The country was in peril
August 9, 2019

Blain's Morning Porridge

"The country was in peril; he was jeopardizing his traditional rights of freedom and independence by daring to exercise them."

Sorry for lack of comment yesterday. Unavoidable, and I've already been beaten up for not publishing….

You can make an educated guess on just how badly the current bond bonanza is going to end by the number of fund managers and individuals bragging about how much they've made in fixed income in recent days.

Tumbling global bond yields scream global slowdown, (US$15 trillion of negative yielding debt) while stocks remain resolutely optimistic. Make sense of that if you will. Remember Blain's Mantra No 1: "The market has but one objective – to inflict the maximum amount of pain on the maximum number of participants!" And Mantra No 2: "In bonds there is truth."

You know it's past hatstand o'clock when one of the best performing global assets is a 100-year century bond issued by Mexico! If you'd bought the much derided 100-year Austria bond-tap a few months ago, you are up 25 percent! Current bond prices are so high (and the yields so low) because they reflect the likelihood of today's financial fears turning into real destabilizing events.

In contrast, stocks are so high because they factor in the expectations that things will get better, central banks will keep juicing markets through easing and new quantitative easing, and the reality that stock dividend yields beat bond yields!

It's incredible that investors in ultra-long bonds are crowing about such short-term returns! But that's the world – short-term is everything, while we neglect the long term.

And the really annoying thing is – you could rationally have predicted this would happen. As the world wallowed into trade crisis, rising geopolitical tensions and expectations of slow down, it was kind of obvious that central banks lacked any other policy response but to keep cutting rates and promise more financial distortion.

If you'd just listened to that financial genius Donald Trump (US Readers – Sarcasm Alert) you'd have made off like the butcher's dog with the sausages!

The next question is: for how much longer does this go on? The bottom line is lower for longer rate and QE infinity are not economically healthy. But, perhaps we are finally approaching the end of the last 12 years of economic insanity. It's Friday, and it's been a while since I've had a good rant. Indulge me for a few moments…

One of the great military quotes is Marshal of France Ferdinand Foch: "My centre is giving way, my right is in retreat, situation excellent. I attack!"

The markets are convinced the global economy is headed towards slowdown/recession, stocks and bonds look utterly mispriced and bubblicious, while looming trade wars, Brexit, Italy and other geopolitical minefields aplenty threaten growth. What's possibly to like about the market outlook?

Absolutely everything! Short-term BEAR, but long-term BULL!

For a start, the picture isn't half-as-bad as it seems. In the UK and US, strip away the political noise of Trump and Brexit, and you actually have two high employment, strong pro-business and energetic economies. Europe has far more serious issues. Trade wars and Brexit won't help, but we've made it through far worse times.

My spidey senses tell me the US and UK are moving into a new phase – which will redefine markets. Let me try to explain: I'd characterize the last 12 years as a series of monetary and policy mistakes. Now we might be approaching the converse – a new era of fiscal stimulus.

In the past the mere whiff of governments plotting fiscal spending to reflate jaded economies would send markets aflutter, bond yields soaring and currencies crashing. Markets don't like high-spending governments, because governments don't spend money well.

Now we face a completely unconventional and very different markets. When interest rates are this low and have done precisely nothing to stimulate the occidental economy, then it's time to do something different, and do it well.

We have to do something different - does anyone really think the US Federal Reserve or the European Central Bank are going to stave off looming recession with a further 25 basis points of interest rates cuts? Sure, they will try…but experience shows it's pretty pointless. Time for something different.

Done well, fiscal stimulus might be a good thing. (And let's try not to be sucked into arguments about Neo-Keynesian New Monetary Theory, which pretty much sounds like fiscal carpet-bombing. Please don't anyone suggest it to Labour MPs – they will be all over it like the proverbial cheap suit.)

Fiscal policy has a bad rep. It's extraordinary how much the focus and concerns of financial markets have shifted over the last 12 years. In 2008 it was the "End of the World" as Lehman went down, and the Fed started monetary experimentation on the grand scale through quantitative easing.

In 2009 governments were ruing the costs of bank bailouts, while the market wondered if more "socially useless" financials would go to the wall. Global stock markets were unloved. By 2010 we had a full European sovereign debt crisis developing. In 2012 ECB President Mario Draghi pledged to do whatever it takes.

