Scotsmen are seldom mistaken for a sunny day
September 11, 2019

Blain's Morning Porridge

"It is not enough to serve our enemies with legal papers…"

Many of my readers think I'm some sort of uber-bear, repeatedly predicting some inevitable and unavoidable market Armageddon is imminent and just moments away. While Scotsmen are seldom mistaken for a sunny day, I'm actually a fairly cheerful soul. Even while foretelling the dire and bloody end of the financial world I always caveat it with no matter how bad the next downturn might be - the sun will come up the following morning. However, and but again.. (dark clouds blank the sun) I do think we should be aware of just how tenuous all this market euphoria in bonds and stocks still is.

This morning we wake up to lots of stuff that could move markets:

It's no surprise WeWork initial public offering now looks in serious trouble. The largest stockholder, Softbank, asked the firm to postpone the IPO. Its junk bonds are crashing because without the IPO, WeWork loses access to an agreed US$6 billion bank credit line finance. While the junk debt price tumbles, it's unlikely the firm will launch a new bond to cover the shortfall in its curious ‘lose more money to make less business' strategy.

Investors are turning away. WeWork is now caught in the classic liquidity death spiral. There are few ways to successful escape such a terminal stall. Their CEO, Adam Neumann, has made himself one of the most disliked and divisive figures in the tech world, and could find himself at the receiving end of unpalatable demands he surrenders control, gives up his controlling stock – which could uncover a host of interesting surprises on how he's milked it.

Meanwhile, the latest White House whammy, John Bolton's departure as national security advisor, leaves Trump surrounded by a coterie of empty yes-people. It might lead to a less aggressive USA foreign policy, but the image of a Roman Emperor surrounded by horses he's elevated into Senators sticks in the mind (Editor's note; Emperor Gaius Julius Caesar Germanicus, better known as Caligula, in some accounts made his horse, Incitatus, a Senator as a reflection of the contempt in which he held Senators as a body and as individuals). I guess we better figure out what Mike Pompeo is thinking to figure out what Trump will tweet next.

And, I'm delighted to see the UK's Labour Party is adopting a fairness policy towards Brexit. The Deputy Leader of the Party, Tom Watson, has decided it's only electorally equitable if they split themselves as divisively as the Conservatives by announcing Labour policy is now to have a new Remain referendum before a general election, and Labour's stance is "unequivocally" to remain. Not quite how Labour policy was described to me yesterday, but it's marvellous stuff. We now have even less idea what Labour policy might be – which puts them in same league as Boris.

As the UK tumbles towards political civil war with both parties divided, can no one else perceive the horrible danger ahead of us? Is anyone else trying to figure out just how terrible a UK government controlled by "nice" "sensible" "caring and understanding" Liberals might be??? Imagine patronizing 300 Head Teachers telling us what to do… It's just too frightening to contemplate… (PLEASE MAKE IT STOP!)

However, all these above are just the starters…What really, really worries me this morning is the very real possibility markets are losing their faith in central banks. What if central banks were to confess and admit that zero interest policy and quantitative easing have been utter bunkum, haven't worked and we need to do something else? What if such an outbreak of honesty triggers a Taper Tantrum of monstrous proportions? It would kill the bond market – just at a time when investors are still putting in money to bonds out of stocks in search of yield and because they believe most corporates will weather the looming global recession! Such a confidence collapse might be about to happen.

The last ten years of distorted markets and addiction to central banks have been the consequence of unwise monetary experimentation (aided and abetted by some extraordinarily stupid political decisions, like austerity, stupid regulation and bureaucratic behaviour). Collectively, they've got the financial markets into their current mess. Bond yields are a massive bubble. Stocks are overvalued. We're due a reset. Personally, I want to put more money into alternatives – real assets decorrelated from the distortions in financial assets. As a private investor, I'm struggling to find such funds to invest in! (IDEAS PLEASE?)

