Mint – Blain’s Morning Porridge September 19 2012
The new issue market continues to storm ahead. Nothing to worry about! That stagnant pool of excess liquidity is being sopped up by investors glued to the IIIA new deal pages (NIM4 on Bberg). Seldom have investors been so desperately nice to investment bankers to secure allocations on the hot deals. I’m watching for the cracks to appear.
In the background a number of analysts put out some excellent and profoundly negative thoughts on Spain’s debt position, and how Ranjoy et all will be bounced into accepting ECB aid. (NPLs at 9.86% says soon!) Some think Spain capitulation to the inevitable might trigger further weakness across the Euro, while others believe firing up the OMT buy-programme would be a positive for the Euro, demonstrating the new mechanisms being put in place work and confirming the “Europe is short-term weak, but long-term saved” prognosis. (We need more info on OMT – can it buy new issues? If not.. it’s pants.) Whatever. Get over it. Let’s see what happens with tomorrow’s Spain auction.
Back in the real world have you noticed all-out Financial War has broken out?
Some say (my mate Martin Malone) the opening volley was the Draghi OMT plan, but Bernanke’s jobs and growth at any cost, China stimuli plans, UK QE and now the latest Japan stimulus plan (Yen 10bln asset purchases etc), represent economies mobilising for a beggar thy neighbour scramble for growth. Not everyone can win a race to boost money, devalue and expect it to solve social meltdown through jobs.
There is bound to be a cost – and one solution is buy LINKERS. Yep. Is the Inflation genie out the lamp? Don’t wait to find out if you missed it. If you want to look at some charts – happy to send ’em through.
Meanwhile, the ECB’s Jens Weidmann hasn’t resigned over the Draghi put, but he’s clearly sulking. This morning he’s in the papers quoting Goethe and the Faustian pact the EBC has entered into by pledging to buy bonds – “the dangerous correlation of paper money, state finance and inflation..” Da da da dum.. It’s a tribute to news-flow savvy Europe he’s been persuaded to stay.
The new scramble for growth raises all kinds of long-term questions for strategists:
Is the US going to be able to create value jobs (as opposed to low pay Mac-Jobs) that might just enable it to meet it looming and massive budget liability mismatch crisis before it creates total gridlock in increasingly partisan government? (Just think about what Romney said about the 47% of Americans on support he feels no responsibility for!)
Can China get rich before it gets old? Will the demographic time bombs of single child and selective gender explode before the wealth is created that might just placate the population? I see trouble ahead.
Will Europe understand and accept the only real solution to the Euro crisis is essentially a massive and never-ending fiscal transfer union from the rich hardworking north to poor profligate south? Will Europe’s electorates accept their eventual role as German pensioners and all that entails? Can Germany get over the fact it’s the one that is truly trapped in a hopeless pact with the Devil? Stay in the Euro and Germany retains dominance of a massive internal market, but must pay all the rising social costs. Leave and the cost of exit could destroy Germany. (What are the Target 2 flows owed to Germany? Over a trillion yet? )
Can the Euro hold itself together through its metamorphosis from Union of equal independent states into something darker and less democratic? (Imagine the Darth Vader theme from Star Wars playing in the background… and remember he started off as cute little moppet Anakin Skywalker…)
All the above are such massive picture stuff it’s hard to conceive these are all investment challenges of today and tomorrow. At the same time there are plenty of smaller things to worry about. Like Australia – been in the press lots recently as likely to experience a succession of rate cuts as the central bank responds to slower China commodity demand. We’ve been thinking about A$ trades, but nothing yet is a must-do!
Another issue that has us concerned is Portugal. Jimbo and I have always taken the view the Portuguese, unlike their neighbours, are essentially pragmatic and adaptable (you wouldn’t say that, Bill, if three generations totalling seven of the noisiest, most hysterical, most disrespectful people in Europe had moved into the two-bedroom apartment next door to you in Wengen; the other BB).
As a senior Portuguese investor once told me – “we are used to being poor”. Yet the weekend saw massive public demonstrations against the government over the imposition of higher social-security contributions. The logic is difficult to discern – it won’t create jobs and will cut consumption - but it came alongside the EU/IMF troika approving slightly easier terms.
We’re worried the Portuguese rally – strongest performing market this year – could stumble. We doubt the government will fall, but escalating social tension alongside buyers thinking about taking profits makes the market look… “wobbly”. On the other hand we do have buyers still looking for Portuguese exposure (count me out; my Portuguese exposure is too high as it is; the other BB).
Out of time..
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