Blain’s Morning Porridge – October 31st 2019
“He’s the hairy handed Gent who ran amok in Kent..”
October 31st 2019
I saw Lon Chaney Junior walkin’ with the Queen, uh
Doing the werewolves of London
I saw a werewolf drinking a pina colada at Trader Vic’s
His hair was perfect… Na-ah-hooo!
On this spooky day, a deathly ditch beckons our premier… Zombie Boris tomorrow?
First, a digression…
I can’t help wonder if Warren Zevon wrote the classic Werewolves of London the same night as the AIBD ball was being held in Park Lane. Early 90s I think. We were pre-loading cocktails in Trader Vic’s ahead of the gig and one of the guys – a senior Credit Suisse chap was there… I’ve always reckoned he was the inspiration for Werewolves of London.. (Extra points for anyone who can name the chap I’m thinking of..)
Back in the Real World.. US Q3 growth beat expectations and was a very respectable 1.9% – in line with 2% last quarter. Jobs? Nothing to worry about. Inflation? Marginal. Yet the Federal Reserve did exactly as expected and cut interest rates again. Lower interest rates are not the sign of a healthy economy. Fed Speak is spinning it as “easy money is fine in this robust economy because there is no inflation to worry about.” And it won’t upset the President.. too much.
We will look back and conclude it was another massive mistake. There will be consequences.
But surely Ultra-low interest rates have been a stunning success for the economy? (US Readers – Sarcasm Alert.) Central bankers and the Governments they advise/act for, barely understand the devasting consequences of stupidly low rates. The level of interest rates has profound consequences on economic behaviour. Rather than encourage investment, low rates change the mindset, distort economic rationales, and actively discourage productive investment – for instance; focusing corporate management on borrowing to boost the stock price through buybacks rather than building new plant. That’s an obvious distortion. But it’s not the only one.
10-years of ultra-low rates achieved low growth throughout the developed Occidental economies. Without China delivering 7% growth though the last 10-years, and dragging us all up in its wake, then the only gains low rates have given the US and Europe have been: a massive stock and bond (financial assets) boom (or let’s be honest and call it a bubble), booming income inequality and political populism. Congratulations… Central Banking actions have made a desert and called it victory.
Just a year ago, the 10-year US Treasury was yielding 3.25%. Today its 1.77% and was below 1.50% earlier in the year – it been a massive bond rally that’s made fund target returns this year. Anyone hi-fiving their investment prowess because the followed bonds down should probably retire now. You are at the top. It won’t continue. Over the last 20-year the average 10-yr yield was around 3.3%. It’s been 2.5% since the 2008 Crisis. At less than 2% rates are screaming something is not right. And the Fed is juicing it even more with $60 bln of monthly asset purchases to cover a dysfunctional money market?
And, when the next crisis comes… what are central banks going to do? More QE. Lower Rates? The central bank cupboard is as intellectually bare as it is short of stimulus capacity when it comes to the next financial crisis.
On that happy observation…
Trump and Impeachment
What’s going on re US impeachment hearings has profound potential consequences for markets. There is a possibility it all gets horribly messy. A bad outcome will diminish confidence in the US system – and thus the dollar and the markets. It could be made even more complex if Trump is impeached and subsequently wins a second term. When I’ve written about US politics before, I’ve been widely trolled for daring to criticise the “greatest nation on earth”. (Nonsense.. Scotland can do no wrong!)
The US constitution is a marvellously succinct document – short, sharp and to the point. It says the president and state officers can be impeached for “treason, bribery, or other high crimes and misdemeanors”. Articles say the president must “take care” his duties are faithfully executed, and specifically ban him from ignoring the “due process” of law.
The documents don’t go on to specify exactly what constitutes a breach of the constitution – but the intent of lawmakers 250 years ago is clear: if the President’s actions break the rules and bring the office into disrepute, then he can be sacked. Why? Because a president that acts above the law puts the state in danger of tumbling into acceptance of such behaviour in the future. If the president shows signs he is becoming a Tyrant, then it establishes precedent. Caesar and his wife must be above reproach. As the power of the Emperor became increasingly absolute, the Empire went into terminal decay. The early American’s understood Cicero and had read Gibbons’ Decline and Fall.
Where do you stop the rot? Because politics around the world are rotting. Here in the UK, look at the number of MPS, especially women, who won’t stand again for Parliament because its increasingly dominated by anger, abuse and threats. What does it say about the US political process when the President is a racist, fanatasist and a liar? Is that the path to tyranny? Or do states get the governments they deserve?
Donald Trump has been accused of many things – but do they constitute impeachable misdemeanours that breach his duty of care and due process? Where do you draw the line between bad and unacceptable actions? There are so many things we could criticise, but he can probably claim he was serving the American people. Triggering Trade War – saving American jobs? Betraying the Kurds – getting US Troops out of Middle East entanglements? Etc. His domestic actions and twittered accusations cover just about every actionable discriminatory phobia – but are they high crimes?
Perhaps they should focus on the bribery clause. If he told a Foreign Government they weren’t getting promised US Military Aid unless that Government investigated a US citizen – well that sounds like bribery with menaces. The threat to withhold is effectively the same as a promise to give. It’s also a misdemeanour because any citizen is innocent till proven guilty – where is the due process. And, its also conspiracy with a foreign agent against a US citizen. Looks a pretty clear case of abuse of power – the duty of care?
But for impeachment to achieve the aim of keeping the government true, then it has to be done openly and transparently. If you are going to stop Trump become precedent for worse to follow – then show clear process. The Democrats do not appear to be following a transparent course. There is a whiff of something dark. It raises the threat it is political gaming.. If it looks like a game and Trump then wins a second term – that’s bad.
The only answer is to show clearly, cleanly, openly and transparently that Trump is guilty. It has to stick. If it is not going to stick – then it will have proved a massive mistake by the Democrats, handing Trump a second term and who knows what next. Increased political instability and even anarchy in the US is bad news. Especially for markets.
Five things to read this morning
Thunderer – Nicky Morgan in exodus of moderate Tory MPs
FT – Cartoon – Green Bonds
Out of time, and back to the day job..