Blackberrys for people who think they are important… I-Phones for people who think an I-Phone is important...

Bill Blain’s Morning Porridge – March 23 2012

By Bill Blain, senior director, special situations, Newedge (as seen on TV)

T: +44 207 676 8615; Mobile: +44 777 088 1033; E: [email protected]

More evidence of the equity switch – according to a survey some 37% of global investment managers think shares will be the top-performing asset over the next three months – only 12% think government bonds have a look-in.

Yet this morning I’m thinking maybe its time for some cautious safe-haven protection. We are seeing reinforced signs of the next euro-wobble: Spain’s decision to ‘nationalise’ regional debt via guaranteed bond issuance, (effectively increasing the direct government debt load and acknowledging a whole new funding/spending problem), plus rising doubts as to its debt sustainability, have seen its bond yields widen in recent days – yesterday felt like freefall at times.

There is barely a single major real money fund in the UK looking to buy Spain debt, although some German funds are still in the market. There is a good analysis of Spain and its crushing bank problems in the FT this morning: {http://www.ft.com/cms/s/0/d18c93c0-740f-11e1-bcec-00144feab49a.html#axzz1pqSsmfiY} Well worth a perusal.

My own side bet remains for Spain to wobble on, but for a more dramatic collapse in Italy. Smoke and mirrors on the back of the LTRO

disguises the depth of the Italy mire. The Monti government is a compromise and will weaken when Italian unions start to flex their muscles. It could happen suddenly if the centre left parties propping his government decide to pull the rug from under him to garner electoral support ahead of new elections.  

Meanwhile interesting interview in Bild with ECB chief Draghi about not turning Europe into a transfer union through ‘Eurobonds’. Will sound good for German domestic consumption – but I have a sneaking fear we have not heard the last of multi-sovereign Eurobonds!

Sub Debt

Away from Europe – how vulnerable are other asset classes to a re-escalation of the euro sovereign crisis? In the last few weeks I’ve been increasingly nervous on sub debt and associated fripperies like CoCos and such. ‘Complex’ bank paper has rallied spectacularly since December on the back of the sovereign rally – but I’m very aware it’s been on the back of comparatively little volume.

With many institutional investors saying things like ‘bank sub debt is so last year’, its become something of a specialist market – playing call expectations or capital liability management exercises (tender and exchange offers). That’s largely played out now.

One bank trader gave me an interesting analysis yesterday: Imagine the onset of spring triggers a massive increase in the demand for bikes – the cheap mass market cycle shop is suddenly selling 20-30 cheapo bikes a day and starts putting its prices up daily to reflect the surging demand.

Further up the road the specialist fixed-hub (no-gears) courier bike shop doesn’t see any increase in demand, but also puts the prices of its very specialist bikes up in line with rising bike prices. Couriers, aware of rising prices decide to buy still cheaper multi-gear bikes for a fraction of the price of the expensive courier bikes. They try to sell their current bikes into the rising prices at the courier shop. Immediately the courier bike owner pulls his second-hand bids lest he gets flooded in supply. The market for specialist courier bikes collapses in a heart-beat.  

My trader pal sees much the same risk in sub debt – there is very limited street demand, while institutional demand is selective and reckons the market is pretty fully priced. If anyone decides its time to take profits and sell ahead of bank paper crashing in line with tumbling euro sovereigns (imagine it’s a very wet summer and everyone wants to sell these new bikes!), then sub debt prices could spiral downwards.

Nothing new wrong with banks – but is it time for a correction?

Rant…

And now its time for a rant about economics and all the many things I don’t understand. Economics is a confidence trick. If you can persuade people things are fine… they will be. The danger is cynics like ourselves throw spanners into the machine by questioning how it works.

The logic is simples. Confident economies borrow to spend more, creating growth allowing folk to pay back what they borrow. Over the last few years, collapsing consumer confidence and the unwillingness of banks to lend has depressed Europe with lethargic growth at best. Look at yesterday’s EC consumer confidence numbers: ‘up’ to ‘–19’! That’s not good.

Consumers are not intending to spend any time soon. If anything the outlook is looking worse as inflation is set to increase, oil price hikes are kicking in, and few folk are seeing their purchasing power rise.

But yesterday I suddenly realised 1990s-style conspicuous consumption could be coming back. She-who-will-be-Mrs-Blain and I have recently taken a small flat in London – in the centre of Shoreditch: in what we have just discovered is called ‘IT Triangle’. Apparently it’s full of really really smart and very well paid young things who don’t care a fig about finance but utterly worship the gods of Trend, Brand and Fashion…

Yesterday I saw a frightening yet curiously hopeful vision of a future populated by these bright young things happy to believe whatever they are told to believe. We older less trusting denizens of these troubled markets have finely tuned in-built cynicism drivers to question whatever blandishments our leaders (political or fashion) try to throw at us.  

My blinding flash occurred over lunch in Shoreditch House. It's an ubberly trendy club with the food served around the roof-top swimming pool. We surveyed all the beautiful people sitting by the pool working on their MacBooks with iPhones glued to their ears and tried to work out what the ferk do these people actually do?

These are the IT Uber-Geeks, the Urban Brand Designers (who charge your employer billions to alter a logo by a panetone), and Trend spotters. In short – they are the future. Look cool, eat rocket salads and worry about where (not how) they buy the latest must have. In short – they are consumers squared.

Shoreditch (and I am sure every European city) is absolutely full of them. Yet just a few years ago Shoreditch was London’s very own cloacha (look it up yourself...!). Our futures may be like Brave New World on steroids with the Alphas and Betas being bright and wonderful dahling uber-consumers. Perhaps that is a better future – happy shining people buying bright shiny things that make it all better. The power of advertising, twitter, fashion and trend. Problem is – do they ever question where it comes from.. ARRRGGGG!

Where are Keynes and Friedman when you need them..?

Finally… you know Goldman must be close to the end. It's engaging architects to design its new London offices. The clearest signal to sell bank paper is when the issuing bank builds new grandiose corporate headquarters.

Out of time and have a great weekend…