Blain's Morning Porridge - Global Economy looking good, but Europe is distinctly "Wobbly&qu
Blain’s Morning Porridge – October 3rd 2017
“Raised on promises, she could help thinking that there was a little more to life...”
For the avoidance of doubt – the Morning Porridge is unrestricted market commentary, it is not investment advice…
All the data yesterday seems to confirm the global economy is headed back on growth track. Stock markets are buoyant, the bond market is spewing out an extraordinary volume of weird and wonderful deals even though the World’s Central banks all now agree on the normalisation/tightening thesis. If it wasn’t for yesterday’s Las Vegas atrocity, we’d all be in our stock-market happy places this morning.
But over to the east, a big black cloud is rising over Mordor.. The word on Europe is “wobbly”.
That’s no surprise as the political and monetary uncertainty levels looking increasingly threatening: ongoing fallout, doubt and gloom from the German Elections, FIIK* what untrodden road Spain and Catalunya are going to go down, the still-to-come worry about how Italian elections will spice markets early next year, layered on top of what the ECB is going to do next. And then there is all the other stuff, like the Poles somewhat different approach to liberties, the Germans and their Russian gas pipeline, and whatever the Eastern Europeans want to do next to offend Brussels sensibilities..
Markets hate uncertainty.
The question is – how long is this period of raised Euro tension likely to last?
Sadly, there are not immediate solutions – these are all long-term issues (yes, even the German post-election stramash). Some of them, like European countries/regions not playing nice with each other, define the nature of the problem: Europe is not a single state with shared values and history, it’s a hodgepodge of squabbling tribes with long memories.. (You can make the same observation of any group of humans.. we’re fractal!)
Short Euros…but that’s just too obvious? Stocks haven’t taking a hammering (apart from the Catalan banks).
Spain is getting most attention, and there are plenty of opinions to read on the wires. I got comments from a number of Spanish clients yesterday: apparently the Catalans aren’t receiving much sympathy from the rest of the country (Madrid was apparently awash with Spanish flags), the coalition government may be more resilient than we thought, but Rajoy gets very poor marks for his handling. There are also pretty brazen attempts to discredit the leaders of the separatists– highlighting how worried Madrid is. Most of my Madrid based chums doubt Catalan industry and commerce will never accept a breakup, and believe “no” voters did not vote in the “illegal” referendum – figuring true support for Independence is around 40%.
Does that mean a solution might be on the cards? An official referendum perhaps? Unlikely. Unfortunately, I seem to remember from my schooldays there is no word for “compromise” in Spanish.
Interesting observation in one of the papers this morning – Spanish banks hold Euro 300 bln of Spanish government debt, raising the threat of what they call a “doom-loop” . There is a no-Sh*t-Sherlock award winging its way to Fleet Street on the basis the Torygraph has spotted the downright blinking obvious..
I’ve been warning for years about the real and dangerous link between banks and European sovereign credits - I use that wording deliberately: real sovereign issuers issue debt in their own currency which they control, European sovereigns can’t and don’t. They are credits that rely on the ongoing beneficence of the ECB to carry on.
In the event of European sovereign meltdown its highly likely we’ll see a banking “death-spiral” triggered, and contagion across the other peripheral nations as doubts on the ECB acting as lender of last resort and its ability “to do whatever it takes” balloon under pressure.
The whole wobbly edifice of Europe is founded on Draghi’s greatest trick – giving banks unlimited TLTRO money in 2012 and steering them to buy Sovereign debt. Ta-Da! It provided a simultaneous but illusionary solution to both the banking and sovereign debt crisis. If either crisis kicks off again – well, it’s going to get even more interesting…
I’m not certain there is going to be a new European sovereign debt crisis… but it’s a possibility.. a rising one.
Back in the real world….
When a highly regarded stock market guru is excitedly saying “I’ve been doing this for 50-years, and I’ve never seen anything quite like it” as the stock market rallies to new highs on the back of stronger US data (and despite yesterday’s Las Vegas horror), you have to wonder how much longer can it go. VIX remains at record lows. My colleague Steve Previs, stock picker extraordinaire, points out the sentiment indices are all at record highs, and the CNN Fear & Greed Index is at 89 – “Extreme Greed Zone”.
Is it just me wondering about “complacency”? I see Tesla missed its targets again….
Everyone is apparently buying – anyone sitting on Cash is trying to play catch up. I can’t help but remind everyone of Blain’s Mantra No 1: “The Stock Market has but one objective: To inflict the maximum amount of pain on the maximum amount of participants.”
On that happy observation, back to the day job…
Bill Blain