Blain's Mornin
Blain’s Morning Porridge – May 2nd 2017
“Release the Kraken!”
Modern Financial Market Theory is exceptionally complex and often counter-intuitive, but it would seem the algorithms underlying post 2016 markets all seem to function the same way: however bad it sounds, its not! Whatever was said or whatever happened.. its likely to be good, so Buy!
Ultimately, one suspects there might just be a spanner somewhere in the works.. Markets current rosy read on absolutely everything - no matter how lunatic - might just prove to be "over-optimistic." But for the moment, lets go for it:
No matter the economy looks tired - buy stocks.
No matter interest rates are rising and the Fed (and others) are going to "rationalise" the balance sheet - buy bonds.
No matter how uncertain politics are.. relax it will be fine..
No matter the US navy is about to execute Operation Neanderthal on the top half of Korea - its Risk On in spades..
I think you probably see the way this is going.... Nothing to worry about.. it will all be fine, right up to the moment it isn’t.
As the first 100 days stretches into 500 days and infinity and beyond, unbounded optimism looks particularly true of the latest Trump throwaway line about breaking up the banks and reinstating the old investment/commercial Glass Steagall banking divide.
The casual observer might think... ah, no doubt some clerk at JP Morgan or Bank of America turned down a request from the Donald, or one of his spawn, requesting a gazillion dollar overdraft so they can "monetise their one-off opportunity to get rich". Then, in a fit of offended presidential pique, Donald decided it's time to negotiate with banks, starting with a decapitation strike.
Yep, with bank stocks trading strongly, such action would match the Trump shock and surprise programme parameters..
It’s tempting to assume a banker upset the Donald, but its more likely a select band of bankers are looking forward to an invite to the White House South to celebrate.
In broad terms a little bit of pruning could be very positive. The market agrees - deciding the sum of the parts of American banking is worth more than the current whole. Decapitating banks will allow more of them to exist, function and succeed, therefore increasing the value of the whole financial sector. And, a period of creative destruction, taking out more levels of banking middle management, would be value added. Sure, there might be some dislocation and uncertainty... but on the face of it.. how bad would splitting the banks be? A positive period of creative destruction in banking to boost lending and efficiency perhaps?
However, the hidden agenda is, perhaps, more pertinent.
Many bankers would love it. It might allow them to restore their pre-eminence as investment bankers. As a class, they’ve seen their influence wane in the post-Crisis world. Time that was reversed…
Imagine JPM divested off all the Chase Manhattan impedimenta - it would trade on a higher multiple. Or, what about resurrecting Merrill from the deathly embrace of BoA? (Is that a good thing? but it might be fun!) Or even Solomon reborn out of Citi?
Splitting Goldman would be a very dangerous idea - it would simply spawn a brood of mini-Goldmans - each of which will vie to see how many former execs they can put in positions of global power. Of course, Goldman doesn’t really exist in the same financial dimension as the rest of us…
And.. let’s not forget, Trump’s financial cabinet is overflowing with Goldman talent – Mnuchin and Cohn.
Ahah… lightbulb moment..
I can’t help but think there is something more at play with Trump’s suggestion investment banking is freed and unleashed..
If only European banks could be so simply solved.
Imagine if we cut Europe's Gross Banken down to size? Perhaps not. Divide Deutsche in two and the result will probably be two lamer German banks. Or force HSBC to divide - I'm not sensing any particular attractions there.
Meanwhile, the trip up to London gets more and more bizarre... No delays this morning, but not a single functioning ticket machine at the station.. There are, of course, signs up everywhere warning travellers that getting on a train without a ticket is a one-way trip to the Gulag, so folk were understandably worried. Even reassurance from the staff that tickets would be available on the train didn't really help.
Anyway, She-who-is-Mrs-Blain and I got on the train, and it soon became clear there was absolutely no way the guard was going to get round everyone to sell them tickets. He went on the intercom and told passengers the staff at London Waterloo had been warned, and would probably simply open the ticket barriers. Effectively meaning anyone who didn't pay would get away with it.
Now.. what do you do in such a situation?
Well, we both got a "virtual gold-star" from the Guard because we still paid and bought tickets...
Does that make me an idiot?
Probably.. but a virtuous one...
Out of time..
Fastnet Race Charity: http://www.sail4cancer.org/fastnet-2017-bill-blain
Bill Blain