Submitted by Bill Blain of Mint Partners
Blain’s Morning Porridge – September 19th 2017
“I had to phone someone so I picked on you. Hey, that far out so you heard him too..”
There is a veritable hurricane of new issues hitting the market. Like the new Ukraine deal they are being priced to sell – perhaps racing to get down before the rains come. There is the sure and certain knowledge this feeding frenzy is going to stop. With a thumping great crunch.
But the new issue bond market is always feast/famine. There is bigger stuff happening. I managed to spend some time yesterday in the West End of London, speaking with a number of clients about where they think markets are going. Three big themes emerged:
- Much of the current “noise” is utter distraction – including what’s really going on in Washington, the nuances of the Brexit negotiations, Korea and all the other political rumour and sigh hitting markets. Some of stories emanating from Whitehall, Brussels, Berlin and Washington are tremendous – I’d love to share them, but…
- Strip out the political flummery and noise, and the prospects for global stock markets should be positive. Every major economy that matters is now in positive growth, after 10-years we finally seem to have shaken off the Global Financial Crisis, and stock markets (which high) are not impossibly overvalued. The reflation trade is on.
- The fly in the ointment is the bond market. One fund I met is convinced Global bond markets and credit are on the edge of precipice and about to take that terminal step forward. Others fear the unintended consequences of taper and the “End of QE” triggering a reset across global financial asset values – especially across the bond markets.
It’s the possibility of a Global Bond Tremblor unwinding confidence that’s the biggest fear. While the imminent decision (perhaps announced tomorrow) the Fed will no longer reinvest coupon income is significant, most minds aren’t overly concerned on the effects of US taper and a slow gradual rise in US rates on dollar asset values – should be positive for currency. Most believe the US economy is fundamentally fixed, and there is upside potential (more on which below).
The things that have clients more concerned are Europe and Credit. Everyone knows that yield tourists have made credit spreads from EM, Hi-yield and IG implausibly tight. Although any rise in European rates is still a long-way down the road, and likely to be even more gradual than the US, it’s the implied with-drawl of the “do-what-ever-it-takes” Draghi put which makes a renewed circle of doubt around Southern European Sovereign debt a real possibility.
European sovereign debt remains a game of Pretend and Extend. Without the implied support of the ECB – WHO WOULD BUY? Seriously… If Europe’s sovereigns were businesses, they’d be well bust by now. Growth in parts of Southern Europe is past 3% - but it will need a number of years more of this kind of performance to correct the imbalances.
Now… all across Europe, readers of the Morning Porridge will be shaking their heads and saying: “Blain is talking rubbish again.. European sovereigns are not going bust”. No they aren’t… but they are uninvestible at these levels without the Draghi put, and a real interest rates these countries will be consigned to Euro-Austerity purgatory. Something has to change.
Without the Draghi promise who would willingly buy the debt of Sovereign Credits without access to their own currency printing presses, have been borrowing exclusively in someone else’s currency, have essentially unreformed economies at different levels of competitiveness and productivity to Germany, and are characterised by dodgy banking systems that have been encouraged to invest liquidity in the same dodgy sovereign credit debt..?
Either we get a crisis or we get a complete mutualisation – a political impossibility at this stage. Just asking.. S&P clearly disagrees with me.. they just upgraded Portugal to IG.
It’s a very different situation in the US - or UK – where sovereign debt is still sovereign debt, banks are fixed, and it’s just the everyday idiocy that dominates the headlines.
Which leads us back to the prospects for the US and stocks – there is more upside than downside. Taking the global macro of recovering economies, the lack of inflation, coordinated central bank action, and rising activity, slot in the US elections next year.
I read you can get odds-on that Trump will be impeached by 2020 and you can get odds-on he will win the next US Election. With the mid-term elections next year, the Republicans face a very real prospect of an election walloping unless they are clearly seen to rally round the still massively popular Trump. He is making it clear he’s not dancing to their tune, and giving them one very simple choice – dance to mine. Which is why it’s increasingly likely we’ll get somewhere on tax-cuts if not the more complex issue of tax reform. A US tax cut will help – and if we don’t get it, then nothing actually changes..
All of which suggests to me there may be further upside in stocks… but stay nervous on bonds..