Four shocking years changed investment thinking completely. These events still colour the way markets react today. The reason no one tried fiscal policy seven years ago was fear it would reignite the sovereign debt crisis. But, that's a European problem. They no longer hold their own keys to the money printing presses. The UK and US do.

Since the big crisis global stock markets have recovered, and the global economy has utterly changed. While oriental economies have been posting spectacular growth numbers, we've seen wheezing, lethargic "lower for longer" recovery in Europe and the US. It has changed the balance of trade. Despite slow growth, stock markets are close to record levels, fuelled by buybacks paid for through corporate binge-borrowing!

There are all kinds of reasons why growth has been so lackadaisical in the occidental economies – a mix of over-hasty reactive bank regulation that made bank lending more difficult, the insanity of pumping billions into financial assets to reflate economies even as countries adopted deflationary austerity spending as a response to the debt crisis, and the increasing bureaucratization of finance. Who knows why growth was so weak? But...it really doesn't matter.

What matters is where do we go from here? The point is to acknowledge the world is dynamically changing. Disruptive new technologies are now mainstream and have spawned new economic and manufacturing revolutions.

A great example is Tesla: it may be a disaster of a car company, but it has made 100 years of automotive tech obsolete and about as relevant as the horse-drawn carriage. Financial Darwinism is occurring across all sectors – adapt, change or die.

New opportunities from AI, VR and 3D are there to be exploited or missed. Decisions made today about climate change dictate our grandkids' futures. Taking advantage of these opportunities is about smart business, but also smart governments in making sure we have healthy, well educated workforces available to crew them.

We are likely to be living with ultra-low interest rates for the long-term, but real money investors can't meet their pension liabilities on 2 percent US bonds or negative bund yields. The world has changed, and investment rules have changed with it. Investors need something more attractive to invest in – and why not invest long-term by taking long-term direct stakes in the changing economy? I'd argue that gross domestic product growth is irrelevant, while social wealth – creating new well paid tech jobs and solving climate change while addressing change - is far more pertinent.

And it requires government and private sector investment – co-ordinated fiscal spending/investment! Government money is often squandered – sucked into high-spending internal bureaucracies like health and education without really considering how these vital areas of state provision are also evolving and their financial needs changing.

That is, why place priority on maternity wings when the biggest challenge is care of the elderly? My experience bringing private investors into projects to finance them is that their due diligence is the key to successful investments. I suggest the market's diligence can rein in unwise government spending.

The challenge before a state today is the same as business: evolve to the new opportunities. Markets understand that – so why not encourage private investment into state social and economic infrastructure? Sure, that model was discredited with PPI (public private initiative rather than payment protection insurance) in the UK – but let's learn why and evolve better ways of doing it.

I reckon new fiscal spending initiatives in economic and social infrastructure could transform the UK and US. The problem is politics – can these countries get past political gridlock in Washington and Brexit in the UK? I am far less certain on Europe – I wrote recently I'd become a euro bull when I see some kind of fiscal equivalent to the euro emerge.

German friends assured me it was going to happen, but since then they've said Germany is growing more insular and it's less likely. Sorry to say it but without Germany supporting fiscal policy, then Europe is doomed, and so is Germany. They may be great engineers, but they lack the financial imagination to see what's wrong with their horse-drawn carriage economy!

Here's my thinking. I want to retire in a few years time. I want a decent pension. But I can't get that from gilts at these levels. Do I chose dividend yields from stocks, or do I look to my pension fund investing in long-term income producing assets diversified across private and public assets?

Why not indeed? Why shouldn't my pension be dependent on a university churning out valuable well trained engineers and techs to run AI and robotic factories 3D printing new electric power cells? Or do we just leave it unchanged and spend billions producing yet more General Studies graduates with the economic potential of a lump of coal?

I suppose my point is that what we once believed about states reining back spending and where markets are is no longer relevant in the new age. Society must evolve in line with evolving economies – and that's a government function.

If the last ten years have been about unwise monetary experimentation and financial repression. Will the coming years represent a return to sanity? Perhaps. Time for a good dose of fiscal policy. It's OK for countries to borrow – as long as they do it well, and spend the money wisely. That's why I'm confident there are great investment opportunities coming!

