The Morning Porridge - A wet weekend in Bognor
Blain’s Morning Porridge September 22nd 2016
“Something’s happening and it’s happening right now, you’re too blind to see…”
In terms of big stuff, Super Wednesday was about as exciting as a wet weekend in Bognor. The Bank of Japan and the Fed left us “unstirred” and personally utterly unconvinced these central banking clown-princes of global finance can trigger inflation or growth. The credibility gap is widening… (Crashing minor chords..)
I shall now consider the tau of the Stranglers to work out what we’re missing..
The consensus is the Bank of Japan did little. That’s a mistaken conclusion. I’d argue their plans to engineer the yield curve could well unleash a further set of unintended consequence time-bombs on markets. There is a note from Citibank saying its represents the end of the QE era as the BoJ switches from balance sheet expansion to managing the curve. I disagree.. this is deep-dive into even murkier aspects of desperate monetary policy.
There are three responses to dealing with stuff that doesn’t work. a) My default setting it to hit it hard and repeatedly to “persuade” it to work. b) The BoJ kept doing the same thing in hope it might finally work, and c) tinkering with the thing in the hope it might work.
The BoJ is now on option (c). I think their “asset price targeting” sounds a bit “big brother” to me.. and I can’t wait to see how they might manage prices in times of crisis. But, it looks like they are still aiming for the same old objectives (whatever they were) by a different route. The fact the BoJ has bought just about everything it can (to little discernible effect) begs a credibility question.
As the Irish say, “if you’re trying to get there, I wouldn’t start from here.”
Meanwhile, the Fed pulled the plug on hopes and expectations of normalisation last night. Great news for stocks.. blah.. new normal flat yield curve, and sell the dollar. Although they tell us activity is picking up, jobs are gaining solidly, and maybe a hike in December – that was not a bunch of Central Bankers who have a brave and courageous plan to rekindle entrepreneurial animal spirits and get the economy moving again by ending the inflation of financial assets, and focusing on growth. (Actually, that will also require massive tax-reform, but more on that later..)
Nope that was a bunch of superannuated policy economists taking their time to figure out what’s happening and doing nothing. Or it might have been fear of doing something political ahead of the election, or maybe they just don’t know. What it wasn’t was decision making. “We don’t know, so wait and see” is what it was.
Monetary policy and the experimentation of the last few years has proved it’s not a science, but an arcane art-form. I suspect in 100 years folk will look at it with the same sense of bewildered amusement as we consider phrenology maps of the skull. (Incidentally, my colleague Prodi has a prominent lump on that part of his head representing mathematical genius – but that because I just thumped him when he used the P word, (P for Pyrolysis), as we discussed a new renewable energy deal and also see option (a) in dealing with things that don’t work. (heheheh!))
Meanwhile, back on the real world, the new issue market continues to fascinate me. The rules are quite simple. Bring a deal at a sensible well considered price offering investors a little upside and it sells well, is oversubscribed and jumps in the secondary market. Bring a deal at a tight price and it gets ignored and dives in the secondary.
It doesn’t take a financial genius to figure out that’s the action of a unconvinced market – cherry picking deals because they look cheap, rather than fundamental value.
Personally I really really can’t see the value in scrabbling over a basis point or two on a corporate bond yielding the square root of less than nothing when the team and I are out selling a superb asset backed deal with a 7% coupon and upside potential.. Alternatives, Alternatives..
The ways of financial markets are strange and curious things..
No Porridge tomorrow as I’m off sailing with clients…
Bill Blain
Mint Partners