Blain's Morning Porridge - October 5th 2017. Who will be the next Fed Head?

Blain’s Morning Porridge – October 5th 2017

“Always the hurricane’s blowing, always the population growing, and the money owing..”

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

Marvellous start to the day as a cyclist stopped to say hello. He was one of my “nippers” from a Canary Wharf HQ’d bank I once worked for. He started as a junior in Debt Capital Markets origination – today’s he’s head of their whole Sovereign, Supranational and Agency Group! Fantastic! He’s successfully built up the bank’s reputation to be a top name in the sector! I know many SSA issuers read the porridge and will know who he is, so give the lad a mandate from me! Quite proud of him and others I worked with at that bank…

Meanwhile, the markets continue to amaze me. Nothing has really changed re the fundamental picture: stocks continue to bound upwards, economic data is positive, but more and more folk are having to pinch themselves to check if this is real.

Clue: it is not..

Meanwhile, the disastrous intervention of Donald Trump’s twitter-feed on Puerto Rico debt on Tuesday night really should be the subject of a criminal investigation. Anyone with an erg of authority tweeting a borrower is bust is bound to impact prices: Trump’s intervention to say Puerto Rico would go bust caused prices to spike 20 points lower on $74 billion of its debt, before officials were able to restore sanity, and prices to spike back up.

But the damage is done. His ill-informed tweets undo confidence across the whole US municipal bond sector – funding everything from states to local football stadiums. He said, of Puerto Rico: “We have to look at their debt structure.. They owe a lot of money to your friends on Wall Street. We’re going to have to wipe that out.”

I don’t think he realises it’s not Wall Street that is owed money.

They already made their money lead managing the debt issues. While Puerto Rico is known as a distressed debt “specialisation”, US pension funds and savings programmes across the country hold the bulk of $4 trln of US muni assets. He’s just shot the pension savings his electorate rely upon full of uncertainty.

It’s a lesson in STFU 101.

Officials should know when to say nothing. Bloomberg carries a quote from one Muni Fund president: “Like many things Donald Trump says, he doesn’t know the full details of the situation and probably doesn’t care about the limits of his power..”

Now muni investors are panicking about the prospects for other struggling US muni issuers and even some states – meaning prices are spiking down across the board.

And will Donald’s choice for next Fed Head be more considered?

I’ve been reading lots about who is likely to become the next Fed Chair. After checking the form on runners and riders, and talking it through with our head pundit Martin Malone, our Macro Economist who knows these things:

There is still a 10% chance Yellen retains the job, but more likely is a complete and utter change under Kevin Warsh – 70% likely to get the post.

Warsh is a well-networked and connected banker-lawyer with previous Fed experience. He’s married to Jane Lauder (of the make-up family). Her father has been funding the Trump empire for years. Warsh has spent the last 5-years at the Hoover Institute, a Republican think-tank, studying how to reform the Fed and get it back to basics – which means potentially bad news for some of the 27 thousand Fed PhDs currently studying esoteric features of money.. He’ll support less banking regulation, de-emphasise inflation targets, and is likely to be a hawk in terms of rate hikes and rapid normalisation.

He recently told Stanford University: “The central bank and the academic community should engage in a fundamental rethining of the Fed’s strategy, tools, governance and communications.. A reform agenda could improve the modal outlook for the US economy by clarifying the Fed’s responsibilities, improving its decision-making and bolstering its credibility.”

Other contenders look less likely: Jerome Powel is close to Trump, while Neel Kashkari, who has also been mentioned recently, is likely to fail on the basis Trump’s fondness for being surrounded by Goldman Sach’s alumni is clearly fading. One name likely to be named to join the Fed will be Marvin Goodfriend – who could become a Governor or even Vice Chairman.

It’s going to be interesting, and I suspect getting names validated might prove problematical on Capitol Hill.

Out of time…

Bill Blain