Blain's Morning Porridge Feb 16th 2017 - The only thing we are uncertain of is uncertainty, and
Mint – Blain’s Morning Porridge – Feb 16th 2017
It scores over older, more pedestrian works in two important respects. First, it is cheaper; and secondly it has the words DON’T PANIC inscribed in large friendly letters on its cover..
One Trillion Dollars is the new One Billion!
Global Stocks have gained nearly $4trillion dollars. My colleague Martin Malone, macro-economist extraordinaire (but as hat-stand as a container-ship full of frogs) thinks the global economy is headed for the stratosphere! He’s looking at rising growth expectations and rising inflation trends, and concludes stock markets (especially in the US) are massively undervalued in terms of where Global GP will be in a few years. Growth and inflation could see the US economy up 6% on a combined basis this year!
Yet many analysts expect a market reversal, (or at very least a correction), in coming months, and many more fear the GLOBAL RESET button will be pressed to create a massive MEAN REVERSAL MOMENT in terms of the mother and father of global bond and stock crashes. Martin’s happy vision is for gains of some 30% as being nailed on. If Global GDP hits $100 trillion and global stocks are only worth $70 trillion, that suggests stock upside over the next few years..!
I’d like to share his enthusiasm… and, surprisingly, to some extent I do.
US Stock market gains over the last 12 months, and especially during the Trump Jump phase, have been nearly as spectacular as their losses were during the Financial Crisis of 2008. The Lehman reversal moment? Can these gains be maintained? Perhaps.. if a Trump Dump can be avoided. But, there is more..
Take a look at the now widely quoted Global Economic Policy Uncertainty Index – {EPUCGLCP Index <go>} on Bloomberg.
Shock, horror! It’s at a record high. It tells us we are poised at the top of the most uncertain moment in global history.. apparently. All the negativity about who Trump has been sacking, what his henchmen have or have not been saying to the Russians, Brexit, the upcoming French Elections, the escalating crisis approaching in Greece… Oh No! (Readers of a certain age are asked to imagine a Ruth Archer accent) or “We’re doomed” (John Lawrie voice.. which I do particularly well).
Yet, the GEPU Index is based around reading the top 10 US newspapers and ticking how many times they say panic and financial together in economic articles. When the newspapers are full of “fake news” and every journalist (and financial analyst) is basically regurgitating what every other journalist is writing… it’s no surprise they trend towards “sameness”, meaning “the only thing we are certain of is that we’re uncertain.”
Hence the uncertain uncertainty…
Overlay the Economic Uncertainty index with something real – say the VIX index – and another story emerges. Despite the headlines news, the Twitterstorm of Tweets, and liberal head-shaking, real fear and uncertainty is about where it is.. The VIX spiked on the US Election but has been downtrending since then.. it remains reassuringly low!!!
The lesson? Focus on Facts and what the real market is telling us. Not Tweets.
They say its safe for investment bankers to swim in pools of ravenous starving sharks - sharks won’t touch them due to professional courtesy. One of the largest gainers following the Trump noise about unwinding US bank regulation has been Goldman Sachs. Up near 40% and trading at record levels. That’s hardly surprising. It’s not just that 6+ former alumni of the firm are now embedded in the senior levels of the administration (the 3 ton alligators who will “clean” up the Washington swap), but because Goldman is perceived to be the apex predator of the financial system.
US banks were essentially quickly fixed in terms of enforced recapitalisation in the wake of the crisis. Since then they’ve been kept on a tight leash with threatened regulation, Dodd-Frank, Volker etc. The outcome is they are lean, mean and hungry.
European banks are not. They have not been successfully recapitalised and remain essentially unfixed. They are swimming in a gloopy treacle of contradictory regulatory bluster. The rules remain fragmented and indecipherable on a country to country basis (what’s senior and bailin-able in Germany might not be in France). In the face of growing political unrest, banks are not top of Brussel’s agenda – they might rock the already rocky boat.
The bank analysts are wondering what stalled banking process means for the upcoming Basel IV agreements – probably a default agreement to err on the over protective side: larger capital buffers and more oversight. More measures to avoid the last banking crisis making European banks even less fit for any discernible purpose. More measures increasing the un-competiveness of European banks versus the US.
Europe is still kidding itself about moves towards “Capital Markets Union” overcoming these “minor” differences between them. They won’t. Italian representatives on the ECB can talk about mutualising Italian NPLs within Europe. La la la.. we’re not listening sing the Hermans.
What’s the trade? Short Europe, Long US banks..
Sorry for the lack of reliable porridge the last few weeks – delivery has become about as regular as a Southern region train. I’ve been busy doing Bloomberg and other media stuff, but I’ve still got medical appointments due to a wound infection I can’t seem to shake off. Hopefully delivery will become more regular in coming weeks.. but if you have any questions don’t hesitate to email them in..
Finally, big thanks to everyone who has donated to my Fastnet Charity Appeal. I know the race is not till August – but every penny helps. http://www.sail4cancer.org/fastnet-2017-bill-blain
Bill Blain