Scotland have their bonus point
October 9, 2019

Blain's Morning Porridge

"Apparently he blasted the beast right between the eyes, before being eaten by two one-eyed lions..."

Sorry for the Late Porridge this morning, but trying to write while watching the Scotland vs Russia game in the office wasn't a good idea.

What have we got this morning? A rising threat of a no-deal Brexit? The IMF warning of global slowdown on the back of trade conflicts? Or Trump's White House ignoring the impeachment action as treasonous? … Same as, same as… but with the added attraction of basketball in the equation…

I received some fascinating feedback from yesterday's Morning Porridge about central banks and financial repression. Over 200 comments from readers saying they agreed with my considered thesis that central bankers are talking up their own book when they claim quantitative easing and negative interest rate policies have been screaming successes with minor side effects.

I could go as far as to opine that many of the regulatariat and central banking autocracy are delusional idiots who don't understand markets and the unintended consequences of their ill-considered market manipulations – but that would just be an opinion. And saying such a thing would be grossly unfair.

Most (not all) central bankers I've met are clever, intellectually curious and very focused on the disciplines of monetary policy and regulation. I would characterize them as academic and institutionally minded. They mean well. Consensus matters in the regulatory world.

But, if central bankers have a fault, it's the chips on their shoulders about investment bankers. Central bankers know they are very clever, so they can't quite understand why these under-educated street traders working at the banks are paid so much, get more respect and seem better at picking up dates at parties. There is a definite divide in mindset between central bankers and investment bankers.

The investment bankers exploit it ruthlessly. Markets are not about consensus. They are seat of the pants stuff, non-consensual and are driven by often irrational expectations and behaviours – which smart traders recognize and play.

I'd repeat my earlier charge that the last ten years of monetary experimentation achieved nothing except to utterly distort market motivations and direction – and that's because markets don't conform to theoretical behavioural models. Central bankers never understood the implications and unintended consequences of their actions. Investment bankers have been arbitraging them from the get-go! Maybe I should have applied for the Bank of England job….

However, one thing that does worry me is the lack of objective and critical reporting of central banking and policies. Although I frequently express negative opinions, and back them with examples of how and why they are wrong, it's rare to read anything critical about central banks in the press. I would almost think the big news organizations have decided not to be critical…. (and yes, I've been confidentially told that is the case). Central bankers are part of the deep establishment – and therefore on the trusted list. Independently minded market commentators rank even below MPs…

Enough digressions about how to game play central bankers…As trade hostilities heat up, and markets look increasingly jittery, the real issue remains just how dangerous the world is.

It can't help that the US Fed is talking about buying up the short-end to fuel liquidity in US money markets – when money markets get sticky, the rest of the financial economy grinds to a halt.

I've got my stock chartist pals telling me the major indices are poised for a tumble.

I've got the stock pickers warning a correction will pull down good stocks (that is, those firms with strong management, sound balance sheets, healthy cash flow and generous dividend policies) alongside the overhyped dross.

My credit analyst buddies are concerned about how bubbly credit markets are. They see rising default rate indications, and that a possible "buyers strike" by bond market vigilantes is on the cards with risks so high and rates so low.

A number of readers pointed out the problems of Pizza Express are largely due to its private equity owners leveraging it with debt to pay themselves massive dividends. No S**t Sherlock. It would appear one firm is hedged and is actively willing it towards default so it can pick up a windfall.

So where should we be investing? About the only thing I'm pretty certain of is interest rates are unlikely to spike dramatically higher. They could rise modestly on inflation, or we'll see a buyer strike, which will trigger a massive number of discrete credit defaults – that is, zombie companies going bust. That means diversification is critical – and I'd plump for secured pools of assets – which is right in my alternative investment area.

For instance, a pool of property assets will provide a steady stream of returns from rentals. The whole property sector may suffer a downturn if WeWork implodes (it's the biggest office space renter in NY and London) or in recession, but it's unlikely its whole pool will default. It's easy to run scenarios to work out the risk. When such a portfolio is paying close to 5 percent and high-yield CCC-rated bonds are paying less…well which one would you rather hold? Last week we were talking about a similar pool of diversified aviation assets.

