Blain’s Morning Porridge – July 9th 2019
“All the ducks are swimming on the water, fal di ral di ri do…”
In the headlines this morning: https://morningporridge.com/stuff-im-watching
Get ready for a long nervous summer…
Stock Markets were mildly upset by last week’s strong US employment report – but the ducks look to be swimming back into line. We’ll be listening carefully to what Fed speakers say this week – most likely they will remain dovish rather than rule out the ease cycle markets are praying for and Trump is demanding. As it looks likely the UK has plunged into negative growth over the last few months, the BOE will also join the easing queue. How smug will Carney be when he announces it? And Europe? Draghi has already promised the kitchen sink will be thrown at flatline growth… The ECB is likely to ease rates and resume its bond buying programme as early as September according to some analysts.
All of which means… The next couple of summer months are going to be about avoiding treading gingerly to avoid triggering any of the major cluster-ouches that could ruin the holidays. We have to wait out the dog-day season for central banks to ease and restart the party. There are plenty of landmines the market might blunder into. Some of the visible threats to market calm include: Iran, US/UK relations in the wake of the ambassadorial betrayal (the leaks were from Tory Brexiteers), the prospects for real (as opposed to G20 posturing) China/US engagement, or US/Europe trade.
However, it’s the “no-see-ems” that cause most trouble in quiet markets. A big upside shock could be the Fed surrendering and easing early despite the strong numbers. That could be interesting – such a surprise would certainly push the market higher. (It would also confirm my belief the Fed has been taken over by the Pod People and markets are doomed to eternal distortion.)
Downside shocks could come from anywhere – a foolish Trump Twitterstorm, something in Europe, or how about a constitutional crisis in the UK. Summer sentiment can be a fickle thing.. I still reckon Hong Kong is the place to be watching – and a bit surprised to read this morning its UK Policemen who are in senior positions at the head of the Royal Hong Kong Police Force. That can’t be an easy job.
The bottom line – when it’s too quiet out there, it’s time to make sure you hard hat is in easy reach…
Bank in Yoorp…
Yesterday, we saw the all-too-familiar sight of bankers departing a sinking ship clutching pathetic boxes of possessions. Some banks die fast, some die hard and slow… some explode while others splutter on into the equivalent of banking dementia. Sadly, that’s true of too many European banks. I can understand the thinking behind folk buying that have been buying recent high-yielding European Tier 1 CoCos – delusional perhaps to think banks of the quality of MPS and Pireaus will qualify for too-big-to-fail.. but they’ve lasted this long… so maybe they are investible despite their dubious records.
The stock price action on Deutsche Bank said it all yesterday – 10% down on the latest and biggest slashing restructuring plan. But it got me thinking. Deutsche Bank lost its way in Investment banking the moment it lost it self-confidence and became scared of becoming a major global player. As soon as the staff realised it, they lost interest. Bad markets didn’t help, but the speed at which Deutsche’s position in markets crashed was extraordinary and a function of failed top management. After nearly 35 years in markets, I’ve seen it and lived it, all before…
When I was just a young investment banker I ended up with the Germany beat – despite not speaking a word of the language. I had to learn all about their multiple layered banking system and the quirks of the system, for instance; the stability of Pfandbrief financing (“Since pfandbreif laws were enacted, not a single bond has defaulted” which covered up the fact they were set up because so many banks defaulted before!) I learnt there were thousands of banks, and except for the big three (DB, Commerz and Dresdner), were all parochial players. I loved covering the German banks – they were good people, great fun and engaging. Sadly, and I’m sorry to say this.. they aren’t particularly good bankers. Not their fault.
For a start their experience pool was far too shallow – you couldn’t learn in Frankfurt or Munich in a lifetime what my experiences in London and New York gave me in just a few years. And they learnt all the wrong things. While Germans are superb engineers, markets are not an engineering science, and they weren’t trained with the nimbleness of thought required to understand that. You might say something similar about some French banks – superb mathematicians and derivative quants, but lacking the intuitive feel for deals, people and markets that makes the Americans so much luckier – luck and understanding is something you make and learn for yourself.
What is so wrong with German banking? If you call up the biggest most spectacular banking explosions you won’t find many German banks on the list – but their losses and subsequent costs to the German tax-payers of their public banks (the Landesbanken, Sparkassen and IKB ) over the past 10-years have been as extraordinary as the better known Lehman cardiac or the long-drawn out saga of RBOS. I could go through the names and remember their faces, but its not necessary.
Germany’s banks have come croppers on just about everything: losing money in structured debt and ABS in the US, Greek debt, property and covered bonds in Europe, shipping and investments in Austrian banks. Their market is fractured into small localities. That’s the reason Deutsche Bank became a global bank in the first place – because its domestic market was too difficult, parochial and impossible. Yet, that’s where it’s going back to? That’s madness. And that’s why the stock price is where it is.. Down 94% from its peak at $91.63 in May 2007 to $6 today. Walk away and don’t look back..
Before I run off, let me remind readers I published a new book over the weekend – The Fifth Horseman. (The link takes you to the Amazon Kindle page.) It’s a Polemic: who to blame for the ongoing destruction of the global economy. Most market histories are awfully dull affairs, so I tried to make this more interesting: Hell’s Top Banker, TJ Wormwood, managed the global crisis of 2007/08. It’s been so successful he’s looking to extend the programme. His latest “wheeze” to keep up the fear and uncertainty is to introduce a new Fifth Horseman of the Apocalypse – “Financial Meltdown”.
For less than the price of a couple of pints, you can have great read about why the markets are so distorted today…
Out of time and back to the day job!