Blain’s Morning Porridge

“Then the flood came upon the earth for forty days, and the water increased and lifted up the ark...”

The London Monsoon has finally arrived! This morning I was soaked just going out on the Patio to close the French windows – leaving them open last night was something of an error as the rain poured into the living room. Below, the River Thames below was beautifully eerie – the rain throwing up a gentle mist. Quite wonderful, and I expect the whole of London transport’s systems will grind to an excruciating halt because it’s the wrong kind of “foreign” rain rather than good old fashioned British drizzle.

Back in the markets, isn’t it funny how the $14 bln fine for abuse of the mortgage market on Deutsche Bank so closely mirrors the Euro 13 bln tax attack on Apple? Think not for one moment they might be connected… (US readers….) A sad day for global coordination, trade and growth if tit for tat is what it’s all going to be about..

As we go into the weekend, let’s not worry what rising bond rates mean – they mean the cat is out the bag and confidence is fractured… whatever the Fed does next week (likely nothing). It hints of a repeat of the taper tantrum – a hint of desperate covering to come.. Good to know fun awaits next week!

Meanwhile, I am very disappointed in Gillian Tett, one of the finest writers on markets today in the FT. Tsk, tsk I say..

She has given away the “big secret” about why big accounts have taken massive bets on negative yield JGBs! Swapping them into dollars – achieving a quite respectable return (if sub 1% can be called such) because of the negative swap rate – caused by extreme dollar demand! Darn… if journalists understand what we’ve been doing then this game really is up! Read it here on: http://www.ft.com/cms/s/0/e82b8210-79c0-11e6-97ae-647294649b28.html#axzz4KK1ss3cw

But, seriously, Gillian also points out the apparent inconsistency is also a consequence of other factors, including the US money market reforms – something I blogged about yesterday - and yet another force crushing Japan’s financials… just when their economy struggles to reinvigorate itself and needs efficient financial transmission mechanisms more than ever.

Which neatly segues into another FT story – McKinsey publishing a report called the “Death of Banks”. Wheyhey… I can’t resist headlines like that.. http://ftalphaville.ft.com/2016/09/15/2174986/banks-should-hire-mckinsey-says-mckinsey/

The story was bound to attract my attention – I’m more than happy to stand up on the podium, argue the era of investment banking is “So Over”, and I am not adverse to ending speeches at conference with “Goldman delenda est”.. (Look it up if you don’t know the classical allusion.. (“Ceterum censeo Goldmanem esse delendam” if you want a better translation.))

McKinsey, not surprisingly, agree with me, (they probably read the Porridge). Global mega banking is going to shrink to a few names serving only the very largest global mega-global multinationals, asset managers and funds. The rest of the market is there to be seized! US banks look strongly placed to take the top places. What happens to the “also-rans” will be fascinating..

I happen to believe the outlook for “New Markets” is going to be very positive – but I doubt it will involve the current incumbent banks in their present form. It’s going to be new, innovative, and very exciting – but requires pretty much a global reset in terms of ways institutions are currently doing things. I can spot half a dozen opportunities for new finance – and if we’re going to get there.. I probably wouldn’t start from here! Nimble new financing firms will take advantage – stodgier firms wedded to past ways of thinking will struggle.

Meanwhile, a client pointed out a great piece yesterday in the WSJ: Germany’s three bad banks – The Bundesbank, The ECB and European Stability Mechanism!

The story looks at how the German economy is under the cosh. Nearly 8% of German trade is with UK – they can’t afford that to slow when they face massive trade imbalance with rest of Europe, are on the hook for enormous amounts of NPLs via these three “bad banks”, face domestic political problems, and have seen domestic savers slaughtered by the low rates. The 36% of German exports to the rest of the EU are financed almost entirely on the “never-never” Target 2 imbalances!

And finally, and going back to the FT – the Porridge is free, while the FT is not – great news about the recovery in Scots Whisky exports! Folk think the Scots economy floats on a sea of oil, but not so. Whisky exports are something like the third highest real UK export earner, and lower sterling and sheer quality of the product means we’ve seen a 22% rise in exports of single malts!

Now it is true that some Japanese whisky is damn fine, the Welsh make something exceeding palatable, and even some US and Irish Whiskey’s are pretty close to drinkable… but nothing compares to the real thing.

While I enjoy a classic Martini (and nowhere beats Duke’s Hotel in St James), or a glass of fine wine, a classic single Islay Malt is a thing of such wonder and perfection I really can’t understand why it doesn’t cost £1000s per bottle.

While I can identify which part of Scotland a whisky comes from and what it was matured in (sherry or bourbon casks) – identifying the regional character from the subtlety of smokiness, the smoothness and degree of peaty flavour and the phenolic hints of malted barley and even seaweed in some, my father can identify the individual distillery.. (even if he can’t quite remember which one of his granddaughters is which!)

My Grandfather was even better. He could tell you not only the distillery, but the name of the men who made it, and which school they’d been to!

No Porridge on Monday – out travelling, but have a great weekend!

Bill Blain