The female all too often wins...

Mint – Blain’s Morning Porridge  - February 26 2014

When the indestructible meets the irresistible, the female all too often wins...

Markets have finally woken up to what’s happening with the Renminbi. We’ve been watching the slide, the hints of a wider collar, and anticipating the signals being sent about China bank rates, relationship to the dollar, growth indications and expectations, and attempts to redirect outward investment back into domestic consumption.

A sharp lesson in a weaker Yuan may cause Chinese investors to hold off on another London prestige trophy asset and buy something cheaper at home – where signs are mounting that unsold housing will pop the bubble. It isn’t a one-way bet.

I suspect the concern on the Yuan will be seized upon by the China Syndrome groupies (those who believe China is heading into its own version of the 2008 Financial Catastrophe), as evidence the end is nigh. More rational minds will be looking to discern the policy goals.

Back in the real world, I’m going to assume everyone read the WSJ’s brutal note on PIMCO’s Bill Gross yesterday. What? Father Christmas and The Devil are the same person? Nooooo….  Hardly a surprise to discover the world’s foremost bond investor isn’t a particularly pleasant character, who refuses to make eye contact with subordinates or talk to folk in the morning.

The reason I’m not running any of the many banks I worked for is I’ve repeatedly made the mistake of being too nice, calm and reasonable. (And I’ll beat the crap out of anyone who disagrees…) In response to the story, Gross admitted to Business Insider he’s “not a morning person”.

But a sensationalist story in the WSJ, written for the consumption of US middle management, isn’t necessarily going to change the market’s opinion. The story Gross and El-Erian squared off to each other one morning will hardly surprise anyone who has worked a trading floor. I’m the most reasonable of men, but even I’ve questioned the parentage of my colleagues loudly across the floor.

Feel pity for my boss, Richard. He’s in the firing line all the time – although that’s his fault for being wrong. It happens. Get over it. Constructive disagreement is the way finance stress tests ideas and concepts. Maybe it’s not the right way, but it would be less fun if it wasn’t.

The brisk, divergent and forthright exchange of opinions across the trading floor is what makes markets. I’m intrigued who leaked the story and why…sometimes festering sores cause losing Alpha males to get all bitter and twisted… 

The problem with the WSJ article is its now in the open, and all across America suburbia will be wondering about their retirement plans.

That leaves open the question whether Gross can survive the WSJ’s surgical strike on his character and business acumen. "PIMCO needs to avoid becoming an upside-down pyramid balanced only on Bill Gross…" and that was one of less damning quotes.

What are the implications? Let’s assume Gross stays, and every move he makes will be scanned for signs he’s wrong rather than right. (To be frank – we’ve been saying he’s a reverse indicator on treasuries for a while.) Let’s assume he retires and who then is ready to step up and steer the $237 Total Return Fund leviathan? Bottom line is no one is there to replace him, but don’t be surprised to see his role diminish as PIMCO promotes his successors.

Back in our markets, one of our major themes yesterday was Hypo Alpe Adria where we traded short and intermediate bonds for a number of clients. We’ve some views on the likely credit outcomes we’re happy to share. We’re also buyers of second/third tier Covered bonds and CoCos. Let us know your thoughts. Co-Op bank is likely to be in trading focus after a number of commentators suggested it’s the next European bank basket case. Oh dear…

Moving on, and one of my great pleasures is being asked to appear occasionally on BBC’s pre-Brek Drek programme to review the newspapers with Naga and Sally. Always fun and challenging to sum up a host of stories in just a few moments. This morning was a particularly interesting gallop: Ukraine, France, The Yuan, Bitcoin, Nuclear Power in Japan and Visas for wealthy entrepreneurs. 

Try summing these up in two minutes… 

Rebuilding Ukraine is going to be a disaster because of the massive unquantifiable costs the EU will face, and the distrust it has already engendered from Russia. For an excellent potted history of why the Russians are so peeved try Simon Sebag-Montefiore in last night’s Evening Standard.

France’s failure to reform, restructure and create jobs mean it will likely miss EU targets on debt reduction and will trigger further doubts on the sustainability of single currency.

The recent slide in the Yuan is complex – related to banking rates, the switch to domestic consumption, and in part draws back domestic money into the economy – moreover, as everyone expected it to rally, it’s a good example of a market catching players by surprise.

It’s not yet clear how the collapse of the Mt Gox exchange will effect Bitcoin, but how can you retain confidence in an imaginary currency without any country or asset to back it – especially when the rumours suggest the exchange was hacked and the insecure coins stolen?

A new nuclear power programme in Japan is a critical long-term crutch for Abeonomics – the question is can it happen quickly enough and on a scale to seriously boost the economy before Abegeddon occurs?

Gold Visas for wealthy Chinese entrepreneurs has been one of the factors supporting the recovery in Portugal – as the Chinese buy assets, they’ve also been buying villas on the Algarve. Will a similar scheme in the UK be equally successful, or will it just be more rich folk buying London flats to leave empty?

No porridge for the next few days as I spend some time on Piste… I’m at least 20 kgs over my ski weight, but that means greater momentum so I’ll go faster.. (????)… but still looking forward to a few days away.. 

Bill Blain

0207 786 3877

[email protected]

[email protected]