Blain’s Morning Porridge  – 6th February  2019

“Let them eat iPads…”

In the headlines this morning:

My comments on poverty in San Francisco went viral y’day. Over 200,000 views on Zerohedge – and over 1000 comments. (Not all of them very polite. Some quite rude and some amusing.)

The wider issues of why the richest economy on the planet has allowed such squalor, degradation, and inquity is a tough one to address. Sadly, solving depravation doesn’t seem to appear on Mr Trump’s “Make America Great Again” agenda. Neither is it on the list of boastful philanthropic projects espoused by billionaires in their gated communities – they seem to believe poverty is something that happens elsewhere and anything else can be solved with robots and algorithms… broken people are just externalities.

The consequences of not addressing creeping poverty and income inequality are too great to ignore. It needs to be solved (and not just in the USA). To paraphrase a greater American: “We do these things because they are difficult..

Meanwhile, back in the real world..

What’s happening in the markets? I’ve long been predicting the end of QE would cause bond yields to rise, and stocks to tumble. Without Central banks as the distorting buyers of first and last resort prices should correct downwards. Seems I was wrong again.. There is too much money in the world.. apparently.

This year, money has been pouring back into the Corporate Bond world. Suddenly all the fears of rising defaults, compromised leverage ratios and debt burdens, and the fears of rising rates seem to have evaporated in the wake of the less agitated and less impulsive Fed. Credit spreads have tightened. High Yield is back in favour. Emerging Market deals have been blow outs – even for names like Turkey. Government bond yields have tumbled again – back to the stage where the bulk of Europe’s Euro Sov Bond Market is now effectively ZIRP and NIRP (zero and negative interest rates!)

What’s happening? Are we in a new world where long-term interest rates are set to remain lower for longer? Where growth is going to remain stop-start leaving Central banks accommodative? Is this the new New Normal?

Or are we just in a period of uncertain hiatus? Where investors sort of realise interest rates can’t remain this low forever, but got so burnt by the stock market volatility at the end of last year, they’ve got to put their money somewhere.. therefore into relatively safer bonds. There is an awful lot of money out there to be invested. Thus a trickle of money back into bonds becomes a flood – and everyone follows the money.. Its described as FOMO (“fear of missing out”) in other blogs.

I’m still not convinced. I still think the big risk is a flood of money today becomes illiquidity tomorrow. Gonna happen…

Curious things happen in bonds. Congratulations to any holders of Air Norwegian bonds. The expectation on the market was they’d default on their unsecured bonds, but a last minute rights issues last week (knocking the stock price down 33%) put the crisis on hold. The bond price rose 15 points in heartbeat. They are changing their expansionary model, and looking to consolidate.

There are still games to be played in the name, the sector and in Aircraft. I flew Norwegian to San Francisco and back – sitting in a nice new B-787 Dreamliner rather than a cruddy old Jumbo BA bought back when I was starting my career.. It was a most pleasant experience.  I suspect IAG (BA’s owners) will be back – they need the planes, therefore the stock may be worth some work.

Elsewhere I notice Goldman Sachs is pulling out of the commodities trading business as CEO David Solomon cuts costs by cutting less profitable businesses. The firm will cut trading of metals and precious metals, and from the logistical side of physical commodities.

It comes at an interesting time for my employer, Shard Capital – and an opportunity for me to do some pure marketing! We’ve just launched a new Commodities Derivatives Businesses, focusing on serving end clients with commodity hedging solutions. Many of our clients have seen the larger banks pull out due to high costs. We’ve put a new team on board to broke commodity trades, together with a strategic partnership to clear and trade through Marex Solutions.  The team are active in Energy, Precious Metals, Industrial Metals and Agricultural Commodities.

I know I have many readers from the Aviation sector – my colleagues have a number of ideas in terms of aviation fuel hedges they’d be happy to show. If you’d like to receive more information on the Commodities Team, set up lines, and get access to their reports, please let me know and I’ll put you directly in touch. I can send you the pitch book!

Out of time, and back to the day job…

Bill Blain

Shard Capital