The Morning Porridge - Say hello to the Aliens...
Blain’s Morning Porridge October 6th 2016
“In tough times, everyone has to take their share of the pain…” “Oh Joy..”
It’s a bleak depressed mood here in Mint Towers… I looked out the window, and the rays of light to the East looked like an Alien Spaceship on its way to lay waste to the Wharf. Please. Brilliant. Something to look forward to.. Photo attached..
Why so miserable you wonder?
Because there is so much to write about this morning, and none of makes any real sense! The only visible upside is it’s our colleague Graham’s big birthday – so pie and mash for lunch! (Go on, do a trade with him..)
Other stuff for today?
What’s the Fed thinking, the exceedingly unlikely likelihood the EC has the cojones to taper its bond buying programme, Deutsche Bank on the wires for dodgy deals with the dodgiest Italian banks (quell surprise…), and will Theresa May call a UK election (breaking the 5-year term rule – yet another piece of Cameron-la la consigned to the dustbin).
Meanwhile, the great and good of the financial firmament are hi-fiving themselves at the IMF – back in the day I used to go to the World Bank junket every year! The NGO coincidently warned yesterday of the dangers of economic stagnation as global debt tops $152 trillion. It’s a sobering thought to ponder what will happen to borrowers when global rates normalise.. oh no!
Forget it.. it’s never going to happen. The new normal means they can’t normalise because that would trigger a global debt hangover and financial systems collapse of wormy tequillesque proportions… and nobody wants that.. do they.. (Press the reset button, press the reset button..!!)
So don’t worry about the raft of client comment yesterday, and “stuff” from the investment banks, predicting reversal in US bond markets – they say 10-year Treasuries will step-up into a new 10-yr range (up a massive mind-boggling 25 bp!) Tomorrow’s payrolls data might provide ammunition to support the growing belief Yellen and her Fed are keener than ever to hike US rates to ease overheating in the labour market. (Really???) Other hawks point to the return of inflation indicators – with a general perception 2% is back on the horizon.
However, my equity chums tell me thin markets and uncertainty bode ill for any hike – any stock sell off will slash economic confidence.. And we don’t want to damage delicate confidence do we Ms Yellen…. (Especially ahead of an election, but post a number of commentators think she will resign if Trump wins..)
In Europe, the rumours swirling around the ECB’s supposed plans to “taper” its bond buying programmes are extraordinary. A number of clients wondered if the ECB plans to ease the purchase programme because they’ve basically bought everything already and are running out of new things to purchase.
Apparently, according to my mate who knows a girl who dated a bloke who once went to Frankfurt, the ECB will taper by Euro 10bln per month….
After hours of diligent research and empirical scenario testing we’ve concluded a 10bln monthly taper will cause European bond yields to rise by one gazillion basis points. Immediately. Of course, that might prove to be something of an issue for Europe’s struggling economy..
Since Europe is still mired in zero growth and massive yoof unemployment despite NIRP, QE and Do Anything Except Anything Draghi, a quickly flashy hand-pass over the calculator tells us a gazillion basis point rise in rates might be a “bad thing” for European stocks and unhelpful for economic confidence.. if it wasn’t for the fact there is precious little confidence anyway.
And I am shocked, shocked, absolutely shocked, to read on Bloomberg this morning that Deutsche Bank has been indicted for colluding with Monte di Busti for concealing losses, mismarking books and the rest. And guess what? Germany’s premier bank has been doing much the same for a raft of other clients – arranging over 100 deals for 30 clients that allowed them to pass off loans as derivatives. In view of the questions around DB’s own derivatives book.. nope I won’t go there..
Are we surprised?
Frankly we are not. And this is something I’m going to write about later today. The last 8 years since the start of the Global Financial Crisis has seen the pace of financial evolution and change run at a phenomenal rate. But its difficult to move on from the past. Is it any surprise that some financial institutions are still doing the kind of deals that we’re de-rigueur some 30-yrs ago.
When I was a young banker I found myself working at a Japanese bank in London where we did a raft of “window-dressing” trades to cover losses at Japanese insurers. Many of these went even more badly wrong.. fortunately I saw the writing on the wall and made an early exit.
The point is that was 30-yrs ago. The fact banks are still doing it when its patently much more illegal highlights a crass misunderstanding of how the world has changed since the 1980s.
Later today I’m going to put out a note on European Banking – a look at the relative Spectrum between Europe’s Good, Bad and Ugly banks. (I wanted to say Fugly.. but I’ve been told to draw the line somewhere..) My basic point – supported by the data – is the European banks that have successfully responded to the Global Crisis are those that have evolved best, embraced new technologies and digitisation, and had the managerial competence to handle change. The failing banks are those still caught in the past.
If you want a copy of the note…
And finally.. an “interesting” performance from Theresa May at the Tory Conference. She’s seized the middle ground, firmly distanced her government from the Cameron-era. She looks practical and pragmatic. And lots of folk are wondering what changes next – were there hints of change at the Bank of England..? Don’t be surprised.
And an early election to confirm the Titanium Lady is here for the long-term?
Now… what shall I do for the rest of the day…
Bill Blain
Head of Capital Markets / Alternative Assets