Blain's Morning Porridge - Sept 14 2017 - Nothing to worry about then.. except bonds, oil, UK, E
Blain’s Morning Porridge – September 14th 2017
“He spoke of lands not far, or lands they were in his mind.”
For the avoidance of doubt – the Morning Porridge is unrestricted market commentary, it is not investment advice…
What do we know different this morning? There is apparently nothing to worry about. Everything is coming up roses. These are not the droids you are looking for – says my market guru Steve Previs. All the old market bears, like me, are looking for stuff to grumble about – terrified by the unintended consequences of QE, caught in the headlights of apparently overbought markets, of whatever else panics them… etc.
But what do we know?
We know nothing – the markets continue to make new highs supported by a blaze of good news and positive expectations. The disappointing China data and threat of poor US data is momentary.. apparently.. But, but and but again… mood and sentiment can change on a dime..
I shall crawl back into my pit and ponder..
I could list a whole run of things likely to worry the markets in coming months. As usual, 99% of things the market unwisely labels “known unknowns” prove nothing more that whispy worries and momentary concerns – that with the benefit of hindsight we built up out of all proportion.
But, I am still convinced there is trouble ahead in bonds. The fact countries like Tajikistan and Ukraine are doing blowout deals is one thing – it shows price compression is out of sync and we are approaching a Ukrainian Chicken Farm Moment in the new issue bond market. It’s inevitable. The UCFM is an immutable law of bond physics.
I suspect there is trouble ahead in Investment Grade as well – which spells trouble for delicate sovereign sentiment. I got lots of positive feedback on my comments on the Austria “2% for 100” years deal yesterday, including a very astute observation from a US client as I tried to whet his interest: “So the objective of the ECB is to generate inflation, and you want to sell me a bond yielding effectively nothing for a 100-yrs? Think about inflation and yield curves, and stop wasting my time..”
Conclusion… long term investor goals and central bank objectives might not always be aligned!
And then there is oil.
My colleague Ara Levonian at BGC has been thinking about rising OIL risks out the Middle East. The Qatar/Saudi stand-off is over 100 days old, and could escalate as the lines and alliances are drawn, and Trump’s been making calls. A failed call last week between Saudi’s bright new crown prince and Qatar could signal the next stage is coming – and the concern is a sudden escalation in Tension (involving Iran, Turkey on one side vs Saudi, the Emirates and Eqypt on other) could trigger an oil price shock.
Meanwhile, I was asking my Macro Economist Martin Malone for his long-term outlook on Oil. I’ve rather taken the view the $50 barrel is likely to prove long term, reflecting the new supply balance, the success of the US new producers adapting to the lower price, the need of oil producers to keep selling, and Iran able to keep the Saudi’s under the cosh through cheap production ramping up in the next few years.
Martin’s response was interesting: “Why?” Why don’t you expect prices to return to a more normal higher level as the global economy normalises? One of the factors driving growth has been cheap energy – as the global economy recovers.. why would energy prices not also recover..? Higher oil prices could change the global outlook and pummel sentiment.
Elsewhere, I was struck by one blog commenting: “Pound strength is the dominant theme, even as the UK economic outlook continues to plummet.” Does it? Is the UK really in such trouble? Record employment, but weak wage growth.
The UK has become a massively more competitive economy since Brexit – car companies and plane makers are opening new plants because UK labour is cheap. (In dollar terms the UK labour force is around 30% cheaper than the US!) Although the Bank of England meeting today is predicted to remain on hold re rates, the mood remains hawkish in light of the possibility of wage inflation.
Fears about the UK are based on our current negative “issues” with Europe rather than the positives and continuing inward investment we’re likely to see.
The future for Europe and the UK should be bright – separate but close. The UK doesn’t want to be part of the European Vision of a unified single state, but we should certainly be mutually supportive. Instead, the divorce is turning messy and it’s the kids that will suffer.
It’s a vision thing.
Our “government” has somewhat misplayed the UK hand. The first thing the new PM should have said is “every European living and working in the UK will be welcome to stay and be treated exactly like our own citizens, and in the future Europeans will always be made welcome on these shores.” There is still time to make a similar offer.
That would not be a bad economic bargain for Britain and Europe.
Instead, Europe is going to put up a wall. It will hurt both ways, but mostly it will hurt Europe’s youth. I predict any smart young lad or lass on the Continent will quickly figure out their global prospects are going to be wider and better outside if Europe puts up false walls across the channel. Young Brits are going miss nearly as much. Damn shame…
Enough regret. Positive thots as I get on with the day job..
Bill Blain
