Blain's Morning Porridge, submitted by Bill Blain of Shard Capital
“We’re going to need a bigger boat.”
Chaos? The Real New Normal
Yesterday was… interesting!
When they write the history of this crash at least there will not be any doubt about who to pin the blame on! Trade war. Great idea.
Stocks take a spanking! Bond yields tumble! High yield bonds offered only! China stops buying US agriproducts. Renminbi breaks 7. Trump calls China a “Currency Manipulator”! China responds with a FROAD! The global bull market stops. Suddenly. Crash, bang, wallop…
So much for Fed Juicing the markets and pandering to Trump by stopping Quantitative Tightening with last week’s minor rate ease. Utterly pointless. Global Markets now pay the consequences. Market is focused on the real stuff again – the implications on growth of a serious trade war between the US and China. Currency moves are at the forefront – China lets Rmb slip and then shows it can restrain it. This is way past a simple business cycle move – this is about fundamentals. China is serious and is not going to cave. What just moved the markets was real stuff – and you don’t need to be a genius to figure out Trump’s Trade War is not great news.
It probably doesn’t help Larry Summers tweeting: “We may well be at the most dangerous financial moment since the 2009 Financial Crisis with current developments between the US and China.” A No-Sh*T Sherlock award for stating the downright obvious is on its way to him. (But 2009? Where were you in 2008 Larry?)
Does this market have further to correct? Markets are lower – when to start buying again? Steady – lets figure out the reality:
- We’ve got a politically inspired global trade war that isn’t going to end any time soon – which is likely to trigger global recession and slower growth – but also opportunities. Wars usually do.
- Strong dollar is horrible news for EM. Competitive weakening by others will go nowhere.
- Real economy – such as it still exists, is pretty much at top of cycle – witness earnings and full employment.
- We’ve got massive financial bubbles – caused largely by artificially low interest rates and QE – in financial assets: global stocks and bonds – likely to see correction, and investors trying to exit illiquid bond markets – feels very 2008/2009 where illiquidity was major crisis.
- We’ve got central banks out of policy options – so we’re likely to see them do the same as they done before, the danger being they fuel asset bubbles further.
- We’ve now got over $14.5 trillion of global bonds yielding less than 0%.
- The reality is pulling money from overvalued stocks to invest in overvalued bonds doesn’t look a very attractive option – even though it might be the loss limiting one.
Put all the market factors together, and the outlook for financial assets looks poor. But so much money is tied up in inflated stocks, I suspect it’s a correction rather than a crash. Where else can you go? Sell stocks to buy zero yield government bonds? That’s a choice… ?
I suspect the credit market takes a spanking – and an outbreak of illiquidity across bond markets. I’d keep any eye on fixed income ETFs – everyone says they are safe.. Yeah.. sure they are. Watch carefully...
The upside is wobbly markets spell massive opportunity to buy performing assets on the cheap. I’m looking for sellers of illiquid bonds and private assets. There are going to bids out there – just not bids sellers are going to like.
Blain’s Brexit Watch
Even as the global economy trips and tumbles, back here in Blighty, its same-as, same-as. Sterling gets a bit of a respite from the fact the rest of the world now looks as daft as the UK! Whoopee! But it won’t last long.
Jeremy Corbyn is vaguely suggesting a no-confidence vote in September. Gosh! How original? With Boris holding a majority of one, how long did Jeremey take to come up with that not-so-cunning plan? Boris’ chief strategist and headsman Dominic Cummings is quite clear in his strategy – doesn’t matter if Boris loses a no-confidence vote, it will be too late to avoid the Oct 31st deadline.
Facing out a confidence vote is Boris’ apparent strategy, but we’d prefer something a little more positive. The longer Boris can hang on without the distractions of a hostile parliament, the longer it gives him to reach a new agreement with Europe. But there aren’t many signs or signals of any meaningful discussions with Brussels (which is exactly why I suspect they might be happening?).
I suspect the odds of No-Deal on Oct 31st are shortening. Even if Boris does get Europe to agree an acceptable solution to the BackStop, his wafer-thin majority means he has a slim chance of getting it approved pre-Oct 31 in Parliament. Boris is betting he can win an election, but only after Brexit. If the plan is to deliver, as he promises, it’s difficult to see any alternative to No-Deal.
So stay short of sterling and… er, that’s the best I can suggest.
In many ways I prefer Trade Wars to Brexit.
2019 Bloomberg L.P.
