Blain’s Morning Porridge – January 24th2020
“In the short-run the market is a voting machine, but in the long run it weighs profits.”
I started off this week wondering if markets were approaching a corrective top after an insanely euphoric start to the year. Chartists were telling me signals of imminent doom and gloom were there to see where the momentum lines converged on their price and volume graphs. Thus far we’ve only got one of the markets I expected to shift showing any real change – Oil, which has trucked down through the week. The other assets: stocks, bonds, dollar and gold haven’t done much.. but could they yet shock us? Why not..? The year is yet young. Oil could yet prove the trigger – crashing oil prices hardly suggest global economic strength and recovery!
The event of the week was the rapid escalation of Killer Snake Flu – as the UK’s tabloid Sun Not-a-Newspaper has described the Wuhan Coronavirus. We now know it’s killed 25 people including one young fit person, it doesn’t necessary show fever as a symptom, and its already spreading around the globe. Chinese cities with a combined population of 36 million people have been put into lockdown, and the Lunar New Year holiday looks certain to be muted. Its already having direct effects on growth, consumption and markets.
Yet, we know next to nothing about where this goes next. The World Health Organisation has not yet called a global pandemic, and we don’t know just how virulent, dangerous, or contagious it is yet. It’s a developing story. Killer Snake Flu is a classic No-See-Um event – unexpected, unknown and triggering great uncertainty in the market mindset – partly on how government responds.
Then there has been Davos, where the World’s great and the good and Trump gathered to scare each other about trade, protectionism, the environment and climate. They politely listened to Trump’s electioneering and wondered how to deal with Greta: keep their customers happy by being seen to act without upsetting their shareholders by acting.
The FT reports record pessimism at the conference, summing up the week in a quote: “There’s a certain befuddlement, the market is up 30% but it doesn’t feel like it’s up 30%.” (That’s because the 30% gains are an illusory bubble burped out of the over-abundant liquidity created by Central banks – a sugar rush that is now making the market sick.. but I’m bored telling that story…)
The basics are simple: despite the parties, the champagne, or Carrie Lam – the Hong Kong leader basking in a 14% approval rating – dishing out Dim-sum to the few conference liggers willing to be seen with her, deep in their souls (at least for those who still have them), the Davos attendees know the gig is up. They are beholden to central banks maintaining appearances, keeping the hordes from the castle gates via low rates and QE, while they struggle to adjust from 2000s capitalism that made it fine to ramp up stock prices, pay themselves billions in stock options, and trigger massively wider income inequality.
The Davos-set will continue to cry crocodile tears about the environment, spout platitudes about Me-too while engaging in extra-curricular activities, praise equality and go buy themselves another fur-coat and swill champagne paid for by the sweated labour of zero-hour work-slaves. Someone drop a bomb on Davos…. It’s so last decade…
Meanwhile, back in the real world…
On the back of a record new-year European Bond Market volume – €200 bln plus in 3 weeks – does Ukraine getting a Euro 1.25bln new 10-year bond issue away at 4.75% earlier this week mean we reached the Ukrainian Chicken Farm Moment in Bond markets? I’ve been asking that question every couple of years since the Great Financial Crisis of 2008, stunned by how tight and unquestioning bond markets have become.
The UCFM is something I can definitely claim – actually it was myself and my then business partner Jim St-Johnston who first came up with the concept. It’s based on the story of a deal we were both involved with years before. The eponymous chicken farm launched a bond deal just before the outbreak of bird flu in Hong Kong. Few investors had ever heard of the company, but with an interest rate north of 10 percent, who could resist? We had to push investors away from the roadshow meetings. It was massively oversubscribed. But, the chicken farm was uninsured and Bird-Flu caused the market to immediately crash 30 percent or more.
The UCFM is now market legend. In one of the periodic moments of disbelief at tightening spreads as few years ago, Mark Gilbert of Bloomberg wrote about it a few years ago, describing it: “that moment of supreme belief when anything is possible in the new issues market will always be remembered as “The Ukrainian Chicken Farm Moment.””
The story in the FT on the new Ukraine deal quotes investor surprise, the suspicion investors had been bait-and-switched, and concerns about complacency – but dismisses it all as just the way markets happen. So far January 2020 has seen the highest volume of new issuance in global bond markets ever. I sure would like to know what corporates intend to do with that money. Of, course.. more stock buybacks or maybe some M&A at this market top!
Of course, with bond yields so low and spreads so tight… how are investors expected to make any kind of return? And that possibly explains why the market is completely ignoring the basics of where stocks are currently priced. When equity dividend yields are so much higher than bonds, then the rules of money gravity and yield tourism will likely keep the stock marker strong.
If you want a story to sum up stock markets: earlier this week Netflix was down after disappointing numbers that raised serious concerns about future growth prospects for its more competitive US subscriber base – very serious stuff. Yesterday it rallied to a new peak on the back of expectations Asian subscribers will rise because they will stay at home, scared by the Snake Flu – and you can’t get Netflix in China!
Sorry to bore you all, but just to make my life complete, Southwestern Rail train guards have decided to go on strike again. Their gripe is that new rail technology means their vital role of pressing the door close button is now done automatically. In December travel from down South into London was nearly impossible due to their last strike. When it happens again I am going to work mostly from home because its not worth getting stressed and having another heart attack. If the Rail Workers want to get all luddite and Victorian on us, I suggest we, the customers and the government (who are likely to have take over the failing rail franchise), get Medieval with them and the company management.. and I mean that in the very painful Tarantino meaning of the expression.
It’s the day before Burn’s Night – when we Scots celebrate our national bard, Robert Burns. He was one of the great Poets of the working people, despite being a tax-collector at one point. Burns became the toast of his generation during his lifetime. Today… well I’m sure he’d be at the receiving end of some pointed barbs from the Me-Too movement, and criticised for his lack of Woke – whatever that might mean. He told it like it was and never minded whom he barbed.
Like all Scots I claim kinship with Burns – his mother was a Blain, and at least two of his children from the wrong side of the bed appear in our family tree on my mother’s side. My favourite Burns moment recently was my daughter Jenny reading A Red, Red Rose when I finally married She-Who-is-Mrs-Blain a few years ago: “And fare thee weel, my only luve, and fare thee weel awhile! And I will come again, my love, though it were ten thousand miles.” before slyly adding, “And I would walk 500 miles and I would walk 500 more, just to be the man who walked 500 miles to stand beside your door..”
If you are going to a Burns Supper this weekend, try it – it works. Who said poetry was dead and irrelevant…?
Five Stories to Read This Morning
FT – UK debt management chief gets set for fresh borrowing binge
BBerg – A CoCo Bond at 3.375%? The Market’s Still Crazy
Bberg – ECB’s Lagarde Says Markets Shouldn’t Assume Policy on Autopilot
WSJ – Ebullient Mood in Davos Should Put Investors on Edge
WSJ – China’s Coronavirus Response is Questioned: “Everyone was Blindly Optimistic”
Have a great weekend, and out of time..