Blain’s Morning Porridge – Nov 22 2018

Blain’s Morning Porridge – 22nd November 2018

“For they are the knights of summer and winter is coming.” 

For links to market headlines go to:

US Thanksgiving Day. May they enjoy. For the rest of us a quiet day in prospect? I think not.

What’s wrong with these markets?

Markets are about sentiment and expectations. At the moment, the mood feels miserable. The overarching concern is global growth vs timing off the next recession. (Yep.. it’s coming.. just like Winter.) I’m not hearing anyone particularly enthused or seeing any positive prospects for the upcoming G20 or how current trade ructions will play out.

The general expectation is for further damage to the outlook for global trade – not just China vs US, but also the implications of the US vs Europe/Germany (watch next week’s summoning of the German Autos to the White house), and the prospects for Europe’s economy if we get a nasty post Brexit mess.

The global economy has staged a stuttering anaemic recovery these past few years. The squeezed middle classes haven’t seen more money in their pockets to drive spending – instead they’ve been ramping up credit in the hope of jam tomorrow. It’s not coming, so consumers are belt-tightening. No wonder stocks and bonds are wobbling as everyone tries to suss out the consequences.

Where did inflation go? If that was recovery, just how bad is the next recession likely to be? We really do seem to be in the new normal – low growth, low inflation, low everything…

Underlying the macro-concerns are “driver” worries. Everyone is watching the Fed – which is watching US employment and is going to keep “normalising” rates, no matter what it does to stocks or how much pain it creates for Zombie over-levered companies. What’s going on in Oil – a market recently described as 3 men: Putin, MbS and Trump.. and the latter doesn’t care. Oh yes he does…

And then we get to the technical issues – such as the chronic illiquidity of bond markets, the squandering of $4.6 trillion in recent years on Stock Buybacks (converting equity into debt to put money in the hands of the few), or the anticipated consequences of unwinding the QE monetary experiment. The bad news is the yield tourists who drove up markets (right across the spectrum from HY, EM, to Stocks) are heading home.

Many of our buy-side clients are telling us their investment committees are telling them to re-focus on top credit ratings and liquidity. Good luck to them as they look for bids on the 50% of the market poised on the edge of sub-investment grade.. (Chortle, Chortle… that’s the sound of stable doors slamming as the horses bolt off down the hill..)

And then we get to the micro details, the fears and facts that driving price vol in individual securities. Fears and Facts drive volatility:


  • Fears      would include stories like the dismal performance of UK banks due to      Brexit fears, or bonds anticipating a worst-case Italy story.
  • Facts      would include concerns on borrowers such as PG&E and GE, how wide the      puddle of dirty suds from Danske Bank’s Eastern Europe Money Launderette      will spread, and what declining iPhone orders mean.


Is there anything positive to say?

Of course! Investment opportunities are changing to reflect the new environment. Still very good money to be made from smart investing – particularly in real assets producing real returns (more on that later!). Or you can stick with common sense – and play Vol games.

For instance – the European bank sector looks like its just gone 10 rounds with a neutron bomb.

Maybe it’s time for some selective punts?

I feel like I’m a Canadian hunter on a baby-seal clubbing excursion every time I mention Deutsche Bank. Once more it’s under pressure. Yet again it’s in the news for all the wrong reasons – getting fingered as an accomplice to Danske Bank’s laundry service, losing money in its “Central Risk Book” through poorly hedged US equity risk, and watching its stock price hit new lows. As a Swiss Chum told me re Deutsche – “It’s a coconut every time!”

On the basis its always going to be bad at DB and they aren’t likely to get it right any time soon… let me suggest buying their short-term senior debt.


Because it’s unlikely to go wrong.. Whatever Europe says about not bailing out banks – the Germans are not going to let DB go. Whatever European law dictates about no state bank support – surely these rules apply to others? Not Germany. I confidently predict DB pays back its short-term senior debt.

Busy day ahead…. Time to get on with it!

Bill Blain