Blain’s Morning Porridge – July 18th 2019
“ The best laid plans o’ mice and men gang aft awry.”
In the headlines this morning: https://morningporridge.com/stuff-im-watching
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Apologies for absence of Porridge last few days, but an even bigger apology is due for a stupid mistake I made last week – see below. Lots of stuff to think about today – increasing trade spats, rising worries about Brexit taking the pound to parity, what’s happening in Yoorp, Iran, and the rest.. And these are supposed to be thin summer markets..
But let’s start with Donald Trump…
I admitted a guilty pleasure in Donald Trump’s tweets – owning up to occasionally laughing out loud at his racist, bigoted and sexist comments because they were so politically incorrect. Let me retract that. I am sorry. They are not funny – they are disturbing. Neither are they stupid – they are calculated to resonate with his supporters. Donald is determined to win his second term, and its clear he will play any card to do so.
What have Trump’s tweets got to do with markets? Everything. Markets are about behaviour. Factor in just how different Trump is when trying to work out how he will effect markets. Don’t expect conventional moves – which is why I now pretty much discount any chance of a real US/China trade agreement. We might get a cessation of hostilities, but only until Trump decides to reopen them. He’s confirmed himself as the definitional loose cannon, although he’d probably prefer “disruptive”! Factor his shocking behaviour into your market calculations.
Do his recent racist tweets represent the way the US president is really thinking? Or are they just electoral subterfuge to appeal to his supporters? The fact he’s deliberately condoned racism in his hunt for a second term confirms a President prepared to cross any line. If he isn’t willing to draw a line, then that’s profoundly dangerous.
(It may also be the current barrage of hate directed against Congresswomen who don’t share his political leanings and background could be a deliberate distraction to turn the news focus away from who disgraced financier Jeffrey Epstein has been pimping for. Interesting how quickly Labour secretary Alex Acosta (who brokered the face-saving 2008 deal) resigned. A number of US sources tell me fallout from Epstein could become the financial industry’s “Me-Too” moment – if it isn’t kept off the front pages.)
Perversely, Trump’s out-there beastliness makes it much easier to strategize likely market outcomes. (The difficult bit will come when it unravels.) The UK’s former ambassador will not have been the only diplomat bluntly telling foreign governments exactly how Trump plays. Anyone “negotiating” with him will be under no illusions re his honour or decency – although I’m sure they will flatter his ego to secure necessary deals.
Understanding Trump’s behaviour and motivation – and how these influence America – is a critical component of current markets. Issues like trade, global relations, tax, geopolitics, and the independence of the Fed have all been Trumped. It’s difficult to be positive about solving long-term issues like global growth, income inequality, social division, environmental challenges or trade – when the American president behaves like an African Kleptocrat, sacrificing basic values to maintain his grip.
It’s worth reminding us what former UK Ambassador Kim Darroch said – essentially you can’t analyse Trump as a normal politician: he plays by his own rules with few of the checks we associate with the US system, his White House is dysfunctional, chaotic and incompetent, relationships between the Department of State and the President are in tatters – and surprisingly he didn’t even get round to rampant nepotism.
His attack on the squad of socially aware and concerned congresswomen on their ethnicity was a calculated and provocative insult. Economically they are probably wrong and somewhat naïve. But Trump knows that’s a fight he might have lost because they aren’t stupid. He didn’t even bother arguing, but played to his supporters. If it’s OK for the president of the USA to be racist, then its ok for them. That bottle is uncorked – you can’t go back. The implications and consequences of reopening festering racist wounds will be enormous – but he doesn’t care as long as he wins.
And when the president says they are Un-American… well we saw how that played out in the 1940s and 50s.
I can’t believe more of decent right-wing Americans haven’t vented their disgust – which should worry us even more in terms of how well Trump reads the mood and suggestibility of his swathe of the electorate.
Let’s move back to Markets.
As we move through Earnings Season, we have our first big tumble! Netflix – actually losing 130k subscribers in the US and missing growth internationally. I don’t want to gloat, but exactly what I suggested might happen is now happening. First, they are failing to grow the subscriber base to cover costs. Second, they are losing subscriber favourites like Friends and The Office – which are being moved to competing sites. Third, the competition is eating their lunch as Disney and others have the lightbulb moment and realise the value of their content and how to monetise it. Fourth, in a world of multiple streaming services Netflix is struggling to attract viewers.
Netflix says it’s got great content coming up, but what about last few months? I think I opened my Netflix once or twice, but I’ve been watching loads of stuff on Prime! Time to switch Netflix into Now?
Meanwhile, on the other side of the pond…
Europe looks interesting. New European Commission elect President Ursula von der Leyen doesn’t take office till November but is already shaking the Brussels tree. She won her confirmation by a slim majority – prompting charges of political chicanery. It’s causing doubts on her long-term ability to deliver anything significant from the deeply divided and increasingly fragmented European Parliament. She’s set an agenda that includes Greening the EU with new carbon taxes and a 55% cut in Carbon emissions and gender equality in parliament. She faces global trade disputes and sorting out the EU’s budget when many member states are deeply concerned.
But the big issue for Leyen, and new ECB Head Christin Lagarde, is Berlin – how to drag along Germany into agreeing closer fiscal union and new policies to drive growth? Its desperately required – the current “whatever it takes” sticking plaster approach of ultra-low rates and QE worked well enough to keep the Euro from imploding, but is now hopelessly entangled and ineffective. Without new Bunds to buy the EU is up to its limits buying other EU sovereign debt! There is no agreement on new strategies to boost the economy.
One bright spot is Angela Merkel, who is emerging from the current electoral dance in Berlin looking in fairly strong shape with her coalition looking likely to hold together. Does that give her more time and incentive to deal with President Macron of France and move forward on Europe? I simply don’t know. I read a very long in-depth analysis on current German politics (God knows how I stayed awake) by one of the leading German banks y’day. Not once, did it even mention Europe, the EU or EC. That confirms what I suspected – Germany isn’t particularly minded to support change in Europe… which means there may be a German in charge in Brussels, but don’t expect anything dramatic.
And unless Europe does solve the fiscal aspects required to make its Monetary union work.. then we are in serious trouble!
I am delighted to see Leyen has ditched the Beast of Berlaymont – Martin Selmayr, pretty much self-appointed secretary-general of the European Commission. He was defenestrated earlier this week. (What a wonderful term – first popularised in Prague at another unsuccessful attempt at European unity (of a sorts).) Selmayr claims he is departing Brussels on his own terms – but that’s clearly not the case. Wonder where he will surface next?
Out of time, and off to do the day job
Bill Blain
Shard Capital