Blain's very late Morning Porridge - Jan 15 2018. Carillion - too big to fail, to big an embaras
Blain’s Morning Porridge – January 15th 2018
“You and I come by road or rail, but economists travel on infrastructure….”
The Morning Porridge is unrestricted market commentary freely available to all qualified investors on an unsolicited basis. It is not investment research.
Sorry again for late and short porridge this morning. It’s not me being lazy, but other stuff like meetings and client stuff keeps getting in the way of completing my daily rant at a decent time.. Today it’s a US holiday, so maybe folk will have some time on their hands..…
I am indebted to Anthony Peters, a fellow scribbler, for informing us this is “Blue Monday” – officially the most depressing day of the year. I’m quite happy! I had a fantastic weekend although its tempered by my little girl going off to Australia for a year later today (she will be looking for a job in Melbourne if anyone is reading this in Oz), and this morning I had a great breakfast. What’s not to like?
The story of the morning is Carillion – the UK infrastructure contractor – collapsing in a myre of debt. Their business was focused on government contracts – and it’s been common knowledge it’s been on the brink for months. The interim CEO warned markets they were in trouble late last year, and facing “commercial failure [on the back of] too many unprofitable contacts; we are building a Rolls Royce, but only getting paid to build a mini.”
An alternative perspective on Carillion is “Too Big to Fail, but too embarrassing not to”, according to an infrastructure specialist I spoke to this morning. Some kind of further continuity government support looks likely – but debt holders are going to be zeroed.
Funnily enough, aside from things like the Edinburgh Tram, UK infrastructure projects are generally pretty successful, on time, and to budget – unlike, say, the embarrassment of Germany’s Berlin Airport or Stuttgart Bahnhof projects. The infrastructure business in the UK has led to constrained labour supply to other construction sectors – slowing down other parts of the economy. We’ll be thinking about the unintended consequences upon the economy of Carillion later today..
What else out there this morning?
Fascinating article from ZeroHedge filtching some Citibank research (https://www.zerohedge.com/news/2018-01-14/citi-reveals-reason-behind-markets-meltup). It reminds us one big risk of normalisation is the end of central bank liquidity from “$2 trillion to zero” – something we’re all aware of, but are worrying less about because despite the cuts, markets keep “Melting Up”. It’s causing complacency. Perhaps our focus on the upside of Global Synchronised Growth is hiding the truth..
Citi are warning declining government QE distortions propping up markets have been replaced by Chinese FX reserves flooding in. China reserves stand at $3.14 trillion, and are increasing by $130 bln per annum. It’s going somewhere. City say where: “China’s aggressive police change after the Shanghai Accord in Feb 2016 unleased a record 21 out of 22 positive months for the S&P”, says the City report.. As a result, Citi is taking “a cautious stance on 2018”.
Meanwhile, I read Morgan Stanley waring clients of similarities in Stocks between 1929, 2000 and today: the S&P Shiller PE stands at 33 – comparable to the great crash of 29. Watch out for banker falling from the 14th floor.. (They also note Greek 10-year bonds now trade at 3.6%, (tightening from 5.3% in December) a mere week after I warned the time to really worry is when Greece yield less than the US – that time is coming…)
So as we start the third week of the year its more of the same – lots of angst about markets as bursting bubbles, and as much fear about missing further upside before they might or might not burst…
Very out of time…
Bill Blain