The Sun has got his hat on and is coming out to play…

Bill Blain’s Morning Porridge – March 27 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]

Just how solid is the US economic “recovery”? Bernanke’s comment the Fed won’t withdraw stimulus too quickly before 2014 to support weak US jobs growth was greeted as nailed-on QE3 by some. The Fed’s determination to stick to its long-term interest rate view, (which started a few months ago when it announced two-year expectations), was curious at the time. Now we get Bernanke’s Aegis-like vision discerning weak employment growth: “not sure the pace of improvement in the labour market can be sustained.”

Perhaps the Fed knows (or sees) something we don’t – like just how shallow the foundations of this vaunted US “economic recovery” actually are?  Perhaps a note of caution to the current stock rally? Nope – still rallying like there is a tomorrow.

Today may provide better economic direction and clues with a raft of consumer confidence and retail data in Europe and the US. Mixed number for Germany. France came in surprisingly stronger! US is expected to be a modest positive. But the bottom line is there are few signals of the “Growth Drivers” Europe desperately requires to turn around the increasingly once-again wobbly Sovereign Debt market.

This week’s European can-kick speculation is about

how big the new “Bailout Fund” is going to be, and what political contortions will be gone through to get to a fudgy solution at this weekend’s Copenhagen meeting – unfortunately it’s utterly irrelevant.

If Italy or Spain weaken, and either plunge to the depth of requiring a bailout – it’s hard to see how even unlimited ECB largesse through loans or bond buying will turn round sentiment. If it looks like happening there will be market opportunities to ARB both Italy and Spain markets to exploit ECB rescue actions – but confidence in the EURO will be shattered - again.  

Without growth, the inevitable endgame for Europe is struggling economies as their debt burdens grow and become increasingly less sustainable. The critical question is what triggers the moment they have to cross the disaster threshold and request a bailout?

With Greece it was obvious – it had a large and obvious refinancing roadblock in March 2012 that forced the process to begin early. The stop lines are not so obvious elsewhere. What happens with Portugal? It doesn’t have a similar debt roadblock – a hurdle perhaps in September – but at what point does it become unsustainable? In short – it can probably wibble on for a good time yet.

What about Spain? It’s already pre-funded a large slice of its 2012 funding needs. What would trigger it requiring a first bailout? A further slide in the banks? Greater hits on capital from housing write-downs?

And Italy? What would trigger the country being forced to ask for a bailout? That’s the most difficult to actually see the trigger moment – sure the government may fall on the back of union pressure and spreads may balloon, but effectively the LTROs pre-funded the country for much of this year.

Today’s short Italy and Spain auctions may prove interesting, but with plenty of LTRO money still in circulation, we aren’t expecting any shocks. YET!  

Market Mood and the Weather

Something I’ve read a lot about in the media this morning is “behavioural psychology” - suggesting markets respond to the environment. The theory also gives such deep insights that if a carpet salesman is recommending you buy a carpet, you really should not be surprised. It’s yet another example of the downright bleeding obvious dressed up and explained as complex economic concepts – but hey-ho.

But perhaps there is something in it? It’s got me wondering as to why the market is so lethargic these days? I suspect the current freak weather may have something to do with it. London temperatures are higher than the Sahel, air-quality would disgrace a Chinese steel-making city, and the prospects are it continues for weeks.

If it’s making me grumpy and giving me hay fever-like headaches and sniffles, the combined effect on markets may be more significant than we think. Weather and bond markets? No there is an interesting thought.

I’m sure hedge funds are already betting on the current northern kink in the jet-stream - the feature that has put this blocking high over the UK - remaining in place for some time. They are now buying up UK ice-cream futures, sports-events and Coca-cola bonds. Me… as soon as I finish this, I’m off to buy one of these funky fans from Mr Dyson.

Out of time, got a headache and blocked nose..

(Apologies for lack of Porridge on www.brianbollen.com on March 26; blame it on travelling from Milton Keynes in middle England to Wengen in the Bernese Oberland, which trip included a fascinating coach journey from MK Central rail station to Luton Airport in the tender care of a driver who didn’t know the route. It’s the first time I’ve ever been on a bus driven by a self-appointed (and fairly pig ignorant) committee of its passengers. I’ve seen as much of the innards of Luton as I would like, thanks very much: Brian Bollen)