Blain’s Morning Porridge – Nov 6th 2018

Blain’s Morning Porridge  – 6th November 2018

“If I should come out of this war alive, I will have more luck than brains. I like to fly, not to kill..” 

In the headlines this morning:

There are innumerable sites predicting the US mid-term results. The consensus is the Democrats are likely to post a small win in Congress, while the Republican’s will hold onto the Senate. That’s a recipe for gridlock – a result many financial commentators think could be a mild market positive.

It’s a confusing moral dilemma: the heart says Congressional Gridlock restraining Trump’s least pleasant behaviours must be a good thing. The head says more pro-business Trump initiatives is a good thing for markets, employment and growth.

A thin Democrat congressional majority won’t stop Les Blues delaying presidential nominations, harassing Trump with impeachment threats, and generally ensuring the democratic decision-making process in the US is stymied. Hey-ho.. that’s the way it usually is. Look back on the achievements of the last two years with nostalgia and a certain amount of relief that Trump didn’t do worse.

Removing uncertainty is always a good thing.. Within a few days market’s will be back to normal. What’s to worry about a thin Democratic majority in Congress. What possible damage can they do? (US readers – Mild Sarcasm Alert). Once the results are out the way, then it’s back to business and markets as usual:


  • The      outlook for bonds will remain negative on the back of the recent strong      data and likely Fed action. It’s interesting just how much attention FRN      and Treasury Shorting ETFs and strategies are attracting.
  • How      will stocks fare without further boosts from Trump? Probably not so badly      seems to be the consensus. October is behind us, earnings aren’t bad, and      Trump is promising a trade settlement with China.


Oh dear…

As soon as the market starts to settle into a “nothing-to-worry-about comfortable chair”… it’s time to check out supplies in the bunker.

There are a host of things to worry about.. and most of them are debt related. I must re-do the calculation I did last year on US corporate indebtedness.

What volume of debt have US corporates raised through bond markets and leveraged lending these last few years?

What was it spent on? (Rhetorical question – it wasn’t productive capacity… it was largely spent on buybacks).

When does that debt come due? Oh… in the next few years?


So basically, US corporates have bought back stock or leveraged up, transforming equity into debt to pay massive dividends to owners and bonuses to management who forced stock prices higher… And that’s a recipe for a healthy stock market? (US Readers – another sarcasm alert.)

And then there is there is government itself.

I’m sure many readers will have seen or read Bloomberg’s recent interview with Nassim Taleb (Black Swan Man) on Bloomberg. He believes the next financial crisis will be more severe than 2008. Ouch! His arguments are simple and brutal – ultra-low rates and QE have increased the aggregate debt burden and spread it across the whole financial system. Taleb sees looming crisis in social security, student debt and housing.

I agree, and raise him with destructive regulatory policies and rules that have made markets less efficient and less stable. Add in an extra-hot spice of unsustainable personal debt and corporate debt, and we’ve got yet another debt cyclone heading our way.

Surely not. Treasuries and Gilts are sacrosanct.. they can never be bad? When I were a lad, I remember Treasuries at 18%.

But my maths must be crap. Taleb is quoted from a Bloomberg interview saying “we’ve borrowed $1 trillion and we’re paying $300 bln in interest”. Am I wrong to conclude he’s borrowing from the wrong bank? (I think it must have been a typo.) I don’t think the USA is paying 30% in interest.

Please ask small children to look away now, but its time to get out the US Debt Clock. The scariest page on the web; , shows the USA has borrowed $21.6 trillion. Basically that’s $217,000 for every US citizen, and $9,200 in interest each every year.. The other numbers (like assets – liabilities) are too scary to share on a pre-watershed blog…

Whatever the numbers are, it’s an enormous amount every single American owes. How efficiently is that money invested? Well… we all know the quality of US domestic infrastructure… (yep, another Sarcasm alert). They do get the best equipped armed services in the world. Unfortunately, tanks, stealth bombers, submarines and aircraft carriers have a depreciation coefficient of 100% over a few years. Sure, there are all the multiplier effects that go with defence spending – but go back to my arguments about corporates leveraging up to pay bigger dividends and bonuses to the owner/management class.

The big argument about US treasuries is that nothing can go wrong – foreigners will keep buying them because there is literally nothing else for them to buy. That is absolutely true, and will remain true right up until the moment it isn’t – which will be the same moment the rug is pulled from under Treasuries and yields balloon. The trigger might be inflation. It might be something less obvious – housing, personal debt, pension… name your poison.

Don’t gloat.

The UK is little better. It’s a sad fact most of my taxes go to paying government pensions. I put up an article on the website last week about the escalating costs of the NHS last week – sadly, no one has the political courage to redesign it for the modern age.. Despite the absolute dedication of its medical staff, its gorging on money just to stand still.

As for Europe… I wonder how secure the constructed Euro sov debt market will prove to be? An Italian, a Greek and a Spaniard walk into a bar. Who pays? The German?

On the other hand… let’s assume we get a market calming US midterm result tonight. Everyone relax. Might be time to put the buying boots on. What have been the worst performing assets of 2018? Looking cheap.. I wonder its time for a spending splurge.. that debt storm might just miss us…

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

Bill Blain