The Morning Porridge - Why so serious?
Blain’s Morning Porridge October 3rd 2016
“That makes me smart…”
Mondays.. Who loves Monday? What’s not to like. A clean-sheet to a new day, a fresh start to the week, the month and the last financial quarter of 2016..? Sadly, it’s yet another year likely to resound in financial infamy.. (infamy, infamy.. they all got it for me.)
There are a couple of market moving threats vectoring into markets this fine morning. Still nothing solid around the shoal of rumours darting around Deutsche Bank. Some analysts say it's a buy at these prices. I agree - but only as a cheeky speculative play. While a more reasonable US fine of, say $5.4bln, and even a SWF equity injection, might avoid and immediate crisis - long term nothing changes re its dismal future prospects. Or those of European banking in General. More below..
And Brexit is front and centre again after UK Premier Teresa May sets March as the date to trigger the Article 50 negotiations. It puts the coming trials in context and the market, typically, reacts by spanking sterling lower.
It feels DBK will remain the major driver on short-term market action. I don’t think it helps that German politicos have little sympathy for its travails.
More generally the world remains a deeply disappointed place about growth, futures and political swamps.
My own fears revolve around my kids never having the chances we had, and worries how they will ever find fulfilling careers/get on the property ladder, or find life/balance. Scale that up to the national level, and it’s no wonder frustration with life and political failure has resulted in the new-normal low growth economy spawning the like of Trump and Brexit. These are not solutions – these are just bigger problems. It’s enough to make you go back to the cave, pull the duvet up in the hope things get better by next spring, next year, decade, or the century after that.
In that navel gazing vein, asking why we are all so bloody miserable, El-Arian, “Mo the Tash”, had some interesting thoughts in the FT over the weekend – suggesting these economic, financial, political and social tensions risk become the defining drivers of our collective future. Well worth a read on http://www.ft.com/cms/s/0/c06bba4e-83cd-11e6-a29c-6e7d9515ad15.html#axzz4LiVGaCrN
When I finally get round the writing THE BOOK.. Blain’s definitive explanation of the “Global Financial Meltdown 2007-2021”, it will blame the crisis on politicians, central banks and regulatory failure. While we’ve had Act 1: the financial instrument stroke and liquidity crisis, Act II: the European Sovereign Debt Wobble, and Act III: the false recovery, monetary mistakes and financial asset inflation, still to come is Act IV: the European Banking Crisis revisited, and Act V: putting the global economy back together.
The scene where the market wakes up to exiting the last eight years of fiscal repression, monetary experimentation and inflated financial asserts, is going to be terrible to behold…
Elsewhere in the Pink-un I read one analyst at a major fund group saying he expects to see returns struggle to average around 5% over the next 30-yrs, while another investment head despairs of finding sufficient investment income….
Well that’s what you get if you invest all your client’s money in bonds yielding diddley-squat. Here at Mint we take joy and delight finding real assets and real yields. If it's not aircraft yielding 7% plus, property at 8%, renewables at 10%, or Telecom infrastructure showing double digit returns. As always.. you know who to call..
Elsewhere, what’s really happening at DB? As mentioned a few analysts see it as a buy. There is no liquidity crisis they say, therefore it can’t possibly go topside-bottom. The balance sheet shows they have 133 bln in cash and 179 bln in trading assets (which is balanced by liability of 189 bln wholesale term funding). The loan deposit ratio is 76% - deposits are larger than lending.
Liquidity is why the market is panicking, and DB has plenty of cash with a large and insured deposit base.
Meanwhile, the news flow suggests a political deal where the US DoJ avoids a row that sinks Europe’s “premier” bank by cutting the $14 bln fine to a more reasonable $5.4 bln. That will take months/year to negotiate – giving the bank time to restructure and put reserves in place. Asset sales are underway. Did the market get unduly panicked because some “genius” US hedge funds publically exited?
On the other hand, I’m indebted to the Torygraph for reminding me of T-Squared (Tidjane Thaim of CS) saying European banks are not investible. It points out a) banks can’t make money in ZIRP environment b) capital requirements are penalising European banks, c) what investor will put in money to European banks just so the US DoJ can then grab on with it’s next raid, and d) new Finrech is “eating the banks’ lunch”. (Its not often I agree with the Torygraph, but Jeremy Warner nailed it this morning…)
So perhaps some cheeky plays on DB stock, but the CoCos? Sure.. but not me. Someone else can be holding that parcel of festering excrement when the ticking stops.. Because… it will.
Out of time, and off to do the day job..
Bill Blain
Head of Capital Markets / Alternative Assets