Blain's Morning Porridge - Nov 20th 2017. What next for the Germans?
Blain’s Morning Porridge – November 20th 2017
“When you turn an election into a three-ring circus, there is the possibility the dancing bear will win..”
For the avoidance of doubt – the Morning Porridge is unrestricted market commentary freely available to all qualified investors on an unsolicited basis. It is not investment advice…
Ha. Macron must be creasing himself with laughter… I bet he struggled to keep a straight face as he commiserated with the (soon to depart?) Angela… Funny how the good news is all French these days…
And in Harare/Berlin an elderly befuddled leader doesn’t know if she is coming or going..
Despite triggering of Gotterdammerung, market reaction to the German electoral talks collapse is curiously muted – the Euro taken a minor spanking, and stock markets a tad-let lower.
I’m not really surprised at the lack of fireworks. Markets have become blasé about political noise – understanding how easy it is to over-react. It’s going to be a short holiday week, its year-end and folk are protecting what they’ve made this year. As one heads westwards, interest or cares in German politics diminishes pretty quickly? It’s just something that happens – Isn’t it?
Er.. actually…. what’s going on in Berlin is pretty important stuff. Or, at least it should be…
I’m trying to get my head round what happened and what cracked – it’s important to understand the collapse to work out what happens next… Last week chums in Berlin assured me it was a just a matter of time before Muti Merkel signed a new coalition deal. Over the weekend it all came apart.
It would seem the Greens and the Liberals just didn’t fancy the compromises and potential electoral suicide pact that underlies being Merkel’s stooges.
Back in September I warned the coalition process was likely to be far more difficult and fraxious than the market expected. I even said the chances of an outright failure to agree were as high as 50% – check out Porridge Extra Sept 25th. I was told I was a know nothing idiot (not disputing it!). But, I didn’t expect crisis this soon. My worst case was a second election triggered early next year – and Merkel squeezed out.
I’m going to spend some time talking around contacts and putting together some new scenarios, but I’m struggling to find much upside.
I suspect Merkel will have to go. The outlook is for a complete re-jig in German politics; out with the old, and in with something new(er). New coalition discussions or an election will be equally drawn out. A new administration could be vulnerable, weak and uncertain as the “leader of Europe” is entirely inward focused in coming months/years.
Don’t underestimate the sentiment effects on Europe. Who is going to lead the agenda re closer union, banking union and reform of the ESM, bailout and QE policies? And what about dealing with Putin, Italian elections next year, the inevitable Greece bailout blow up, renewed immigration crisis, Brexit, a blow-up with Trump, and a Frenchman to replace Draghi at the helm of the ECB looking increasingly nailed-on.
And I reckon the young emperor in Paris, Macron, is going to be disappointed – if he see this as his chance to re-establish French leadership at the core of Europe, he may be well disappointed. If Berlin doesn’t care.. who’s interested?
Perhaps not – Yoorp is a long-game.
Back in the real world, and further to my note last week about the bubblicious credit markets, the prospects for a bond led crash, and signs of weakness in HY due to reduced covenant protection, overly frothy yields, and investors who don’t really understand leverage outside their credit comfort zones, I’d add yet another worry - banks looking to boost revenues by adding complexity.
Now the GFC of 2008 finally seems behind us, we’re seeing old names like Deutsche and Barclays announce they are out hiring bankers again – a sure sign the next downturn is coming. We’re also seeing follow the leader behaviour as the banks try to increase profits.
Guess how? By pumping credit derivatives driven products and complexity at yield hungry buyers…
Goldman are pushing to move from 7th to no 1 on the CLO league table. They see it as a profitable place to double dip market – selling loans to CLO issuers, and CLOs to investors!
Natexis has taken a boost from its financial engineering team creating CLOs and equity derivatives to push at Asian investors. (Taiwan are big buyers of the most risk equity notes!) The bank’s CEO is favouring complex transactions to boost revenue. It’s currently 6th on the CLO league table. It’s taking risk by warehousing deals before they are packaged up!
Deutsche is also pushing to raise its place in leveraged lending as it re-emerges from its decade of cuts. They aim to get back into the top five on the leveraged lending table.
If you are looking for signs and signals of where the next crisis lies – just follow the investment banking herd!
And on that happy note, back to the day job!
Bill Blain