We're going to need a bigger boat
August 6, 2019

Blain's Morning Porridge

"We're going to need a bigger boat."

I love racing my little Foxer Dinghy. It's a spiteful little beast – difficult to sail well. It's a constant battle to keep it going fast while not tipping it over. I'll be sailing along fast and steady, feeling in control, and suddenly an unexpected wave or a gust of wind hits. The boat unbalances. I can feel it happen. As I struggle to react, the side of the boat tips under the water and the river pours in. Next thing it's capsized and I'm swimming round my boat trying to get it upright again. It's sudden and its chaotic. Once the "death roll" starts, it's very tough to avoid.

A few moments later I'll be back upright, bailing out the water, and set to carry on racing.

I suppose the difference between trading markets and racing my dinghy is there isn't a politician trying to get himself elected by telling the wind and waves what to do.

Yesterday was… interesting! When they write the history of this crash at least there will not be any doubt about who to pin the blame on! Trade war...great idea.

Stocks take a spanking! Bond yields tumble! High-yield bonds offered only! China stops buying US agriproducts. Renminbi breaks US$7. Trump calls China a "Currency Manipulator"! China responds! The global bull market stops. Suddenly. Crash, bang, wallop…

Relax. Roll with it. We've been here before. So much for the US Federal Reserve juicing the markets and pandering to Trump by stopping quantitative tightening with last week's minor rate ease. Utterly pointless. Global markets now pay the consequences. Market is focussed on the real stuff again – the implications on growth of a serious trade war between the US and China. Currency moves are at the forefront – China lets its currency slip and then shows it can restrain it. This is way past a simple business cycle move – this is about fundamentals. China is serious and is not going to cave. What just moved the markets was real stuff – and you don't need to be a genius to figure out Trump's trade war is not great news.

It probably doesn't help Larry Summers (who on BBC Radio Four's Today broadcast this morning sounded very like Trump) tweeting: "We may well be at the most dangerous financial moment since the 2009 financial crisis with current developments between the US and China." A special award for stating the downright obvious is on its way to him. (But 2009? Where were you in 2008 Larry?

Get the sail out the water, stand on the dagger board and roll the dinghy upright.. climb back in..

Does this market have further to correct? Markets are lower – when to start buying again? Steady – let's figure out the reality:

• We have a politically inspired global trade war that isn't going to end any time soon – which is likely to trigger global recession and slower growth – but also opportunities. Wars usually do.

• Strong dollar is horrible news for emerging markets. Competitive weakening by others will go nowhere.

• Real economy – such as it still exists, is pretty much at the top of the cycle – witness earnings and full employment.

• We have massive financial bubbles – caused largely by artificially low interest rates and quantitative easing – in financial assets: global stocks and bonds – likely to see correction, and investors trying to exit illiquid bond markets – feels very 2008/2009 where illiquidity was the major crisis.

• We have central banks out of policy options – so we're likely to see them do the same as they have done before, the danger being they fuel asset bubbles further.

• We now have over US$14.5 trillion of global bonds yielding less than 0 percent.

• The reality is that pulling money from overvalued stocks to invest in overvalued bonds doesn't look a very attractive option – even though it might be the loss-limiting one.

Relax, the boat is upright again, let's bail out the water and figure out where we are..

Put all the market factors together, and the outlook for financial assets looks poor. But so much money is tied up in inflated stocks, I suspect it's a correction rather than a crash. Where else can you go? Sell stocks to buy zero yield government bonds? That's a choice?

I suspect the credit market takes a spanking – and an outbreak of illiquidity across bond markets. I'd keep an eye on fixed income exchange-traded funds – everyone says they are safe. Yeah...sure they are. Watch carefully...

The upside is wobbly markets spell a massive opportunity to buy performing assets on the cheap. I'm looking for sellers of illiquid bonds and private assets. There are going to be bids out there – just not bids sellers are going to like...

Right, the capsize didn't help, we're behind. How do we catch up, and get back in the race?

Blain's Brexit Watch

Even as the global economy trips and tumbles, back here in Blighty (for the benefit of non-British readers, I should probably point out now and again that Blighty is the native British affectionate name for this sceptred isle), it's same-as, same-as. Sterling gets a bit of a respite from the fact the rest of the world now looks as daft as the UK! Whoopee! But it won't last long.

Labour party leader Jeremy Corbyn is vaguely suggesting a no-confidence vote in September. Gosh! How original? With today's Prime Minister Boris Johnson holding a majority of one, how long did Jeremy take to come up with that not-so-cunning plan? His chief strategist and headsman Dominic Cummings is quite clear in his strategy – doesn't matter if Boris loses a no-confidence vote, it will be too late to avoid the October 31 deadline.

Facing out a confidence vote is Johnson's apparent strategy, but we'd prefer something a little more positive. The longer Boris can hang on without the distractions of a hostile parliament, the longer it gives him to reach a new agreement with Europe. But there aren't many signs or signals of any meaningful discussions with Brussels (which is exactly why I suspect they might be happening?).

I suspect the odds of no-deal on October 31 are shortening. Even if Boris does get Europe to agree an acceptable solution to the backstop, his wafer-thin majority means he has a slim chance of getting it approved pre-October 31 in Parliament. Boris is betting he can win an election, but only after Brexit. If the plan is to deliver, as he promises, it's difficult to see any alternative to no-deal.

So stay short of sterling and…er, that's the best I can suggest..

In many ways I prefer trade wars to Brexit.

Out of time and back to the day job..

