Blain’s Morning Porridge – May 2nd 2019

Blain’s Morning Porridge  – May 2nd 2019

“If you can walk away, it’s a good landing. If you can use the airplane the next day, it’s an outstanding landing!”

In the headlines this morning:

What’s not to like about current markets?


  • A strong US economy – the strength of last week’s 3.2%      growth rate data will likely be bolstered by a strong Jobs number tomorrow and ongoing solid economic releases through this month.
  • A US President determined to pump-prime an economic      boom ahead of election year – who will do anything to avoid a downturn.
  • Theresa May finally doing something decisive and      sacking a minster for indiscipline might suggest political firmness on the way, and maybe even a deal with Labour on Brexit?
  • A compliant(ish) Fed showing no sign of tightening      policy. (Some analysts put it another way – the Fed rejecting Trump by not cutting rates…)
  • The same Fed perceiving no concerns on inflation,      painting a picture of a US economy on a “healthy path”.
  • Signals Trump wants the China Trade deal signed asap –      and even prepared to “compromise” on the key content – could provide another market booster.
  • US Oil production reaching record levels.
  • Apple surging 5% – despite falling sales – because it      announced another stock buyback. (See link  to a very interesting Bloomberg note on Apple’s failure to fill the      looming iPhone “crater”.)
  • Maybe global trade is not a bad as we feared – has      anyone noticed the Baltic Dry Index (an index showing global shipping costs) is up 54% in the last month?
  • Second quarter corporate results were expected to be      poor – lower because of the global trade fracas and overstretched. Instead they’d generally been stronger than expected, hinting at a much firmer      base.
  • Q2 Reporting across the Tech sector – the sector many think most vulnerable to a correction – has been solid. Aside from Alphabet’s lacklustre numbers, most Tech did well. Facebook was supposed to be the one that would cost us all dear because of on-going privacy issues and      regulation. Nope. FB has seen a massive gain!


All in all, its not a bad picture. Economic growth, low rates, strong corporate performance, global trade not dead, and smiles all round..

Or is it a bit complacent? I reckon the rosy picture I’ve painted above is somewhat distorted – it’s a dangerous reflection of deeper underlying issues with markets.

I am concerned about the bond market. Why? Because in the bond market lies the truth.

It’s very difficult to invest sensibly in the bond market at present. Rates remain distortedly low. Much of Europe is back in negative yield territory. US rates have not normalised either. Its an investment truth you can’t survive on 2.5% 10-year Treasury Yields, and corporate bond yields at spreads so tight they don’t properly reflect risk. Treasuries are supposed to be the zero-risk rate – but when the discount rate they provide is simply wrong, then it effects every other investment – distorting the risk/return equation.

Fixed Income Investors are left with the option of idiosyncratic plays – looking for value in thin illiquid markets. Over the past few days I’ve been speaking to clients about a whole raft of bond ideas to generate above market returns, but it’s difficult to focus on making 6% by taking extremely clever and complex synthetic European Sov risk when the stock market is touching new highs each and every day.

There are smart bond market plays out there – but overall markets seem focused on yield tourism again. When bond rates are too low to care about, money is looking for unconstrained returns that can’t be found in the dull boring predictable bond markets. When bond yields are so artificially low and stock prices look to have another leg up, then it difficult to ignore them!

Remember Blain’s Market Mantra no 1: “The Markets only objective is to inflict the maximum amount of pain on the maximum amount of participants.”  Feels to me its setting itself up to catch as many bond market refugees as possible, and fleece them in stocks…

Call me Cassandra, but I don’t think this ends well..

One interesting snippet to note.. I note Warren Buffet has made a big bet on Dubai property (which is down 25% in last few years..) What does he know that we don’t? We’ve been talking about the likelihood of increased volatility and potential instability in the region, rather than it finding a firm base.. Hmmm. Must consider foundations in sand…

Out of time and back to the day job..

Bill Blain

Shard Capital