Blain's Morning Porridge

“Don’t stand in the doorway, don’t block up the hall. For he that gets hurt will be he who has stalled..”

If the Porridge was the “Pyongyang Times”:

Our glorious Governor Mr Carney justly deserves our unreserved admiration. He should be made Governor for life. The recent run of marvellously strong UK data, and the enthusiastic uptick in underlying sentiment is entirely due to his swift and courageous rate cut and renewed QE programme. His supreme mastery of economics, timing and growth is incomparable. Compare and contrast the glorious performance of UK workers with Europe, where production is declining faster than expected. Where we would we have been without his diligent leadership? The people of North Korea UK are thankful to him..

But, back on planet Earth, its BOE day again… and he’ll probably keep his head down re last month’s unnecessarily childish Post-Brexit tantrum. Don’t expect the Bank to back off – they are still “assessing”. The fact Carney pressed the monetary panic button just weeks after the vote and before anything was clear in terms of effects, shows Central Banks aren’t as data-dependent as they claim to be.. We live and learn, and our eyes open sceptically wider every morning.

Meanwhile, as Brexit seems to be boosting the UK, the leaders of Europe’s lesser financial capitals must be wondering what happened to the flood of Brexit refugees expected to set and move corporate headquarters? I wonder how quickly recent upticks in German office space will reverse in line with the recovering market in the UK.

But, as the Brecit Cassandras remind us.. the long term consequences of Brexit are not yet understood.. (Nor, I suspect will they ever be.. a lot could change politically through the next 18 months – which is about when I reckon Ms May will drop the Article 51 bomb.)

Back in the real world (which I define as broadly anywhere not Europe), the new issue market continues to struggle. Yesterday’s State Bank of India 5.5% perp deal barely built a book. It was initially planned to be $750mm, but when orders barely touched $700, it was scaled back to $300 mm, and even then the price is down a point. Caveat emptor.

The real shocker in corporate debt and the stock market isn’t likely to come from one of the many known unknowns we face, such as the US election, European Elections, wobbles in monetary intervention or the growing anticipation of coordinated fiscal action.

The real threats come from the unanticipated consequences of other things, or the completely unknown unknowns. These, by their very nature, are impossible to predict.

Consequences, however, is a fun game to play.

Consider this – the death of the US money markets. The US$ 2.5 trillion market is being emasculated by new regulations that will crucify Prime-Rate Funds. New rules due Oct 14 could see a further $300mm pulled from the market. The largest losers are likely to be banks – many of which still take substantial short-term funding from CP. If dosh aint coming from money markets, then where? No wonder LIBOR has ballooned – triggering real interest rate rises while Central Banks are still easing!

At the same time, I understand Japanese banks are big funders from the market, recycling these funds into Asia, where they prop up dollar markets across the region and into the Middle East. French banks are also said to be relatively more reliant on the market than others. Go figure where the pain hits..

That said, I’m looking for bargains in banking – if anyone has ideas… happy to discuss.

After listening to one account yesterday saying they were liquidating into cash – I think that’s unnecessary panic. There are other ways to skin the proverbial ocelot. So my challenge for today is “design the perfect portfolio for today’s uncertainty.”

Let’s see.

· There is a good argument there is further upside in corporate, HY and EM bond spreads on the back of tightening yields on the back of BOE and ECB buy programmes. However, the downside is the likelihood of being caught in a liquidity trap when everyone runs to doors simultaneously.

· Flight to Quality liquidity – in a bad market, even treasuries might be “sticky”.. but they are like to be the safe haven of choice. Today it’s the short-end.

· Stocks? Look awfully overvalued to me, but my stock picking chums say I worry unnecessarily – and good dividend yields can be found. My worry is – are they sustainable..? I wake up every morning panicked about my HSBC position..

· Alternatives.. now that is where I think the real world offers real returns and superb relative value with and a modicum of safety.

Two of my picks in Alternatives at the moment would be:

i) Aviation – the world market for air-travel demands 50k new planes in 20 years, but only 40k are likely to be built. That keeps the value of old planes high. Demand vs Supply. It’s possible to hit 8% yields on decent/liquid airline assets.

ii) UK property – whatever the Brexit moaners say.. the UK is short housing. Got a range of deals with 7% plus returns..

There you go.. real world solutions for real world problems… you know who to call..

And out of time again..

Bill Blain