Blain’s Morning Porridge – June 11th 2019

Blain’s Morning Porridge  – June 11th 2019

“We are looking to lead the debate and discussion of wider regulatory issues…” 

In the headlines this morning:

Apologies for lack of comment y’day. I was out on a sailing day raising money for Wessex Heartbeat, a most excellent charity who provide care and support for all those affected by cardiovascular disease – they are particularly close to my own travails with a dodgy ticker! Despite it being June, we were cold, wet and freezing! But, we came back smiling because a Bad Day on the Water trumps a good day in the office anytime! Not sure we can be so cheery about difficult markets..

Back in the Real World (1) – We started with a discussion on the Tory leadership race, but the consensus on the desk was all the front-runners are patently rubbish with zero chance of resolving Brexit to anyone’s satisfaction. Well known City trader sitting next to me (who doesn’t want to be named), reckons its Boris by default on the basis at least we might get a giggle before the inevitable plunge into a Corbyinista Hell..   Oh, come on… “anything’s got to be better than the fridge”, said the sausage after being plucked from the freezer and stuck under the grill…

Bottom Line – Nothing Changes… Sterling and UK remain a “wait and see” moment with no solution on the horizon..

Back in the Real World (2) – Stocks are on a roll. Explain why?

All the evidence from cars to shipping points to a global slowdown. Yet stocks are rising? Because Donald took the heat off Mexico? A dismal US jobs report (get over it, it doesn’t matter)? The Fed apparently bending to Trump’s will? Deepening tensions with China as Trump challenges Xi to turn up at the G20 at end of the month? Headlines about crisis looming for Australian economy as China sniffles? A booming M&A market as the defence contractors Raytheon and UTC team up – “sure sign of top of the market” scream the headlines? Anti-trust investigations across tech – the driving force of the US market boom?  Analysts are dusting off their “end of a 10-year boom” headlines. Or how about last week’s ECB meeting as good as confirming its QE infinity in Europe?

That’s a pretty damning list of things to worry about in terms of the global economy – and remember there is loads of other stuff like Iran, oil-prices, freak global weather, etc. Does it matter? It’s just news. Of course, it doesn’t matter. What matters is how markets react, and because markets are now so inured to uncertainty, they will probably just breeze off a Trump vs Xi gunfight in Tokyo deepening the trade war, and snigger as Facebook and Google get rapped by the Feds for being naughty boys.. The Eurozone will heartily congratulate itself on QE infinity, and the next ECB president will be sworn to secrecy on the real issues….

However, the risk of training markets to react like Pavlov’s dogs to stimuli (or in this case, training them not to worry..) breeds dangerous complacency. Remember Blain’s Market Mantra No 1: “The Market has but one objective: to inflict the maximum amount of pain on the maximum amount of participants.” To achieve its foul ends, the market sucks us in… and when so much money is sloshing around, just desperate to find something to do… then it gets so much easier..

Meanwhile, last week I warned the most likely outcome of the collapse of Neil Woodford’s grand investment vision would be a regulatory clampdown on “Illiquid investments”. Sure enough FCA chief executive Andrew Bailey warned in the FT it “raised important questions about Britain’s regulatory approach towards investment in illiquid assets”. He acknowledges the role of funding start-ups and SME’s but the gulf between what regulators think liquidity is and the needs of the real economy seem unbridgeable. In the wake of the need for better ways to finance growth via SMEs we should be encouraging proper risk based funding and lending, rather than leaving it to fairy-tale concepts like peer-group funding and collapsed entities like Lendy!

When the crunch comes – as it periodically will always do, any asset can become illiquid. A bit of initial honesty – to accept that illiquidity is part of the risk equation and should be factored into an investment should be the starting point, not a definition buried in Ucits dictating what is and what is not “liquid”. Making fund managers taking responsibility is what should drive investments, not rules…

If you want a classic example on how to do it wrongly, try this excellent article from this morning’s FT about how Europe should re-regulate itself after Brexit. The French demanding a new stricter proscriptive regulatory regime is fascinating. French regulator Robert Ophele talks about rules, readability, and convergence, but not once does he even mention the purpose of markets – to finance the economy! It’s about the most hopeful thing I’ve read in terms of a bright future for London’s financial sector after Brexit. Free the markets to make mistakes! Its critical to long-term success!

“The line between what is financial advice and what is not is a bit of mess”, comments a former chief exec of the Investment Association. On Saturday morning, she-who-is-now-Mrs-Blain got a missive through the post telling her that her investments in Woodfund funds were now gated. While she does look at her pension statements, she can’t remember choosing to put money in Woodford: “I just agreed to the fund package suggested to me”, is her excuse. I wonder how many other savers got similar letters? The fact it’s becoming increasingly clear how certain retail brokers were willing to recommend funds into their top 50 lists on the basis of the Fees they were receiving is going to get very interesting. Terry Smith, of Fundsmith, is quoted in papers talking about one firm: “recommended funds were chosen mainly for fund managers’ willingness to comply with a charging structure which enables  [xx] to maximise its own profitability, and not because they perform well for investors.” 

This is going to be interesting… I suspect Mrs Blain’s investment in Woodford will prove an costly mistake, but the broker involved will pay dearly for it in compensation…

Out of time and back to day job..

Bill Blain

Shard Capital