Blain's Morning Porridge - despite the angst, thin holiday markets...
Blain’s Morning Porridge – April 13th 2017
“For what shall it profit a man if he gain the whole world and suffer the loss of his soul?”
As we roll into the long Easter weekend, markets look distracted by a whole bunch of contradictory bluster. We’ve got the tensions over Syria and Korea, the Turkey vote, and the French election next week. Commodities down and Gold up. VIX has been edging higher, hitting its highest level since Trump won the election (although its still way below its long term average range.) Yet, the bond and stock markets seem indifferent to the rafts of uncertainty coming their way…
What does it all mean?
Let’s not forget we’re facing 4 days of closed markets – most institutional investors and the banks, (who let retail worry about VIX), have already bedded down their positions ahead of the holidays. They aren’t going to reset them (and risk running up expensive hedging bills) ahead of double weekend. Markets don’t normally run into the Easter holidays in a weak mode… the pain tends to come in the weeks following!
One blog this morning suggested the reason markets aren’t really moving in the face of approaching peril is because: “the junior quants running the Algo-Farms [which pass as “considered, wise investment managers” these days] have forgotten to run their computers.” Reminds me of the reason NASA trained Astronauts to go into space – someone had to feed the monkeys…
Aside from “hope” (which is never a good strategy), there seem to be two factors feeding Stocks and Bonds. They continue to benefit from ongoing financial asset distortions in Europe, Japan and to a lesser extent from the UK and UK. Are they right to assume accommodative monetary policy will continue to provide the put? For the time being… perhaps, but that is only part of the picture.
There is also the weight of money still chasing yield – look at the unfeasibly large books new bond deals are attracting. Massively oversubscribed, even at tight levels. If anyone needs reminded of “Blain’s Ukrainian Chicken Farm Moment” rule of new issue markets… might be time to check it out.
In terms of the value of the stock market, I can’t figure out if what is keeping stocks so buoyant? Maybe its expectations of a strong earnings season to come – my gut feel is it could be disappointing (something that follows my “US economy is exhausted after 10-yrs trying to stage a recovery), or is it still anticipating Trump will push through tax-reform and growth policies?
At this stage folk who think the Trump Jump effects are real seem to be missing the big reality – nothing in Washington has changed: the diverse and loosely aligned lunatic fringes of the Republician party mean policy Gridlock remains the reality. (If the Democrats were any better they’d be laughing themselves silly..) Trump might have spotted it – hence Steve Bannon on his way out.
So instead of fretting about financial assets – which I believe to be over-inflated asset values across fixed income bonds and equity/stock markets, I’m sticking to real assets in the Alternatives Sector.
What is a real asset? Something that earns predictable earnings or shows real tangible value. For instance the cash flows from mortgages, rentals, leases or predictable future cash streams. Something uncorrelated from the madness of markets…
For instance, one aviation deal we placed last year is based around cashflows from 4 different regional jets leased to successful regional airlines. We know such aircraft are in scarce supply and that regional airlines are facing growing demand. We can also predict exactly what the aircraft will be worth in 10-years time because we can understand demand growth and aircraft makers production schedules. The result is a 10-year 6.5% plus bond yield. Schweet. Extend your thinking – shipping has the reputation as the most dangerous asset class in the world, but in fact it’s a whole series of discrete markets each with their own characteristics and predictability. We’ve got a deal we’re thinking about in a mega-safe market niche that will throw off a very predictable 10-yr bond yield multiples over where government bonds are yielding!
Or look at property, infrastructure or whatever.. Real Assets vs the distortions that are inflating financial assets…
More about this stuff next week.. unless of course if all goes exciting over the weekend….
It’s a bright beautiful morning here in Mint Towers. Overlooking the Thames we should be treated to the sight of over 30 Tall Ships visiting for a race to celebrate the foundation of Canada 150 years ago. Last night they were sailing right past our balcony on Limehouse Reach – it was magical. It’s a nautical weekend for me! I’ll be spending Easter at The Royal Ocean Racing Club’s Easter Regatta in Cowes..
I do hope your break is as fulfilling and perhaps more restful!
Fastnet Race Charity: http://www.sail4cancer.org/fastnet-2017-bill-blain
Bill Blain