Blain’s Morning Porridge – May 3rd 2019 – May Day Rant

Blain’s Morning Porridge  – May 3rd 2019

“Because something is happening here but you don’t know what it is. Do you Mr Jones?“

In the headlines this morning:

Thanks to all the Porridge Readers who have forwarded me the Bank of England Job, suggesting I apply. Not for me…

A few years ago I used to think I was being hilariously witty when I wrote about the Global Financial Crisis 2007-2027.

I fear I might not have joking! It doesn’t necessarily mean we’re in for 8 more years of austerity, doom and gloom. Fortunes will continue be won and lost. Markets will go up and down. There will be plenty more to write about in terms of extraordinary corporate madness – like Tesla’s new convertible issue (Please!) – and credulous markets. I’m not convinced there will be the global financial reset many fear.

But there are going to be long-term tectonic finance shifts. The next few years will likely see a complete turnaround in the basics of current markets. Be prepared. I suspect we’ve hit peak greed. There will be significant political shifts and reinvention – populism won’t last long. I also expect a massive change in the role of central banks, and their inter-reaction with governments, to drive clearer economic goals and objectives. The age of inflation targeting is over – we are going to undergo profound change after the scale of the last 10-years mistakes becomes apparent. It’s going to be bad news for some, but great for others.

I suspect Green/environmental themes will also come to the fore as the scale of what we’ve done to ourselves becomes apparent – and our kids will thank us for finally waking up to our responsibilities. (Perhaps the Climate Change Deniers should remember that capitalism is about taking responsibility!) As soon as I finish the Morning Porridge, I’ll be due dilligencing a carbon sequestration deal that looks very interesting and an industry of the future!

There are a whole series of things the week that have triggered this morning’s Friday rant:

·       Billionaire Ray Dalio’s comments on the inevitability of Modern Monetary Theory, and his acceptance of the need for taxing the rich, is one aspect of the new financial reality. The imperative for change in the actions of central banks as they are stuck in zero rates is one thing. The fact his thoughts are echoed my many other leading economists, but also by the rising star of politics, Alexandria Ocasio-Cortez, is fascinating.

·       I was stuck by the Sob-Story of a Chinese mother who blubbed she thought the $6mm she paid a corrupt sports coach was sponsorship to get her daughter into Stanford University. The video her daughter made was much more revealing – justifying her privileged admission to her “followers” on the basis of hard work she never did.

·       Or how about the billionaire boss of US pharma firm INSYS, John Kapoor, going to jail for bribing doctors to overprescribe opioids – now one of the largest killers in the US. What shocks me is the numbers of doctors happy to take $150k per year from Insys not blinking as they were killing their patients!

·       This week in LA was the “Predators Ball” in Los Angeles – the Milken Institute’s annual gab-fest of the great and greedy of the markets. It’s been described as yet another gathering of “Billionaires telling Millionaires what the ordinary people think”. The theme of the conference was “Driving Shared Prosperity”. (WTF does that mean?)  Some of the participant quotes are shocking – but at least the Billionaire message was very simple: Capitalism is Good, Venezuela and Russia prove that Socialism is very bad – taxing billionaires is Socialist and therefore very bad. The conference came complete with a sound garden and a puppy petting park – because petting puppies “reduces blood pressure, promotes focused inter-reactions, and stimulates problem solving.” BARF.

And then there was a discussion I had with a client this week. He’s a very successful fund manager who has been doing well. He was enthused, interested, and keen to explore new investment ideas. Over coffees we got onto talking about his young family, the fact he doesn’t see enough of them, the misery of his 1 hour each way commute, and his feeling of constant struggle – his earnings seem to just cover the mortgage, fees, schools, the cars and all the other sundries of modern life. He is time poor and feels financially stretched. He’s certainly in the top 0.2% of UK earners, but feels he’s just making do.

Most of us will know exactly how he feels. He is not alone.

Apparently, you need a £250k income to survive in London these days. San Francisco is even more expensive.

What is in store for our kids? Even after we poured money into their education and they’ve found “good” jobs, they struggle to pay rent on grotty flats (with little expectation of buying their own), and are lumbered with student debt. What have they got to look forward to? 30/40 years of clinging on before retiring on miserable pensions they’ve struggled to save in the heartless gig economy? And these are the better off kids..