My current worry is central bankers are increasingly trapped. If they don't keep interest rates artificially low, then both the bond and stocks bubbles will burst. Even if they sustain the illusion, but keep on cutting, its effectiveness is weakening. The bubbles may burst anyway. It will result in that most of amusing of financial moments… discovering who has been swimming without any swimwear.

Stocks should be in trouble because the global economy is going to slow. Bonds should be in trouble because low rates are not justified by inflation expectations (which are rising), or by deflationary threats – which are real, but not powerful enough to justify negative interest rate policy in a real world. Something has to give.

There are two forces at play.

The first is political: In the US, the President is trying to boost his re-election chances by screaming it's the fault of the central bank for not juicing the economy more by slashing rates. In more sensible places, politicians are realizing monetary policies don't drive growth, so they want to juice economies with fiscal policy – borrow more money to spend into growth.

The second force is overcoming the orthodoxy – which holds that fiscal policy is dangerous because it hikes debt to levels where investors lose confidence in the economy. It's a fair point that's been proven many times.

All of which makes me look at the recent headlines in Europe; the number of European Central Bank members openly disagreeing with Draghi's calls to further ease, or German politicians arguing against a fiscal boost for the ailing German economy. These sound very negative and orthodox. But are we looking at an under the radar central banking coup in Europe?

According to a number of well briefed papers and articles, the ECB may not give us the easing and bond buying bonanza the markets have been promised. Even French members of the ECB committee are saying "Non!". We have Senior Economists like Jurgen Stark, former ECB Chief Economguesser, saying "With a second asset purchase programme the ECB will continue to disturb markets and prices do not reflect the risks anymore."

Or how about Olli Rehn's recent gem: "if you don't do anything, then you don't have any side effects, but you don't have any impact on the economy either!" Or the French Finance Minister, Bruno Le Maire: "We are at the end of the efficiency of monetary policy. The risks we are now facing are not related to financial stability, but how to fuel growth. The response is not only in hands of the ECB."

Is it deliberate? If the ECB can't keep buying.. then maybe it's time for Plan B? These comments above all play into the hands of new ECB head, Christine Lagarde, whose job will be to politically herd the felines of the ECB and European governments into a fiscal union to boost German and European fiscal spending. Tomorrow's ECB meeting is going to be critical. Don't miss it!

And finally this morning.. A blast from the past. It is over 30 years ago the World Bank launched the first $1.5 billion "Global" bond – underwritten and sold simultaneously in euro and US markets! It was a stunning success. I remember it well. I was already a market veteran when it launched. Someone posted the original press release on Linked-In yesterday. Wow. Reading through the list of underwriters that no longer exist was a memory jogger: First Boston, Salomon Brothers, Shearson Lehman Hutton, SBC – all but shady memories, and I wonder if anyone remembers Yamaichi, IBJ, or even when Nomura was a powerhouse. What I remember about these early global deals is how quickly global investors grasped the concept and piled into the deals.

At the time I was on the syndicate and debt capital markets desk of a small Japanese bank in London. (At least three of the team are still Porridge Readers!) We were popping out structured deals linked to the Nikkei (which was then about to hit 40K). Some of our deals were massively levered – if the Nikkei collapsed, the insurance company investors would lose their principal in just a few thousand points fall. Guess what happened…

What really struck me yesterday thinking about the World Bank bond was how innovative the market was then. We were working with investors to build new exciting, and usually very good products – Nikkei-linked bonds were an aberration.

Today you can tell how well my career progressed by the fact I'm still ringing round speaking to investment desks, but it's no longer: "Wow, that sound great, let's talk." I'm more likely to get "sorry, don't think that fits our investment guidelines/ESG Policies/liquidity objectives/it's a sector we don't like", or the dreaded: "I don't think compliance will like it."

Ah…. Were things really better when dinosaurs roamed the earth…? Plod, plod, plod…

Out of time and back to the day job..

