Blain's Morning Porridge - Oct 31st 2017. BOE later this week, what's wrong with the UK, and
Blain’s Morning Porridge – Halloween: October 31st 2017
“He’s the hairy handed gent who ran amuck in Kent. Lately he’s been overheard in Mayfair. Better stay away from him, he’ll rip your lungs out Jim. I’d like to meet his tailor.”
For the avoidance of doubt – the Morning Porridge is unrestricted market commentary, it is not investment advice…
Sorry for absence of Porridge y’day. Signalling Problems meant the train was stuck somewhere in the no-man’s land of North Hampshire … At least it will be quiet at home this evening as She-who-is-Mrs-Blain takes her Nimbus 2000 for a blast round the rooftops of London. (Small children beware: she will be the one in the sharp pointy hat cackling in a Welsh accent… and weighing about the same as a duck* (extra points for the reference..)
It may be Halloween, but it’s a busy week:
Mumble-swerve is Powell got the Fed Hed spot – a 3 on the Hawk/Dove scale is about as much as it matters. We’ve got US employment data later this week. A bunch of the current political uncertainties are apparently deflating: the headlines say the Catalan rebellion is floundering, the Kurds are stepping back from triggering civil war in Iraq, and even El Norte Koreans haven’t been particularly naughty. Little snippets of news actually sound hopeful, like S&P raising Italy to BBB on “improving” growth prospects. So sit back and relax – everything looks rosy..
Except it never is. What can possibly go wrong? Ah, yes… the UK. We’ve got the Bank of England rates meeting coming up.
The UK economic outlook fills me with dread. There is something tediously inevitable about the list of some 36 Tory MPs guilty of various degrees of sexual harassment. Yet another predictable disappointment as the entitled little t**ts let the country down again. Some of them will be outright sexual predators, but most will deny their guilt, even to themselves, on the ground their insults and degrading behaviour was just “light-hearted” banter or “high-jinks”. If that’s the quality of our lawmakers – no wonder we are in despair about the future.
One on hand the UK is a G5 economy, a leading innovator, and financial centre. On the other, our defining national characteristics are amateurism, the school of “David Brent” middle management, muddling through, and profound unawareness of other cultures and the right of foreigners to be foreign. Add utterly incompetent leadership to the equation, and you’ve got to wonder about the investibility of Dear Old Blighty.
As we bravely march down the road to Brexit: roughly half the population are fearful we’ve made a terrible mistake, (but are largely too polite to rock the boat), while the other half are waving Union-Jacks with menace, blithely unaware of how serious this might be. BOE chief Mark Carney is now an Enemy of People after suggesting it’s not a terribly good idea, and his warning of 2 trillion financial jobs at risk will probably further incense the Reece-Mogg set.
Relax.
While we’re going to continue to experience massive Brexit Fuelled uncertainty – the end result will be less bad than it currently looks. Common sense will prevail – the Danes need somewhere to sell their bacon, someone has to eat French cheese, and since Europe is doomed to economic servitude to Berlin, we’ll remain the major market for overpriced German autos.. (for a while, till we’re all buying Tesla battery frames with an Aston body on top!)
Back to the Bank of England – it’s the last inflation meeting this year, and there is good chance they will hike from the historic low of 0.25%. Why? Many folk fear its premature and an unjustified risk – but with employment at a record tight 4.3%, rising inflation and concerns about the effects of ongoing monetary policy stimulus and unintended consequences – perhaps it’s time to hike to 0.5%/
The question then becomes – how many more hikes to come? 2, 3, more?
That is the global question. While everyone is wondering about a potential stock market correction, our main concern is interest rates. As we are all aware, markets are a delicately balanced but complex equation linking the cost of money (interest rates), confidence and growth.
Despite the fact global central banks have been talking a coordinated book on normalisation, our major concerns is a series of interest hikes, or a deepening bear phase in the bond markets, could trigger a serious sentiment collapse in the already frothy looking equity markets. As global central banks shift from the easing of the last 10-year of easy monetary experiementation towards tightening, the bond market will see yields rise and increased concerns about just how firmly moored this recovery is.
We’re all aware of recent private-equity farragoes, where over-levered zombie companies have gone bust. How many more if rates rise? What will higher rates mean across credit markets, and for EM borrowers leveraged in dollars? How quickly will an unwind of spread compression occur, and will it cause contagion in stock market sentiment?
All of which is the real uncertainty. Not Catalunya, not Brexit, not the Trump tax-reform plans, or next year’s Italian elections. The real question is how robust markets will be to the coming tighter monetary environment and the end of the Bond-Bull Cycle I talked about last week..
All of which leads us to banks. Disclosure time: I am p.a. invested in HSBC – and glad I am. Its Pivot to the East is working, and the new management look well set to continue that success. But, otherwise I’m shy the entire banking sector. Why invest in organisations where the boards are spending 99% of their time avoiding regulatory fines, responding the over-regulation and an increasing burden of red-tape and rules telling them exactly what they can and can’t do, and even more dangerously; what they can invest in.
Does that view change? As rates normalise banks will have significant margin opportunities. Time to get back involved? Perhaps. Sell Prefs and buy banking stocks? I’m thinking about it.
Back to the day job!