Blain’s Morning Porridge – November 6th 2019

Blain’s Morning Porridge  – November 6th 2019

“The priggish and rearfied demeanour of this pompous ass are utterly disconnected with the way things work.” 

Blain’s Financial Porridge Podcast on Website (Subscribe to Audioboom podcast or go via Spotify or iTunes (Other channels available from Audioboom)

Book: The Fifth Horseman – How to Destroy the Global Economy, is on Amazon in Kindle or book format.

November 6th 2019 

It doesn’t actually matter which UK politician is on the Brek-Drek sofa.  They all ruin my day.  And that’s unfair.. because I’m sure their mothers loved them all.  Jacob Rees-Mogg is getting it between the eyes this morning.  Nigel Farage ruined my trip into work as chuntered away about the Brexit party winning loads of seats.  We all know he’s a pub charmer, so why spoil it by telling implausible political porkies?  Yesterday is was Starmer and Gove – the Mekon is welcome to take them both back any time.  I’m sure Jo Swinson doesn’t rant at her Granny.

I feel particularly sorry for Jeremy Corbyn.  In a fair world he’d be approaching National Treasure Status.  He would have spent his entire working life in parliament utterly useless on the backbenches, but fulfilling the vital role of reminding Labour members of their roots in working class social-communism.  He’d be a combined living museum and warning from history at the same time. Jeremy would have rejoiced in his status as a world authority on man-hole-covers, and, in his political dotage, become as loved as the late Tony Benn.  Instead… he was kidnapped by the extreme left, turned into Momentum’s puppet, and now there is a chance Scotland’s parting gift to England will be Jezza the premier!  Ouch.

Still.. There is no point in worrying today about stuff we’re going to have to worry about tomorrow and every day until December 12th – when I suspect we will have to worry much more..

Back in the Bond World

Its been a great year for the bond market. If you invested in January you’ve made lots of money. If you sold in August, then you haven’t lost a fair amount of it.  There hasn’t been a bond rout, but the slide in prices and rising yields means the market is finally waking up to the danger in bonds.  Ultra low rates are a bubble.  We’ve seen signs of that in recent new issue indigestion.  Long-dated bonds were the biggest gainers due to the effects of low rates and duration, but as rates rise, it’s the long-end that suffers most. Duration means: “what you won on the swings, you lose on the roundabouts”.

Everyone’s favourite story through the summer was the staggering success of the Austrian 2.1% Century Bonds due 2117.  They were priced at 120 in March, and then soared to 210 in August – reflecting their duration and expectations of zero rates in perpetuity. Today they are trading at 163 – meaning holders have lost 50 points in price. If you bought the bonds in August…. Oh dear..

Underling the general slide in bond prices are a host of factors – fears of global recession are receding, there is a possible resolution of trade spats, and increasing doubts about the unintended consequences of central banking monetary experimentation over the last 10-years means easing is lower down the agenda.  The risk is we see a sell-off accelerate – who wants to be the last person holding long-dated bonds if rates are going to continue to gently rise?  Liquidity will become a threat – who wants to hold BBB investment grade debt that could morph into a fallen-angel if higher rates strain its credit-rating?

Of course, if we see the promised trade negotiations flounder, if Xi decides he really can’t trust Trump, or the recent very positive economic data deteriorates, then bond yields could equally fall again.. and there is nothing worse than selling out a long-term rally too early.

However, the risk is asymmetric. Bond yields may fall – a little.

But if bond yields really start to ratchet upward it’s creates a host of real threats, not just losses. We’d get illiquidity causing spreads to widen dramatically and the potential that credit concerns do a jump into equity fears. Consequences.. consequences…

I meant to comment on the China Euro bond last week – Euro 20 bln of demand for a Euro 4 bln deal. Great stuff. But what does it tell us about China and the place of the dollar? Interesting…

Argentina and Sticking Plasters.. 

I don’t look too often at Lat Am or distressed sovereign debt. But, I have to admit a moment of “seen-this-before cynicism” as I read how bondholders forming a debt committee are warning Argentina not to make it’s debt “uninvestible” – telling the country not to impose haircuts or losses in exchange for more time to repay – reprofiling their debt maturity schedule. The funds say if the country wants to return to market, then it has to “walk the walk”.

Hang on?  How much more uninvestible can Argentina be?

We are talking about professional distressed EM debt funds that lent money to Argentina?  Cmon? They were either naïve or, more likely, they are playing games so they get their cake and get to eat it.  They didn’t know Argentina was a basket case and couldn’t predict what was likely to happen?  The funds say the prime concern of the new Argentine government should be placating hedge funds over the demands of the electorate?  If they do so, say the funds, they can sell reprofiling to the electorate, return to markets, and inevitably f**k it all up all over again.

This might not go down well with some clients, but Argentina – and I suspect many other nations – need a complete reset and reconsideration of their debt.  In the case of Argentina “reprofiling” should probably mean zero coupon perpetuals to sort out the country’s many economic imbalances. Won’t happen.  The IMF took decisions, the funds got paid for taking risk, and they should get hosed.  But, what kind of a signal would it send to the global market if a country got to reset back to zero simply so it could rebuild itself? Some deal keeping Argentina in long-term penury will be done, and we’ll be reading about the next collapse in say 3-years time?

Or….. It might be time for some considered consideration of funds that deliberately bet on defaults and are motivated to make them happen – in both corporate and sovereign markets. That will have some of my hedge fund chums spluttering into their rice krispies, but regulatory risk is as much a risk as any other..

Six Stories

FT – Germany will consider EU-wide bank deposit reinsurance, and Germany’s Scholz gives Ground on Eurozon banking union plan

FT – Bondholders warn Argentina not to make debt uninvestible

BBerg – Ray Dalio Says the “World Has Gone Mad” With So Much Free Money

BBerg – Softbank Reveals $6.5 Billion Loss from Uber, WeWork Turmoil

Global Capital – Investors: Stand up and be counted on Aramco

WSJ – China Sells First Euro Bonds Since 2004

Out of time – back to the day job…

Bill Blain

Shard Capital