Blain’s Morning Porridge – June 19th 2019

Blain’s Morning Porridge  – June 19th 2019

“You cannot be serious…”

Check out the new Edition of Property Chronicle:

In the headlines this morning:

Oh dear.. Now I am worried. The only positive I can discern is its International Martini Day – Dukes, here we come..

It was a massive Wowser WTF moment on stocks! Donald Trump says he’s having a meeting with Xi and the stock market goes into the stratosphere! Then XI confirms, and its joy unlimited across markets. New records beckon.… Joy unconfined.. What can possibly go wrong? Softbank head Son telling investors it could be worth $1.8 trillion in a few years? (Note to self – sell stocks.)

On the other side of the pond, it’s a Wow on Bunds…. Spectacular gains y’day taking the 10-year Bund rate to -0.33% after Mario Draghi talked about immediately lower rates, reopening QE and using all the unused A380s Superjumbos to drop wads of money across Yoorp. Spain bond buyers now get a gnat’s crotchet of positive yields, while Italy is just over 2%! Trump immediately tweets branding Draghi an unfair currency manipulator. Draghi looks at the miserable German ZEW and wonders why Donald doesn’t get on an do his own job… (Good to know Trump is on the ball and watching everything… everything.. (Crashing Minor Chords! Note to self – buy Treasuries and Gold).

Meanwhile, the Tories have found something to rally around… kicking Rory Stewart (which, thinking about it, has to be worth trying)… Last night’s televised debate between the candidates was truly terrible. The only positives I could garner was Boris has been stripped of his personality, and Sajid Javid came across measured and even polite. I’d vote for him, but we will never get the chance because most of us are too sensible, young, clever, to be members of the party… Meanwhile, Corbyn looks likely to accept Labour policy will pivot towards a second referendum….

And Facebook is launching its own Cryptocurrency. You have to be f*th*ng kidding me…? Given everything we think know about Facebook, would you let them run money? It aint ever going to happen if the regulators get a say. I suspect Facebook is taking a position for a possible next stage of this ongoing Financial Meltdown – the complete collapse of confidence in Government Fiat money. I’m increasingly of the view that’s one of the potential unintended consequences of Modern Monetary Theory – but its complex. (Promise – will scribble down thots on this in a Friday rant..)

It’s all truly hat-stand stuff…

Step back and think it through? On one hand, the precipitous falls in government yields in the US and Europe seems to confirm its time to be really, really nervous about global growth. On the other, how much of it is over-reaction to noise? In the US its driven by the Trump vs Fed, and in Europe by Draghi. Maybe the yield curve inversion became a self-fulfilling prophesy, and the all the mumbo-jumbo about record low real rates and the lack of vol, spells a deep global depression. Rabid protectionism, populism and rampant patriotism is never a good mix.

Or is the global economy in stronger shape than yields suggest? Global stocks clearly believe it as they rallied y’day on the expectation a Trump Xi meeting ends the Trade War threat.

It’s never that simple. What breaks first? The insanely optimistic and unflappable stock market, or terminally glum debt markets? What’s the hedge? Gold? Nope..

Tomorrow the whole market will be talking about what the Fed says tonight. So, today let’s talk about the ECB. Lots of folk think they are out of options. Europe looks to have economically flatlined. A random set of headlines this morning confirms miserable confidence levels, more French protests, and 7% of Italians living in absolute Poverty.

Yet, the ECB still isn’t talking in terms of rebuilding, stimulating and driving the economy. That isn’t their job. Their job is inflation, reminding us Europe doesn’t actually have a unified economic/industrial/growth policy – that’s a matter for national governments who can’t do fiscal policy spending boosts because then the ECB will be awfully unhappy if they breach debt/GDP levels. There is no common Fiscal Policy. Thus the Eurozone stagnates, withers and has utterly lost momentum…

Full marks to Mario Draghi for doing his best to hold the thing together through his tenure at the top, but what options does Europe’s central bank have after Mario’s “whatever it takes” approach? In terms of dragging inflation higher into its target zone, the ECB singularly failed. How much more negative do rates have to get? Relaunch QE? New asset purchase schemes? Pick a few random ideas from Modern Monetary Theory? Draghi is hinting fiscal policy is the answer – he is probably right, but without political will behind it.. what happens next?

It all depends on who gets the ECB job when Draghi leaves on October 31. He will not be easy to replace. The job requires exceptional leadership and communications skills, but also diplomacy to pull Europe to agree new policy. He (probably not a she) needs a plan on how to move Europe into collective support for fiscal intervention alongside the ECB’s increasingly pointless monetary experimentation – which means convince the Germans.

Draghi was fighting a different war. His goal was to do whatever it took the preserve the Euro. And that meant avoid a sovereign debt crisis by encouraging banks to use TLTRO money to buy govt debt, and then outright QE to keep up the illusion, while keeping the Euro alliance together. His successor has to move it forward towards Fiscal policy objectives.

Unfortunately, choosing the next ECB president is part of wider Brussels Jobs-for-the-boys carve up. The key European roles will be doled out according to who gets what other jobs. Best candidate for the ECB job is going to be a secondary issue to how many other jobs France and Germany get.

Let’s be blunt.. we probably need a German running the ECB to ensure German support for the next stage. While a Dutchman or a Finn might appear nicely neutral, the ECB needs strong direction and political sponsorship by the big dogs of the Union.  Jens Weidmann is known to have been hostile to much of Draghi’s past policies, but I’m told he’s been “accepting direction well” is his “campaign” for the role. He would clearly get the Ear of Berlin – but would the rest of Europe believe he’s listening to him? Challenging for a German, and maybe he has already been too vocal in Germany’s interest?

The other choice could be Benoit Coeure; the French ECB executive board is ruled out because he can’t be appointed to a second term, but like all things European, that can be fudged. He’s clever and brings continuity, and would need much diplomacy to bring Berlin and Paris together on fiscal moves.

Other runners and riders include:

Erki Liikanen (FIN) gets the Economist magazine’s vote, but as I can’t read the Economist (because it is just too boring), I can’t explain why it’s so keen on the ex-Bank of Finland chief.

Olli Rehn (FIN) is current Bank of Finland

Francois Villeroy di Galhau (FRA) is current Bank of France

Klass Knot (NED) is Dutch…

Other brands may be available.. but do they matter? Probably not..

Out of time and back to the day-job..

Bill Blain

Shard Capital