Blain’s Morning Porridge – November 4th 2019
“There are short ladders and very long snakes. That one took us back to square 1..”
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November 4th, 2019… Back in the Real World…
Trawling through the market headlines this morning, I’m struck by the number of comments about how much better the investment environment looks. There is less likelihood of a global recession, corporate earnings aren’t as bad as expected, and jobs are growing. I am unconvinced. I see worrying connections across the wires. From my perspective – which admittedly has been from a train in the middle of nowhere – its feels we’ve reached the end of the something. Time has been called on this particular era of irrational market exhuberance.
My spidey senses are tingling due to manner in which events across markets, individual stocks, politics, geopolitics and gut-instinct are connected. I’m not predicting sudden or massive financial collapse – just a wake up and smell the coffee correction in Bonds (which feels underway), and selective deflation in over-optimistic sectors of the stock markets. As always, any reversal will set off wailing and despair, yet most of the critical lessons will be missed. Fear not – we will get another chance to relearn them in a few years time! (Blain’s Market Mantra No 2: The Market has no memory.)
It’s just as well we aren’t heading for the deep prolonged global recession so many naysayers have been predicting thru 2019. Slowdown yes. Trade is going to remain a problem. But growth drivers were changing anyway. Tech will change the world’s trade roads. China’s furious growth spurt of the last 20 years is over. India might be growing, but it lacks the state momentum to drive global growth the way China did. And climate change will prove deeply significant in the future as consumers are persuaded to believe food miles and imports matter.
Long-term the relationship between the West and China will continue to dominate economies. There is more of a wall than ever before. Xi has consolidated his position as defacto emperor. He will allow his mandarins to make a show of engaging on trade, but has made clear his distrust of Trump. We’ll see that distrust and divergence drive Occidental and Oriental Technological economies apart and inevitably lead to a variation of Cold War economics.
That’s all in the long-term. The medium term is going to be even more fascinating. Expect some surprising shifts over the next few months. Taking some of the effervescence out of overhyped expectations may be positive past the short-term pain. Consider what is to come like toothache: root canal surgery without anaesthetic. Anticipating the consequences is the trick.
Let me try to connect some of the dots:
We’ve heard immediate pushback from international investors on the $2 trillion Aramco valuation Crown Prince MBS demands. Bank’s anxious for fees now say $1.7 ish. Investors say far less, pointing out the returns are less than the other oil majors for much greater political risk. MBS has staked his and his country’s future on being able to diversify the economy away from oil. He can only do that by monetising Aramco because the Saudi Royals have squandered the massive wealth their oil once promised.
The consequences of failing to deliver diversification and jobs will be rising political dissent – which is becoming apparent. Instability in the Middle East? Never a good thing for a global economy still dependent on oil.
Saudi is heavily invested in the increasingly discredited Softbank Vision fund. No matter how many bone-saws are employed, losing $50 bln in the Vison fund will not increase MBS’ political longevity. Softbank’s London based trading head, Rajeev Misra was a genius in the market’s eye last year, but this year is pillioried for running a dysfunctional firm. The papers say his trading style is creating the same kind of losses that sank his former bank – Deutsche Bank. Softbank’s losses in its vision fund are steadily mounting – a string of losing IPOs (Uber and WeWork) spell the end of the Unicorn myth.
Who knew: companies with no discernible route to profit don’t work?
Deutsche Bank is a whole distraction in itself. That you can buy German’s leading bank for less than Malaysian Fraudster Jho Low nicked on an average day from 1MBS says it all about the lack of future proofing across the German economy – which begins to explain the structural problems Germany now faces redirecting national engineering talent and infrastructure. (And is why Europe is likely to remain mired in slowdown long after the rest of the global economy picks up.)
Meanwhile, Berkshire Hathaway – the quintessential fundamental value investor, sits on its largest ever cash pile – waiting for the right assets to buy. Timing is everything. You have to wonder what they know and expect? It’s not just the unicorns that are sinking Softbank feeling a lack of market love. The earnings season was stronger than anyone expected (after all, we were told to expect recession), but the bond market appears to have peaked meaning corporate credit quality and leverage is back in investors’ sights.
And if corporate America looks week, then what about the potential credibility of the Government? While the Democrats pursue impeachment, the world looks on in horror. If Trump was playing games with Ukraine – what has his son-in-law been promising the Saudis? Trump may or may not have committed a crime to justify impeachment – but the devil will be proving it clearly, openly and transparently. The Democrats are unlikely to get the 2/3 throught the Republican dominated Senate they need to sling him. Who cares? The real issue is how American voters read the signal it sends in terms the 2020 election!
Not that the UK or Europe are any better. Political weakness is a major theme underlying global markets.
In Central banking we’ve got Christine Lagarde giving her first big speech has ECB head in Berlin later today. What’s her offer? More of the same plus an intent to bring Europe together in fiscal harmony to paper over the monetary cracks so apparent in the Euro? Good luck to her. Back in the UK – Mark Carney finishes at the end of January, but no one seems to be considering his successor during the election.
Meanwhile, how was your weekend?
Rugby World Cup nothwithstanding, I had a great weekend! Improbable as it may seem, She-who-is-now-Mrs-Blain and I were on a yoga retreat on the Isle of Wight. My chum Ian and I decided to skip a session and snuck into a yacht club in Cowes early morning to watch the Rugby final. One thing led to another, more friends turned up, beer was drunk, lunch proposed and who knows what happened after that – but my wallet is empty. We got back to the retreat very merry very late at night, having uttered nary a single OM through the day. The Yoga mistress made us suffer on Sunday – alternate nostril breathing while being a tree didn’t help.
The Rugby final was fascinating – English overconfidence and bluster was kicked into touch by a resilient South African team with a clear plan: defend like demons, force England on the backfoot in the setpieces to force penalty after penalty, followed by the inevitable breakout – all assisted by sloppy schoolboy England handling errors. South Africa’s plan worked brilliantly – but as one commentator noted… “It might unite country for a couple of hours..”
And if you are wondering why the Porridge is late this morning… as always on a Monday morning, the trains presented a new challenge this morning. According to an email from South West trains, the weekend weather caused a landslip meaning the rest of the world is cut off from Southampton. Unavoidable act of god, or failure of management to identify weakness in the rail system infrastructure? The latter. I’m afraid Britain’s railways have become a metaphor for the country – overly complex, mired in bureaucratic inertia, unable to deliver even the simplest strategies, and essentially broken.
My Chum Nick decided to chance it, got his normal train and was 8 mins late. I decided on a 2 hour Southern Rail Odessey from Southampton to London via Gatwick. Big Mistake. Still the English countryside is beautiful this time of year. And, then when I got into the office my PC wasn’t working.. darn..
Five things to read this morning:
FT – Softbank: Blind spots impair Masayoshi Son’s $100 bln Vision Fund
FT – Investor exuberance fuels hedge fund nerves
FT – Look to credit, not stocks, for signs of nerves
WSJ – Saudi Aramco Launches Long-Awaited IPO
Bberg – Morgan Stanley Sees Market Returns Tumbling Over Next 10 Years
Out of time and back to the day job..