Blain's Morning Porridge - Sept 25th 2017 - Political Noise: Trump vs Sports, Brexit and German

Blain’s Morning Porridge – September 25st 2017

“I shouted out; Who Killed the Kennedys..”

For the avoidance of doubt – the Morning Porridge is unrestricted market commentary, it is not investment advice…

It would be nice to be able to take a whole series of economic data and explain exactly why these mean boom or bust for markets. Unfortunately, this morning we’ve got lots of puzzling political questions to answer.

At the top is Trump. Patriotism vs Sports? Has he finally pressed the wrong buttons by declaring war on sport and creating yet more division across the States? Many years ago, the firm I worked for commissioned a survey of US consumer behaviour asking the question: “what is the last thing a broke borrower will stop paying if they lose their job?”. We expected the answer “their mortgage”.. Nope.. The last thing US consumers kept paying was the subscription to the Sports Cable Channel.

Does Trump know enough not to pick fights he can’t win? Its fine to bluff and bluster and threaten some comic-book dictator, but picking a fight with America’s sporting heros might be another matter. At the moment his numbers are holding up (most folk think he’s divisive, but his core vote remains strong!) His approvals are critical in terms of next year’s mid-terms: the Republicans need to associate themselves with Trump so they might just rally round re tax-cuts. But if Trump has tarnished himself, that changes the equation.

And then there is the stock market – another series of tops in thin markets as we approach the end of the third quarter. Everyone is nervous. VIX, the volatility fear index, remains around the lows. There are so many reasons to fear complacency, but who can afford not to be invested? Remember Blain Mantra no 1: “The market has but one purpose – to inflict the maximum amount of pain on the maximum amount of people.”

No one knows what the trigger for a sell off might be – but something that puts the nail in the coffin of Trumponomics would be as good as anything. (That said, if it happens and US markets do trigger a 20% correction, I’m sure I’m not the only person who will see it as a massive buying opportunity.. (meaning.. it probably won’t happen..))

Next on the political threat map is Brexit. Friday’s “big speech” was yet another noisy political moment. Personally I suspect stretching out by another 2-yrs just ensures no-one challenges the Maybot… The problem is 4 more years of weak rudderless UK politics isn’t going to provide market certainty. Witness the reaction of sterling on Friday. And the downgrade does not help – meaningless though it be.

And then there is Germany. What will MerkeI’s reduced popularity over the weekend elections and the strong showing of the German right-wing mean for markets? It doesn’t change her mandate – so what’s to worry about? A number of commentators say it’s going to cause short-term disruptions in stocks and bonds, but long term will be of no significance. Her Jamaica collation will require a load of bargaining and changes – with Schauble likely to lose his position in Finance Ministry, while the Greens will get the foreign portfolio. Compromises.

I’m less certain it will end up zero negative market effect. The German election subtly changes the dynamic, and further highlights the thin fault lines that could still fracture Europe.

We tend to be taught history in terms of the big “turning point” events; like 1066, Trafalgar or the Reichstag fire. Interestingly, we follow market history in terms of crashes; 1929, 1987, 2007 (note: it’s usually years with a seven!). But, the big events don’t just spontaneously happen – they are the product and result of all little moments that precede them.

Although the German right wing has won a voice in the Bundestag, (unlike the effectively neutered French), they won’t be able to hold Merkel to ransom or turn around policy. However, the result still changes the dynamic, subtly shifting these “Little Moments” by causing a deviation rightwards in the flow of history (wow.. how pretentious does that sound).

A rightwards shift in Germany, the upcoming referendum in Catalonia, and the North vs South Italy divide, all confirm Europe as a collection of distinct self-interested tribal groupings. This morning the Germans will telling themselves: “we’re all good Europeans, as long as you don’t try to force us to accept immigration, outsiders, change our ways, etc..”

I’m sure I’ll be told otherwise by my European chums, that German elections don’t change anything and as an Anglo/Celt I should stop talking nonsense about Europe as I clearly don’t understand it.

However, I’ll simply repeat myself – little moments occur and multiply. Germany has just confirmed a subtle shift towards separateness and borders, at a time when Europe was hoping for closer union and debt mutualisation. That has got to figure in long-term European investment strategies.

Finally.. it’s a big week for Central Bankers exercising their vocal chords.. better pay attention to them I suppose.

Out of time, and back to the day job..

Bill Blain