Bill Blain

Shard Capital





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Blain's Morning Porridge

"It is not enough to serve our enemies with legal papers…"

Many of my readers think I'm some sort of uber-bear, repeatedly predicting some inevitable and unavoidable market Armageddon is imminent and just moments away. While Scotsmen are seldom mistaken for a sunny day, I'm actually a fairly cheerful soul. Even while foretelling the dire and bloody end of the financial world I always caveat it with no matter how bad the next downturn might be - the sun will come up the following morning. However, and but again.. (dark clouds blank the sun) I do think we should be aware of just how tenuous all this market euphoria in bonds and stocks still is.

This morning we wake up to lots of stuff that could move markets:

It's no surprise WeWork initial public offering now looks in serious trouble. The largest stockholder, Softbank, asked the firm to postpone the IPO. Its junk bonds are crashing because without the IPO, WeWork loses access to an agreed US$6 billion bank credit line finance. While the junk debt price tumbles, it's unlikely the firm will launch a new bond to cover the shortfall in its curious ‘lose more money to make less business' strategy.

Investors are turning away. WeWork is now caught in the classic liquidity death spiral. There are few ways to successful escape such a terminal stall. Their CEO, Adam Neumann, has made himself one of the most disliked and divisive figures in the tech world, and could find himself at the receiving end of unpalatable demands he surrenders control, gives up his controlling stock – which could uncover a host of interesting surprises on how he's milked it.

Meanwhile, the latest White House whammy, John Bolton's departure as national security advisor, leaves Trump surrounded by a coterie of empty yes-people. It might lead to a less aggressive USA foreign policy, but the image of a Roman Emperor surrounded by horses he's elevated into Senators sticks in the mind (Editor's note; Emperor Gaius Julius Caesar Germanicus, better known as Caligula, in some accounts made his horse, Incitatus, a Senator as a reflection of the contempt in which he held Senators as a body and as individuals). I guess we better figure out what Mike Pompeo is thinking to figure out what Trump will tweet next.

And, I'm delighted to see the UK's Labour Party is adopting a fairness policy towards Brexit. The Deputy Leader of the Party, Tom Watson, has decided it's only electorally equitable if they split themselves as divisively as the Conservatives by announcing Labour policy is now to have a new Remain referendum before a general election, and Labour's stance is "unequivocally" to remain. Not quite how Labour policy was described to me yesterday, but it's marvellous stuff. We now have even less idea what Labour policy might be – which puts them in same league as Boris.

As the UK tumbles towards political civil war with both parties divided, can no one else perceive the horrible danger ahead of us? Is anyone else trying to figure out just how terrible a UK government controlled by "nice" "sensible" "caring and understanding" Liberals might be??? Imagine patronizing 300 Head Teachers telling us what to do… It's just too frightening to contemplate… (PLEASE MAKE IT STOP!)

However, all these above are just the starters…What really, really worries me this morning is the very real possibility markets are losing their faith in central banks. What if central banks were to confess and admit that zero interest policy and quantitative easing have been utter bunkum, haven't worked and we need to do something else? What if such an outbreak of honesty triggers a Taper Tantrum of monstrous proportions? It would kill the bond market – just at a time when investors are still putting in money to bonds out of stocks in search of yield and because they believe most corporates will weather the looming global recession! Such a confidence collapse might be about to happen.

The last ten years of distorted markets and addiction to central banks have been the consequence of unwise monetary experimentation (aided and abetted by some extraordinarily stupid political decisions, like austerity, stupid regulation and bureaucratic behaviour). Collectively, they've got the financial markets into their current mess. Bond yields are a massive bubble. Stocks are overvalued. We're due a reset. Personally, I want to put more money into alternatives – real assets decorrelated from the distortions in financial assets. As a private investor, I'm struggling to find such funds to invest in! (IDEAS PLEASE?)

