Blain's Morning Porridge - Politics, Uncertainty, Trump, Obamacare and Article 50 - a volatile m
Blain’s Morning Porridge – March 27th 2017
“A house divided against itself cannot stand… .”
I was approaching the new week with optimism and a sense of positivity - right until I got to Waterloo and tried to get on the Jubilee line…
Regular readers might be surprised, but I spent the weekend on a Yoga Retreat. It's earned me an enormous booty of bonus points with She-who-is-now-Mrs-Blain, and I quite enjoyed it. Fair to say I'm not a natural Yogi, but I got pretty close to a head-stand and there were times when it didn't hurt as much as it probably should have...
But no amount of cosmic karma is going to sort out the mess which markets find themselves in this morning as the Trump Jump looks likely to prove the Trump Dump…
Some analysts are predicting a massive downwards correction in Global Stocks. My own Steve Previs is keeping a careful eye on the charts, but expects prices to “cascade” lower. The technical are all on sell, although some sentiment indicators are still optimistic. Analyse the whys and wherefores of the dump and its difficult to be positive.
During my weekend yogic meditation sessions.. (stop, hold that unlikely vision), I was supposed to be putting my mind in "neutral". But, I found myself thinking about politics. Most weekends are spent in furious activity - all the little things, like dealing with the mail, planning the house, and rushing from event to event. This weekend it was full stop on the other stuff and seeking clarity on the bigger issues….
Its never been so obvious politics are currently the main drivers of investment uncertainty.
As Trump is discovering - the secret is in the deliverables. On the face of it, there is nothing stop a great democracy like the US being able to identify the problems and inefficiencies in its economy and fix them. Except when the problem is the democracy itself - as was conclusively demonstrated late last week.
We were wrong thinking Donald Trump is the problem. (Well he is, but.. in oh so many ways..) Instead its the Republican Party that’s proved itself incapable of compromise. It would be unfair to describe the Freedom Caucus as a lunatic fringe - lunacy seems pretty much endemic across US politics these days. It’s the "we had to destroy the village to save it" approach to politics.
The failure of the Republicans to replace and reform Obamacare - supposedly the signature dish of the new administration - is a shocking eye-opener. It means the outlook for Trump reforming the rest of the swamp looks dismal. If he couldn't sort out the simple stuff, what chance the nutters will agree tax reform and spending plans? The rabid libertarian wing of the Republicans aren't going to approve anything that doesn't trim deficits, cuts spending, and leaves the tax structure basically intact.
Trump Jump to Trump Dump in one easy step.
In Europe the focus will be on Wednesday's trigger of Article 50 - the UK serving notice we are so out of it. There are a number of ways this can play out which boil down to:
Europe perceives Theresa May has a strong position, isn't going to muck around, and agrees a swift pragmatic divorce where everyone agrees to remain friends...
Europe perceives Theresa May's position to be weak - undermined by a strong opposition, internal political dissent, Scotland and the rest... in which case Barnier and the gang will opt for an aggressive "teach these Anglo-Saxon faitherless-weans" approach..
Its therefore important May goes into her meeting with Wee Nicola Krankie today with firm purpose. There is absolutely no reason to give the Scots another referendum. Every single piece of data and the weight of common sense says the Scots would be mad to seek independence now. But, the politics of nationalism is like the politics of populism.. passion not sense.
It’s tempting to suggest Theresa tells Wee Nicky: Fine. Have it. A referendum next month. If you win you are out of the UK the following day with nothing. Absolutely nothing. No more subsidy. No currency and a closed border. It might just work… but it might go horribly awry!
Meanwhile, for those of you active in the FIxed Income and corporate bond markets, I'd like to remind you of Blain's Mantra No 3: "The Market Has No Memory."
I first heard this phrase at the first Euromoney Global Borrowers Conference several centuries ago. The Treasurer of GECC, Jeff Werner, was telling it straight. Big investors had been stung by wider spreads, were telling GECC it was too frequent an issuer at too tight levels, and threatening a buyer strike. But Werner knew it was noise.. they kept buying.
We saw the rule demonstrated again last week.
Volkswagen - still in the dock over the emissions scandal found over Euro 24 bln demand for its jumbo funding, Even more surprisingly, Portuguese bank Caixa Geral de Depositos got a AT1 Subordinated deal away - finding over Euro 2 bln of demand for a Euro 500mm deal. Ok it had to pay a double digit coupon for the funding… but this was a name that ripped into holders not that many months ago transferring debt into a bad bank.
Pimco and Blackrock are leading the legal action, saying Portugal would benefit from repaying the cash. Er no. The market doesn’t actually care.. Give a deal a large enough coupon, and the buyers will come. VW and CGD are great examples of the "Market has no Memory" rule. Do not forget it…
Out of time.. and back to the day job.
Fastnet Race Charity: http://www.sail4cancer.org/fastnet-2017-bill-blain
Bill Blain