Blain’s Morning Porridge: Oct 16 2019 – Trade, Brexit and Climate

Blain’s Morning Porridge  – October 16th 2019

“ I don’t believe in low fat cooking…” 

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Another exciting day in prospect as markets digest the IMF warnings of deepening global slowdown, Moody’s concerns about rising risks, and the Chinese unravelling the agreement they didn’t agree to to buy more US agriproducts. On the other hand, the opening of Q3 US earnings saw the big banks post decent numbers, suggesting the recessionary scare is not having the depth of impact the doomsters expect. There is a balance between just how much slower growth really is, the intrinsic strength of the economy, and even how much of angst is due to trade or just the natural slowing of the changing Chinese economy.  (The truth is somewhere in Blain’s Mantra No 4: “Things are never as bad as you fear they might be, but never as good as you hope”.)

The reality is: get used to lower for longer, the certainty of greater uncertainty, ongoing mumble-swerve about what Central Banks are doing (and what they can do), the need for new fiscal policy, and investors remaining deeply concerned about valuations in stocks, how low bond yields are, etc. Fear is why everyone is going to remain nervously scanning every fleeting shadow for signals of greater risk.

The focus here in the UK will be the last-moment Brexit negotiations. On the basis they don’t know anything about what’s going on, (except vague rumours the Norn Iron DUP has offered to accept the deal if they each get a billion in used-readies and a luxury island hideaway hidden inside a volcano), the BBC reporter outside the Berlaymont in Brussels was reduced down to telling us how many lights had stayed on in the building as Europe and The UK hammered out the divorce terms.

It is all a distraction. It doesn’t actually matter.  The real issue is can Boris push anything through Parliament? He lacks any majority and would rely on labour defectors to agree a deal. He has zero chance of calling an election. I’m told Whitehall is gripped by bunker mentality – effectively powerless as the competing hordes of remoaners, lefties and worse close in on them. Listening to that awful woman from the Liberal Democrats(whenitsuitsus) on Brek Drek this morning – I can understand the depression.

The big UK risk is Saturday.  The majority of MPs remain remainers – and there is a serious risk any Brexit agreement will be swept aside or caveated with demands for a “confirmatory referendum” at Saturday’s special sitting of parliament – which will be accompanied by an expected 1 million protestors demanding a second vote, which is bound to swing a few wobbly MPs.

Back in the real world, there is a great story on Bloomberg about the proposal We-Work finances itself through the issuance of $2 bln of 15% PIK bonds. Wowser! As the story says, that would be a challenge for any bond salesman! It also confirms what an absolute FUBAR the company became. At this stage it’s not an investment. It’s a throw on the dice table. You might get lucky. You probably won’t.

Climate Revolution – accountability and responsibility are key

I wonder how different 1 million middle class Remoaners blocking London on Saturday will be from the Extinction Rebellion protests we’ve experienced the last two weeks?

Each day I say good morning to the security team in our building. Over the last few days they’ve been stretched. The protesters tried to force their way a couple of times, but the team and the police gently kept them out.  Chatting to one of the team he told me about dealing with a very well-spoken grandmother dressed as a Canary who lectured him for killing her grandchildren.  He said it was one of the most difficult and draining situations he’d faced. He had to remain polite but firm as this lady vented and raged, and all but accused him personally of mass murder because he would not let enter the building so she could rant at someone else.

We’ve all heard similar stories.

Nearly everyone I know agrees Climate Change is a massive issue – probably the most important issue facing us all.  But how to solve it?  Angry crowds of swampies don’t necessarily help.  Greta Thunberg has raised awareness and made some excellent points, but has turned off many potential supporters in recent weeks.  Perversely, her effectiveness has been diminished by allowing the political wastrels to post selfies with her. Support from the vacuous Instagram classes might raise the consciousness of some kids, but I struggle to figure how Kylie Jenner expressing her support solves climate change.

What will?

Any solutions are going to be technology led and market driven.  What’s required is a swing from this is an “interesting concept” to this is a “necessary solution”.  Can the market make that shift? Strikes me it probably needs a “Nudge”.  The way forward could include taxing emissions and giving credits for addressing it.  Taxes are fraught with dangerous questions: Would it be a global tax?  How would you collect? How would you avoid free riders and ensure the whole world participates?

David Murrin recently posted a Blog: Climate Change – Avoiding Disaster. He makes the point the public have to be bought in.  That has pretty much happened. The other two key stakeholders are Corporations – who will respond to shareholders and customers, and Governments – who need to take responsibility and push the imperative to act.

Climate Change needs juiced – encourage corporations to deliver technical solutions by putting pressure on shareholders by taxing Carbon emissions – customers will accept it. It’s happening in California – to the fury of Donald Trump – but Corporations accept it because their customers do.  Taxes can be imposed on polluters and spent on incentives/subsidies spent to support investment capital to support solutions.  Alongside incentives and pain, Government can push policies that have direct consequences – for instance: give every home £1000 to improve insulation and efficiency.

The IMF’s proposals for a global energy tax aren’t likely to find much favour – they propose massive costs per tonne on Carbon emissions and are just too monolithic.  The burden on households will be enormous – at a time when nations are struggling to deal with the policy mistakes of Austerity Budgets triggering rabid populism.

National solutions are better – nations initiating their own programmes and climate change taxation policies.  Clear responsibility and accountability is critical.  Many doomsters think it will break down at the global level – arguing China and India will become the greatest polluters and will game emissions. I doubt it – even under the monolithic party, environmental concerns are coming to the fore in China – and there are more electric chargers in Beijing than in the whole USA – apparently! Countries that pollute will suffer.

And while we are talking about the environment, one of the biggest threats is plastic in the ocean. This afternoon I’m going to see a new concept involving automation, wave power and harvesting tech that could dramatically change ocean transport and provide a tech shift making the clearing of plastics from ocean gyres feasible. (If anyone wants to hear more about this tech and costs – let me know.)

Out of time, and back to the day job…

Bill Blain

Shard Capital

Five Things Too Read Today:

WSJ – JPMorgan Flexes Muscle as Goldman Stumbles

BBerg – Brain behind Wealth Tax Makes New Case for Soaking Billionaires

BBerg – Europe Doesn’t Need Another Currency Crisis – Leaders shouldn’t wait for the next disaster before addressing Euro flaws

FT – WeWork could be the venture capital boom’s “burning bed” moment

FT – Global economic policymakers are playing with fire