My current worry is central bankers are increasingly trapped. If they don't keep interest rates artificially low, then both the bond and stocks bubbles will burst. Even if they sustain the illusion, but keep on cutting, its effectiveness is weakening. The bubbles may burst anyway. It will result in that most of amusing of financial moments… discovering who has been swimming without any swimwear.

Stocks should be in trouble because the global economy is going to slow. Bonds should be in trouble because low rates are not justified by inflation expectations (which are rising), or by deflationary threats – which are real, but not powerful enough to justify negative interest rate policy in a real world. Something has to give.

There are two forces at play.

The first is political: In the US, the President is trying to boost his re-election chances by screaming it's the fault of the central bank for not juicing the economy more by slashing rates. In more sensible places, politicians are realizing monetary policies don't drive growth, so they want to juice economies with fiscal policy – borrow more money to spend into growth.

The second force is overcoming the orthodoxy – which holds that fiscal policy is dangerous because it hikes debt to levels where investors lose confidence in the economy. It's a fair point that's been proven many times.

All of which makes me look at the recent headlines in Europe; the number of European Central Bank members openly disagreeing with Draghi's calls to further ease, or German politicians arguing against a fiscal boost for the ailing German economy. These sound very negative and orthodox. But are we looking at an under the radar central banking coup in Europe?

According to a number of well briefed papers and articles, the ECB may not give us the easing and bond buying bonanza the markets have been promised. Even French members of the ECB committee are saying "Non!". We have Senior Economists like Jurgen Stark, former ECB Chief Economguesser, saying "With a second asset purchase programme the ECB will continue to disturb markets and prices do not reflect the risks anymore."

Or how about Olli Rehn's recent gem: "if you don't do anything, then you don't have any side effects, but you don't have any impact on the economy either!" Or the French Finance Minister, Bruno Le Maire: "We are at the end of the efficiency of monetary policy. The risks we are now facing are not related to financial stability, but how to fuel growth. The response is not only in hands of the ECB."

Is it deliberate? If the ECB can't keep buying.. then maybe it's time for Plan B? These comments above all play into the hands of new ECB head, Christine Lagarde, whose job will be to politically herd the felines of the ECB and European governments into a fiscal union to boost German and European fiscal spending. Tomorrow's ECB meeting is going to be critical. Don't miss it!

And finally this morning.. A blast from the past. It is over 30 years ago the World Bank launched the first $1.5 billion "Global" bond – underwritten and sold simultaneously in euro and US markets! It was a stunning success. I remember it well. I was already a market veteran when it launched. Someone posted the original press release on Linked-In yesterday. Wow. Reading through the list of underwriters that no longer exist was a memory jogger: First Boston, Salomon Brothers, Shearson Lehman Hutton, SBC – all but shady memories, and I wonder if anyone remembers Yamaichi, IBJ, or even when Nomura was a powerhouse. What I remember about these early global deals is how quickly global investors grasped the concept and piled into the deals.

At the time I was on the syndicate and debt capital markets desk of a small Japanese bank in London. (At least three of the team are still Porridge Readers!) We were popping out structured deals linked to the Nikkei (which was then about to hit 40K). Some of our deals were massively levered – if the Nikkei collapsed, the insurance company investors would lose their principal in just a few thousand points fall. Guess what happened…

What really struck me yesterday thinking about the World Bank bond was how innovative the market was then. We were working with investors to build new exciting, and usually very good products – Nikkei-linked bonds were an aberration.

Today you can tell how well my career progressed by the fact I'm still ringing round speaking to investment desks, but it's no longer: "Wow, that sound great, let's talk." I'm more likely to get "sorry, don't think that fits our investment guidelines/ESG Policies/liquidity objectives/it's a sector we don't like", or the dreaded: "I don't think compliance will like it."

Ah…. Were things really better when dinosaurs roamed the earth…? Plod, plod, plod…

Out of time and back to the day job..

Bill Blain

Shard Capital



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