Blain's Brexit Watch

The UK remains in stand-off mode with Europe. The odds of a destabilizing no-deal grow higher ever day. Any deal would be a great thing.

I increasingly feel some sympathy for the BoJo government (BoJo being today's UK Prime Minister, Boris Johnson). The UK parliament repeatedly rejected the deal that his predecessor in the office Theresa May "agreed" with Europe on the basis of the Irish backstop.

Even Boris and his mob finally voted for it – and it still failed. That should make clear to Brussels that the backstop is simply not acceptable to the UK. If Europe won't change, then no-deal it is.

Brussels can argue there is no point in negotiating away the backstop – Boris lacks a solid majority to get it passed in parliament anyway. Brussels is betting the Remainers in Parliament will cause the government to fall, a general election and a second referendum that might go their way.

If that happens…we should all hang our heads in shame at the death of democracy. It would be much much much better to get a deal – and it will hurt no one, except dent the Irish Premier's pride and a few Brussels egos.

Get over it and talk!

Have a great weekend. The approaching storm is going to kill my racing plans over the first few days of Cowes Week so a couple of long sleeps are in order.

Bill Blain

Shard Capital





This site, like many others, uses small files called cookies to customize your experience. Cookies appear to be blocked on this browser. Please consider allowing cookies so that you can enjoy more content across fundservices.net.

How do I enable cookies in my browser?

Internet Explorer
1. Click the Tools button (or press ALT and T on the keyboard), and then click Internet Options.
2. Click the Privacy tab
3. Move the slider away from 'Block all cookies' to a setting you're comfortable with.

Firefox
1. At the top of the Firefox window, click on the Tools menu and select Options...
2. Select the Privacy panel.
3. Set Firefox will: to Use custom settings for history.
4. Make sure Accept cookies from sites is selected.

Safari Browser
1. Click Safari icon in Menu Bar
2. Click Preferences (gear icon)
3. Click Security icon
4. Accept cookies: select Radio button "only from sites I visit"

Chrome
1. Click the menu icon to the right of the address bar (looks like 3 lines)
2. Click Settings
3. Click the "Show advanced settings" tab at the bottom
4. Click the "Content settings..." button in the Privacy section
5. At the top under Cookies make sure it is set to "Allow local data to be set (recommended)"

Opera
1. Click the red O button in the upper left hand corner
2. Select Settings -> Preferences
3. Select the Advanced Tab
4. Select Cookies in the list on the left side
5. Set it to "Accept cookies" or "Accept cookies only from the sites I visit"
6. Click OK

Blain's Morning Porridge

"The country was in peril; he was jeopardizing his traditional rights of freedom and independence by daring to exercise them."

Sorry for lack of comment yesterday. Unavoidable, and I've already been beaten up for not publishing….

You can make an educated guess on just how badly the current bond bonanza is going to end by the number of fund managers and individuals bragging about how much they've made in fixed income in recent days.

Tumbling global bond yields scream global slowdown, (US$15 trillion of negative yielding debt) while stocks remain resolutely optimistic. Make sense of that if you will. Remember Blain's Mantra No 1: "The market has but one objective – to inflict the maximum amount of pain on the maximum number of participants!" And Mantra No 2: "In bonds there is truth."

You know it's past hatstand o'clock when one of the best performing global assets is a 100-year century bond issued by Mexico! If you'd bought the much derided 100-year Austria bond-tap a few months ago, you are up 25 percent! Current bond prices are so high (and the yields so low) because they reflect the likelihood of today's financial fears turning into real destabilizing events.

In contrast, stocks are so high because they factor in the expectations that things will get better, central banks will keep juicing markets through easing and new quantitative easing, and the reality that stock dividend yields beat bond yields!

It's incredible that investors in ultra-long bonds are crowing about such short-term returns! But that's the world – short-term is everything, while we neglect the long term.

And the really annoying thing is – you could rationally have predicted this would happen. As the world wallowed into trade crisis, rising geopolitical tensions and expectations of slow down, it was kind of obvious that central banks lacked any other policy response but to keep cutting rates and promise more financial distortion.

