Blain's Morning Porridge - Time to be buying France?
Mint – Blain’s Morning Porridge – March 2nd 2017
“Now what about a nice cycling suit Mr Adams? Cycling is all the rage….”
Despite trying very hard not to, the last couple of days I’ve been thinking about France. The diversity of views on likely Electoral outcomes on both France and the Euro is a classic example of the differences between the way Anglo-Saxon London and Euro-minded Continental accounts think.
Diversity of views is what makes a market, and creates arbitrage opportunities!
A few days of less negative news flow around France keeps the market fluid. Yesterday’s news the Welsh wife of Fillon had been arrested (on Saint David’s day!) didn’t help, but it was also expected. This morning the mumble swerve is about a possible Macron outright win.
Tighter French spreads illustrate the market is no longer quite so convinced France and, by association, Europe is doomed. The 10-year OAT/Bund spread has narrowed. Ahead of today’s long OAT (FRTR 36s and 66s) auction, the market has been remarkably stable with long end buyers in the wings.
However, speaking to end investor accounts about Long-End Euros in London y’day, I encountered nothing but negativity. The London consensus is along the lines of why take long-end Euro and France risk? The London mind-set is grounded in thorough analysis: aerodynamic theory proves bumble bees can’t fly, just as history proves the Euro can’t possibly work and even if France doesn’t implode on this election, that doesn’t mean it won’t implode down the line. There is a remorseless tide of non-Paris right wing sentiment gathering, say accounts. “It won’t end well....”
Gosh, that’s telling these bally foreigners… but… what if the London view is wrong? Perish the thought…
Views from European accounts are far more mixed – and generally positive.
Some are hard-line Euro supporters – arguing the grand experiment is working whatever Les Rosbifs say: “nothing to worry about.” Others are pragmatic – “Europe always finds a way out of crisis and accommodation will be found.” Others are prepared to arb the Anglo-Saxon negativity – buying the bonds Londoners are selling as “cheap to the actualite”.
The European view is the outlook for Europe is improving, (and recent Economic releases even hint at some growth!!) Sans the unpleasantness over Brexit, France will be the big beneficiary of a new Franco-German axis, and the inevitable closer monetary, fiscal and political union that is coming.
Views make markets.
Its very difficult for Anglo-Saxons to buy that view Europe might just actually work. Much better to just assume we know better.. why worry about elections, or the redenomination risks in the unlikely event Maritime Le Pen is elected… London is taking a determined view France can only get worse. Yet, European rates are going to remain tight and the risk is more missing the upside than down.
I’m looking at blocks of Long-End European French guaranteed bonds (proxy semi-sov) yielding 2.60%.. which is a dang-sight better than anything else comparable. If you fancy a play on France… give me a shout – some very interesting (and sizable positions) to show..
Meanwhile, more and more Fed-Heads are calling a March US hike. There are many ways of looking at the financial world to figure out the likely investment outcomes. There are two big issues to figure around the Fed: i) are stocks overbought and, ii) is the bond market about to crash on the inevitable reaction?
Look at the Macro picture, strip out all the noise, and figure how events will impact values. At the moment the macro story is buoyant – bounding stock values are soundly backed by rising global GDP and rising employment expectations. Bonds might widen a tad, but relax it won’t be significant..
You can even argue there is actually nothing to worry about in terms of burgeoning deficits as QE means the “these are not the bonds you are looking for” Jedi mind-trick probably works. (Believe it! Would it matter if the UK Treasury just gave the BOE a £470 bln bank note (effectively a zero-coupon perpetual bond), and wiped out the entire amount of paper held under Asset Purchase Facilities / QE!)
Or you can focus on the signs and signals – like ripping the gizzards out of chickens to figure where stock markets go next. Chartists are one step up from the Roman Augur… figuring what lines on a chart and complex numbers and difficult sums mean. Yep, basically everything boils down to Golden ratios or the Fibonacci series…
My Macro economist, Martin Malone, reckons the current market is redolent of the early 50s and 60s – when the post war global economy was entering the big growth phase. He’s looked at three periods of rising rates: 1954-58 when rates rose from 0.75% to 4%, 1958-59 when rates spile from 0.75% tgo 5% and 1961-66 when they rose from 1% to 5.75%. In two of these cycles the Dow delivered massive double digit annualised returns (18% and 27%) – from 1961 returns were lumpy following the Kennedy crash and then Bretton Woods in 1966.
If you accept the premise we’re in a similar phase, and the current rate hike cycle begain in Dec 2015, we’ve got 17% annualised returns.. Makes you think…
But then you have the other side of the coin. What’s changed? The job created in the baby boom years saw incomes rise, and a burgeoning middle class of accountants, middle managers and such. That spelt greater wealth to drive consumption.
Today’s job creation is weighted towards zero-hours contracts on Mac-jobs, and its middle class office jobs that are most at risk from the Rise of the Robots! (Yep… that includes bond traders and, dare I say… financial analysts!) As the French have repeatedly proved inequality is revolting…
On that happy note, I better get back to the day job..
Fastnet Race Charity: http://www.sail4cancer.org/fastnet-2017-bill-blain
Bill Blain