Its no wonder there is so much talk about social revolution across markets today. We need to make things better. We are confronted with political failure across the occidental economies – the UK paralysed by Brexit, Europe in sway to populism, and the US – enough said. Many of my market colleagues agree with my analysis we face a summer of increasing protest and struggle. History tells us that times of such social imbalance and political impotence spawn the most dangerous event risks.

Let’s go back to the Predators’ Ball in LA. Conference founder Mike Milken is now a philanthropic legend supporting medical causes. Those of us of a certain age remember him as the king of the junk bonds who was sent down to sew mailbags for Uncle Sam after his shady dealings at Drexel Burnham Lambert were exposed in the 1980s. He remains insanely wealthy.  (Some say he was the model for Gorden Gecko – check it yourself…)

Apparently, the conference highlight this year was a 1977 video of Margaret Thatcher telling every one “Capitalism has a moral basis… to be free, you have to be capitalist.”

Thatcher made a good point in 1977 as she prescribed her drastic cure for a very sick and troubled UK in the iron grip of the unions, spiralling from daily power cuts towards the dire Winter of Discontent, before her election victory in 1979. But, I am sure Thatcher would be shocked by Capitalism today. Capitalism is justifiably under attack because of its excesses. Let’s not think it’s a battle between humanity and few billionaires – but what the 0.01% elites have come to represent looks crass, shoddy and vulgar. They are a tiny minority.

The issues should not be about social revolution against the insanely wealthy – but making everyone better. (If they were smart, the wealthy would agree.) At the core of the crisis is income inequality and a populist leftward-shift fuelled by the growing and very visible divide between the haves and the have nots. Firebrands like Democrat Alexandria Ocasio-Cortez have seized the imagination. She is clearly scaring the billionaire class – because they are doing their utmost to dismiss her as a blundering momentary fad. But, she and the rest of the Social Democrats – or Socialists as the right wing are demonising them – are getting airtime, and hitting the pulse of the stretched middle who are nervous on their futures, their families, healthcare, education, taxes and jobs.

At heart, Democrats in the US, and most Labour voters here in the UK, remain Capitalists at heart – taking responsibility for themselves and striving for better. Voting from AOC or for Jeremy Corbyn does not mean Moscow wins and we all start singing the Red Flag. (Disclosure: I am Scottish, that makes me genetically a socialist, but the politician I most admire is probably Thatcher, even though we were chanting: “Maggie Thatcher, Milk Snatcher” on the first Demo I went on!)

When I was at university I was a socialist. Then I joined the city, I reaped the benefits of capitalism and embraced it. But, Its difficult to support Billionaire capitalism when ostentatious wealth is flouted in our faces, our monied “betters” won’t embrace society, and the weak and struggling of society are treated with contempt. (I suppose I had some kind of Road to Damascus moment when I wrote about the shocking poverty, homelessness and drug abuse in San Francisco earlier this year.)

The new Democratic/Socialist agenda is not that shocking – it boils down to upskilling, an educational rebuild, reaffirming opportunities for all, and providing training to create a workforce prepped to succeed in the new modern/robotic environment, and able to be more productive in a competitive/disruptive global marketplace. It aims to create future security by investing across infrastructure to future proof the economy. It aims to cover and provide strong and stable healthcare for all. These are all common goods to benefit the whole of society.

What’s not to like?

The horror is because the Democrats propose taxing the rich to pay for it. The sheer effrontery! They don’t believe in trickle down. They don’t believe rich entrepreneurs create jobs and pay more to their workers. They dare to suggest their social betters pay minimum wages to their workers and pay themselves obscene amounts!

They do that because its true…

Ray Dalio – the hedge fund manager who paid himself $2 bln in 2018 – has noted the change in the wind. Despite that $2 bln paycheck he admits capitalism is flawed and needs reform. He accepts he will pay greater taxes.

Moreover the predicts an enormous shift in policy responses –Monetary Policy 3 and Modern Monetary Theory (MMT) as inevitable consequences of failed monetary experimentation these past few years. These are dangerous concepts – governments spending money is always open to abuse. Issues from simply writing off the vast amounts of public debt held by central banks to generating public consumption through directly paying consumers to consume could be on the table. You can read Dalio here.

There are going to be fascinating times ahead!

Right… where is that pitch on Carbon Sequestration….

Bill Blain

Shard Capital