If you'd just listened to that financial genius Donald Trump (US Readers – Sarcasm Alert) you'd have made off like the butcher's dog with the sausages!

The next question is: for how much longer does this go on? The bottom line is lower for longer rate and QE infinity are not economically healthy. But, perhaps we are finally approaching the end of the last 12 years of economic insanity. It's Friday, and it's been a while since I've had a good rant. Indulge me for a few moments…

One of the great military quotes is Marshal of France Ferdinand Foch: "My centre is giving way, my right is in retreat, situation excellent. I attack!"

The markets are convinced the global economy is headed towards slowdown/recession, stocks and bonds look utterly mispriced and bubblicious, while looming trade wars, Brexit, Italy and other geopolitical minefields aplenty threaten growth. What's possibly to like about the market outlook?

Absolutely everything! Short-term BEAR, but long-term BULL!

For a start, the picture isn't half-as-bad as it seems. In the UK and US, strip away the political noise of Trump and Brexit, and you actually have two high employment, strong pro-business and energetic economies. Europe has far more serious issues. Trade wars and Brexit won't help, but we've made it through far worse times.

My spidey senses tell me the US and UK are moving into a new phase – which will redefine markets. Let me try to explain: I'd characterize the last 12 years as a series of monetary and policy mistakes. Now we might be approaching the converse – a new era of fiscal stimulus.

In the past the mere whiff of governments plotting fiscal spending to reflate jaded economies would send markets aflutter, bond yields soaring and currencies crashing. Markets don't like high-spending governments, because governments don't spend money well.

Now we face a completely unconventional and very different markets. When interest rates are this low and have done precisely nothing to stimulate the occidental economy, then it's time to do something different, and do it well.

We have to do something different - does anyone really think the US Federal Reserve or the European Central Bank are going to stave off looming recession with a further 25 basis points of interest rates cuts? Sure, they will try…but experience shows it's pretty pointless. Time for something different.

Done well, fiscal stimulus might be a good thing. (And let's try not to be sucked into arguments about Neo-Keynesian New Monetary Theory, which pretty much sounds like fiscal carpet-bombing. Please don't anyone suggest it to Labour MPs – they will be all over it like the proverbial cheap suit.)

Fiscal policy has a bad rep. It's extraordinary how much the focus and concerns of financial markets have shifted over the last 12 years. In 2008 it was the "End of the World" as Lehman went down, and the Fed started monetary experimentation on the grand scale through quantitative easing.

In 2009 governments were ruing the costs of bank bailouts, while the market wondered if more "socially useless" financials would go to the wall. Global stock markets were unloved. By 2010 we had a full European sovereign debt crisis developing. In 2012 ECB President Mario Draghi pledged to do whatever it takes.

Four shocking years changed investment thinking completely. These events still colour the way markets react today. The reason no one tried fiscal policy seven years ago was fear it would reignite the sovereign debt crisis. But, that's a European problem. They no longer hold their own keys to the money printing presses. The UK and US do.

Since the big crisis global stock markets have recovered, and the global economy has utterly changed. While oriental economies have been posting spectacular growth numbers, we've seen wheezing, lethargic "lower for longer" recovery in Europe and the US. It has changed the balance of trade. Despite slow growth, stock markets are close to record levels, fuelled by buybacks paid for through corporate binge-borrowing!

There are all kinds of reasons why growth has been so lackadaisical in the occidental economies – a mix of over-hasty reactive bank regulation that made bank lending more difficult, the insanity of pumping billions into financial assets to reflate economies even as countries adopted deflationary austerity spending as a response to the debt crisis, and the increasing bureaucratization of finance. Who knows why growth was so weak? But...it really doesn't matter.

What matters is where do we go from here? The point is to acknowledge the world is dynamically changing. Disruptive new technologies are now mainstream and have spawned new economic and manufacturing revolutions.

A great example is Tesla: it may be a disaster of a car company, but it has made 100 years of automotive tech obsolete and about as relevant as the horse-drawn carriage. Financial Darwinism is occurring across all sectors – adapt, change or die.

New opportunities from AI, VR and 3D are there to be exploited or missed. Decisions made today about climate change dictate our grandkids' futures. Taking advantage of these opportunities is about smart business, but also smart governments in making sure we have healthy, well educated workforces available to crew them.

