Blain's Morning Porridge - July 20th - ECB, Whisky and Airplanes.. the stuff of the day..
Blain’s Morning Porridge – July 20th 2017
“The entire universe has been nearly divided into things to a) mate with, b) eat, c) run away from, and d) rocks.”
We must have been smoking something very strong when we all panicked about the world going hawkish just a few weeks ago.
It probably did, but you wouldn’t know that this morning…
What happened to the inflation will’o’the’wisp? The US has stepped back, UK don’t know what it doing, BoJ was easy last night, and today I expect Draghi’s tone will be dovish when the ECB opines. The confidence indicators show the Eurozone is “recovering”, but employment, growth, and capacity utilisation still remain sub optimal. He doesn’t need to rock any boats – especially when the politics look “interesting”. While Greece and Italy remain poised, and with the dollar so weak, a stronger Euro can’t be on anyone’s agenda. So.. Draghi won’t raise any “serious concerns”, “adapt his intensity”, or “adjust his parameters” any day soon. Let’s wait and see what he says at Jackson Hole in late August.
It’s another July lazy day in prospect. New issues still being pumped out, but there is definitely a holiday somnambulance in the air.
Some great feedback on our note on European bank NPLs yesterday:
“Banking systems are as strong as their weakest link, and the little banks are the ones we need to follow..”
“Look at Target 2 imbalances, they also clearly show the North/South divide in terms of flight of capital” (Italy currently -€417 bln!)
“I’ve lost count of the number of times I have heard someone say “at least the tail risk from Italian banking has diminished now””.
Anyone want to go long Italian banks? If so.. my phone number is below…
As always, I’m thinking how to beat the markets, and after a superb whisky tasting (courtesy of clients!) myself and my Macro Man, Martin Malone, are thinking about buying Spanish Oak forests. Demand for whisky is rising, it’s a premium product, but you can only get 2 barrels out a Spanish Oak tree (which first you have to fill with Sherry.) They take an awful long time to grow and they are fairly scarce. Other oaks don’t work so well – too tannic and woody. (American bourbon casks are plentiful and cheap as chips..)
Whisky is a complex but rewarding business. There is so much to consider. It’s incredibly competitive and the quality is getting better and better. It takes years for a good whisky to mature and be ready. I’m looking for investors in a distillery – if you want to make something proper.
In contrast, you could go Breaking Bad, and use the same still to make raw alcohol, throw in some “botanicals” (whatever weeds are growing in the garden), give it a shake, let the label dry and call it premium “hand-crafted” Gin. Only takes a couple of days.. Just not the same, but you do get to wear a hipster beard and be very counter culture. I understand the are villages in Dorset with more Gin Distilleries than families.
I’ve been drinking whisky all my life (mum gave us “Hot Toddys” to cure colds when we were kids) and I’ve never ever had Ebola Fever – thus proving it’s not only a great tipple, but also the universal cure all.
Back in the real world…
Global Stock markets trending at record levels? Staggers me Greece is going to get a 4.5% 5-yr deal done, and the hi-yield markets are trading with a one-handle over proper credit. And even after a bond crash we are talking 2.25% return for a 10-yr Treasury! My pension fund aint going to buy me new boats on these numbers. Risk vs Return seems to have lost its way..
Surely there are more remunerative and less risk ways to garner real world proper returns?
One of the areas where we’re increasingly active is new alternative aircraft financing. We’ve been involved marketing a number of deals based around aircraft leases that throw off dull, boring, predictable and safe real asset cashflows. It amazes me more investors aren’t jumping up and down for these deals when we can generate 6% plus yields on the safest asset classes! (Probably because they don’t easily tick compliance and regulatory boxes, and anything difficult is just difficult in any modern financial institution.)
At the moment we’ve a number of deals on the runway and some secondary ones in the air.. Happy to talk about them!
This morning I’m delighted to attach a report on the opportunities of Investing in Aviation Assets by my colleague Dr Prodi Bhattacharya. It’s an excellent introduction to the risks inherent in the asset class.
The facts are simple. Aircraft Leases earn income from the airlines using them. Many of our deals have the income guaranteed by the lessee airline. While the economics of the airline business are currently in good shape, there are clearly risks. What if the airline goes bust and stops paying?
What do you do with the plane? Airplanes are depreciating assets. They have a limited life. Their value at any point in the lifecycle is determined by a host of factors. The critical determinants of risk/return, and being able to monetise the investment in times of crisis, include:
How strong is the airline leasing the plane – less a concern than you fear..
How deep and liquid a secondary market for the aircraft type exists, and therefore,
How predictable is the Residual Value of the aircraft at the end of the lease.
It’s the classic Asset Backed “Granularity” argument.
Where an aircraft production run extends for decades, there are thousands of the type, where the economics of operation are easily understood, and there are hundreds of airlines using the type, then it fairly easy predict future values and expect a secondary market. The price predictability of more specialist aircraft makes them more discrete assets – but also predictable.
There are, of course, many technical issues to consider when airlines chose aircraft:
What are the economics of alternative new/old aircraft types – what’s the cost trade-off between more efficient new aircraft or older but cheaper models?
Are the aircraft right sized for their routes – cost efficiency, load factors, range, landing cycles and landing slots, etc.?
Will a technological revolution suddenly replace aircraft with intercontinentally ranged flying cars?
Will an industry revolution create dislocation – as happened when low cost airlines put the economics of bloated National Flag carriers and established airlines to the sword?
But the basics of “dull, boring, predictable” returns are simple: We know that passenger numbers have increased steadily since the inception of air travel. All the forecasts of the major airlines, aircraft manufacturers and aviation experts forecast continued growth – especially in regional air routes, including China, SE Asia, South America and Africa. For the foreseeable future, deliveries of new aircraft from the established airline manufacturers, mean there is at least a 7 year backlog of existing orders when the world needs at least 30k new aircraft in the next 20 years!
We’d love any feedback on Prodi’s report. And give us a shout and I’ll send one of the team to explain the deals we’re currently working on. (And you don’t actually need to know what makes planes fly to garner returns – although it will probably help as you explain them to the investment committee..)
No Porridge till Tuesday. I’m spending this weekend racing round the English Channel on the race boat – it’s our last race ahead of the 600 mile Fastnet Race in August (still time to donate: http://www.sail4cancer.org/fastnet-2017-bill-blain The weather is looking.. bouncy..
Bill Blain