Bill Blain

Shard Capital





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Blain's Morning Porridge

"We're going to need a bigger boat."

I love racing my little Foxer Dinghy. It's a spiteful little beast – difficult to sail well. It's a constant battle to keep it going fast while not tipping it over. I'll be sailing along fast and steady, feeling in control, and suddenly an unexpected wave or a gust of wind hits. The boat unbalances. I can feel it happen. As I struggle to react, the side of the boat tips under the water and the river pours in. Next thing it's capsized and I'm swimming round my boat trying to get it upright again. It's sudden and its chaotic. Once the "death roll" starts, it's very tough to avoid.

A few moments later I'll be back upright, bailing out the water, and set to carry on racing.

I suppose the difference between trading markets and racing my dinghy is there isn't a politician trying to get himself elected by telling the wind and waves what to do.

Yesterday was… interesting! When they write the history of this crash at least there will not be any doubt about who to pin the blame on! Trade war...great idea.

Stocks take a spanking! Bond yields tumble! High-yield bonds offered only! China stops buying US agriproducts. Renminbi breaks US$7. Trump calls China a "Currency Manipulator"! China responds! The global bull market stops. Suddenly. Crash, bang, wallop…

Relax. Roll with it. We've been here before. So much for the US Federal Reserve juicing the markets and pandering to Trump by stopping quantitative tightening with last week's minor rate ease. Utterly pointless. Global markets now pay the consequences. Market is focussed on the real stuff again – the implications on growth of a serious trade war between the US and China. Currency moves are at the forefront – China lets its currency slip and then shows it can restrain it. This is way past a simple business cycle move – this is about fundamentals. China is serious and is not going to cave. What just moved the markets was real stuff – and you don't need to be a genius to figure out Trump's trade war is not great news.

It probably doesn't help Larry Summers (who on BBC Radio Four's Today broadcast this morning sounded very like Trump) tweeting: "We may well be at the most dangerous financial moment since the 2009 financial crisis with current developments between the US and China." A special award for stating the downright obvious is on its way to him. (But 2009? Where were you in 2008 Larry?

Get the sail out the water, stand on the dagger board and roll the dinghy upright.. climb back in..

Does this market have further to correct? Markets are lower – when to start buying again? Steady – let's figure out the reality:

• We have a politically inspired global trade war that isn't going to end any time soon – which is likely to trigger global recession and slower growth – but also opportunities. Wars usually do.

• Strong dollar is horrible news for emerging markets. Competitive weakening by others will go nowhere.

• Real economy – such as it still exists, is pretty much at the top of the cycle – witness earnings and full employment.

• We have massive financial bubbles – caused largely by artificially low interest rates and quantitative easing – in financial assets: global stocks and bonds – likely to see correction, and investors trying to exit illiquid bond markets – feels very 2008/2009 where illiquidity was the major crisis.

• We have central banks out of policy options – so we're likely to see them do the same as they have done before, the danger being they fuel asset bubbles further.

• We now have over US$14.5 trillion of global bonds yielding less than 0 percent.

• The reality is that pulling money from overvalued stocks to invest in overvalued bonds doesn't look a very attractive option – even though it might be the loss-limiting one.

Relax, the boat is upright again, let's bail out the water and figure out where we are..

Put all the market factors together, and the outlook for financial assets looks poor. But so much money is tied up in inflated stocks, I suspect it's a correction rather than a crash. Where else can you go? Sell stocks to buy zero yield government bonds? That's a choice?

I suspect the credit market takes a spanking – and an outbreak of illiquidity across bond markets. I'd keep an eye on fixed income exchange-traded funds – everyone says they are safe. Yeah...sure they are. Watch carefully...

The upside is wobbly markets spell a massive opportunity to buy performing assets on the cheap. I'm looking for sellers of illiquid bonds and private assets. There are going to be bids out there – just not bids sellers are going to like...

Right, the capsize didn't help, we're behind. How do we catch up, and get back in the race?

Blain's Brexit Watch

Even as the global economy trips and tumbles, back here in Blighty (for the benefit of non-British readers, I should probably point out now and again that Blighty is the native British affectionate name for this sceptred isle), it's same-as, same-as. Sterling gets a bit of a respite from the fact the rest of the world now looks as daft as the UK! Whoopee! But it won't last long.

Labour party leader Jeremy Corbyn is vaguely suggesting a no-confidence vote in September. Gosh! How original? With today's Prime Minister Boris Johnson holding a majority of one, how long did Jeremy take to come up with that not-so-cunning plan? His chief strategist and headsman Dominic Cummings is quite clear in his strategy – doesn't matter if Boris loses a no-confidence vote, it will be too late to avoid the October 31 deadline.

Facing out a confidence vote is Johnson's apparent strategy, but we'd prefer something a little more positive. The longer Boris can hang on without the distractions of a hostile parliament, the longer it gives him to reach a new agreement with Europe. But there aren't many signs or signals of any meaningful discussions with Brussels (which is exactly why I suspect they might be happening?).

I suspect the odds of no-deal on October 31 are shortening. Even if Boris does get Europe to agree an acceptable solution to the backstop, his wafer-thin majority means he has a slim chance of getting it approved pre-October 31 in Parliament. Boris is betting he can win an election, but only after Brexit. If the plan is to deliver, as he promises, it's difficult to see any alternative to no-deal.

So stay short of sterling and…er, that's the best I can suggest..

In many ways I prefer trade wars to Brexit.

Out of time and back to the day job..

Bill Blain

Shard Capital



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