We are likely to be living with ultra-low interest rates for the long-term, but real money investors can't meet their pension liabilities on 2 percent US bonds or negative bund yields. The world has changed, and investment rules have changed with it. Investors need something more attractive to invest in – and why not invest long-term by taking long-term direct stakes in the changing economy? I'd argue that gross domestic product growth is irrelevant, while social wealth – creating new well paid tech jobs and solving climate change while addressing change - is far more pertinent.

And it requires government and private sector investment – co-ordinated fiscal spending/investment! Government money is often squandered – sucked into high-spending internal bureaucracies like health and education without really considering how these vital areas of state provision are also evolving and their financial needs changing.

That is, why place priority on maternity wings when the biggest challenge is care of the elderly? My experience bringing private investors into projects to finance them is that their due diligence is the key to successful investments. I suggest the market's diligence can rein in unwise government spending.

The challenge before a state today is the same as business: evolve to the new opportunities. Markets understand that – so why not encourage private investment into state social and economic infrastructure? Sure, that model was discredited with PPI (public private initiative rather than payment protection insurance) in the UK – but let's learn why and evolve better ways of doing it.

I reckon new fiscal spending initiatives in economic and social infrastructure could transform the UK and US. The problem is politics – can these countries get past political gridlock in Washington and Brexit in the UK? I am far less certain on Europe – I wrote recently I'd become a euro bull when I see some kind of fiscal equivalent to the euro emerge.

German friends assured me it was going to happen, but since then they've said Germany is growing more insular and it's less likely. Sorry to say it but without Germany supporting fiscal policy, then Europe is doomed, and so is Germany. They may be great engineers, but they lack the financial imagination to see what's wrong with their horse-drawn carriage economy!

Here's my thinking. I want to retire in a few years time. I want a decent pension. But I can't get that from gilts at these levels. Do I chose dividend yields from stocks, or do I look to my pension fund investing in long-term income producing assets diversified across private and public assets?

Why not indeed? Why shouldn't my pension be dependent on a university churning out valuable well trained engineers and techs to run AI and robotic factories 3D printing new electric power cells? Or do we just leave it unchanged and spend billions producing yet more General Studies graduates with the economic potential of a lump of coal?

I suppose my point is that what we once believed about states reining back spending and where markets are is no longer relevant in the new age. Society must evolve in line with evolving economies – and that's a government function.

If the last ten years have been about unwise monetary experimentation and financial repression. Will the coming years represent a return to sanity? Perhaps. Time for a good dose of fiscal policy. It's OK for countries to borrow – as long as they do it well, and spend the money wisely. That's why I'm confident there are great investment opportunities coming!

Blain's Brexit Watch

The UK remains in stand-off mode with Europe. The odds of a destabilizing no-deal grow higher ever day. Any deal would be a great thing.

I increasingly feel some sympathy for the BoJo government (BoJo being today's UK Prime Minister, Boris Johnson). The UK parliament repeatedly rejected the deal that his predecessor in the office Theresa May "agreed" with Europe on the basis of the Irish backstop.

Even Boris and his mob finally voted for it – and it still failed. That should make clear to Brussels that the backstop is simply not acceptable to the UK. If Europe won't change, then no-deal it is.

Brussels can argue there is no point in negotiating away the backstop – Boris lacks a solid majority to get it passed in parliament anyway. Brussels is betting the Remainers in Parliament will cause the government to fall, a general election and a second referendum that might go their way.

If that happens…we should all hang our heads in shame at the death of democracy. It would be much much much better to get a deal – and it will hurt no one, except dent the Irish Premier's pride and a few Brussels egos.

Get over it and talk!

Have a great weekend. The approaching storm is going to kill my racing plans over the first few days of Cowes Week so a couple of long sleeps are in order.

Bill Blain

Shard Capital



Free subscription - selected news and optional newsletter
Premium subscription
  • All latest news
  • Latest special reports
  • Your choice of newsletter timing and topics
Full-access magazine subscription
  • 7-year archive of news
  • All past special reports
  • Newsletter with your choice of timing and topics
  • Access to more content across the site