And on that, I better finish and get back to the day job. (Scotland have the bonus point they so wanted, and the score is mounting… )

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 globalcustody.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

"Apparently he blasted the beast right between the eyes, before being eaten by two one-eyed lions..."

Sorry for the Late Porridge this morning, but trying to write while watching the Scotland vs Russia game in the office wasn't a good idea.

What have we got this morning? A rising threat of a no-deal Brexit? The IMF warning of global slowdown on the back of trade conflicts? Or Trump's White House ignoring the impeachment action as treasonous? … Same as, same as… but with the added attraction of basketball in the equation…

I received some fascinating feedback from yesterday's Morning Porridge about central banks and financial repression. Over 200 comments from readers saying they agreed with my considered thesis that central bankers are talking up their own book when they claim quantitative easing and negative interest rate policies have been screaming successes with minor side effects.

I could go as far as to opine that many of the regulatariat and central banking autocracy are delusional idiots who don't understand markets and the unintended consequences of their ill-considered market manipulations – but that would just be an opinion. And saying such a thing would be grossly unfair.

Most (not all) central bankers I've met are clever, intellectually curious and very focused on the disciplines of monetary policy and regulation. I would characterize them as academic and institutionally minded. They mean well. Consensus matters in the regulatory world.

But, if central bankers have a fault, it's the chips on their shoulders about investment bankers. Central bankers know they are very clever, so they can't quite understand why these under-educated street traders working at the banks are paid so much, get more respect and seem better at picking up dates at parties. There is a definite divide in mindset between central bankers and investment bankers.

The investment bankers exploit it ruthlessly. Markets are not about consensus. They are seat of the pants stuff, non-consensual and are driven by often irrational expectations and behaviours – which smart traders recognize and play.

I'd repeat my earlier charge that the last ten years of monetary experimentation achieved nothing except to utterly distort market motivations and direction – and that's because markets don't conform to theoretical behavioural models. Central bankers never understood the implications and unintended consequences of their actions. Investment bankers have been arbitraging them from the get-go! Maybe I should have applied for the Bank of England job….

However, one thing that does worry me is the lack of objective and critical reporting of central banking and policies. Although I frequently express negative opinions, and back them with examples of how and why they are wrong, it's rare to read anything critical about central banks in the press. I would almost think the big news organizations have decided not to be critical…. (and yes, I've been confidentially told that is the case). Central bankers are part of the deep establishment – and therefore on the trusted list. Independently minded market commentators rank even below MPs…

Enough digressions about how to game play central bankers…As trade hostilities heat up, and markets look increasingly jittery, the real issue remains just how dangerous the world is.

It can't help that the US Fed is talking about buying up the short-end to fuel liquidity in US money markets – when money markets get sticky, the rest of the financial economy grinds to a halt.

I've got my stock chartist pals telling me the major indices are poised for a tumble.

I've got the stock pickers warning a correction will pull down good stocks (that is, those firms with strong management, sound balance sheets, healthy cash flow and generous dividend policies) alongside the overhyped dross.

My credit analyst buddies are concerned about how bubbly credit markets are. They see rising default rate indications, and that a possible "buyers strike" by bond market vigilantes is on the cards with risks so high and rates so low.

A number of readers pointed out the problems of Pizza Express are largely due to its private equity owners leveraging it with debt to pay themselves massive dividends. No S**t Sherlock. It would appear one firm is hedged and is actively willing it towards default so it can pick up a windfall.

So where should we be investing? About the only thing I'm pretty certain of is interest rates are unlikely to spike dramatically higher. They could rise modestly on inflation, or we'll see a buyer strike, which will trigger a massive number of discrete credit defaults – that is, zombie companies going bust. That means diversification is critical – and I'd plump for secured pools of assets – which is right in my alternative investment area.

For instance, a pool of property assets will provide a steady stream of returns from rentals. The whole property sector may suffer a downturn if WeWork implodes (it's the biggest office space renter in NY and London) or in recession, but it's unlikely its whole pool will default. It's easy to run scenarios to work out the risk. When such a portfolio is paying close to 5 percent and high-yield CCC-rated bonds are paying less…well which one would you rather hold? Last week we were talking about a similar pool of diversified aviation assets.

And on that, I better finish and get back to the day job. (Scotland have the bonus point they so wanted, and the score is mounting… )

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

More on:  Market commentary