You can teach monkeys to fly better than that...

Mint – Blain’s Morning Porridge  - March 6 2014

While troops who look like Russians but aren’t Russians traipse across the Ukraine, and diplomats diplome in Paris, markets are moving on. The new issue market is on fire – fuelled by a wall of new money that has absolutely nowhere else to go. Short-term tactical sentiment remains focused on the immediate news headlines and risk-on/off snap. Medium term, it's not so much mindless contagion, but real world implications. For instance, if Ukraine “heats up” then what will be the effect on wheat prices? – it’s a large producer – and what are the knock-on effects for countries dependent on food imports.

But in terms of long-term strategy – that’s a marathon question that has to be bound in growth. Which economies will prove winners from the global recovery, and which will remain basket cases? The smart strategic play is to figure outcomes in terms of reform – the game of policy and politics. Where are policy actions likely to succeed and where are politics stable enough to make it happen? Apply that template to countries and it's clear some are hopeless. Try it with a few random names….

Today, the focus will swing back to Europe, where it might or might not be a big day. Apparently about 25% of the analyst-o-sphere think the ECB will do something dramatic – although I’m struggling to characterise “not sterilising SMP” purchases as exciting. Some think the ECB may cut rates to zero.

Does it matter? The time for the ECB to cut rates, or kick-start growth via QE, was a while back. (Of course, growth is not the ECB’s job – it’s purely inflation. Meanwhile, deflation is a mythical bogey.. perhaps – but the Japanisation of Europe is a clear threat.) If recovery is coming to Europe, it’s going to be on the back of global recovery boosting demand for the things Europe does well like planes, autos, tech, power, etc. It’s not going to be on the back of the ECB trying to kick start the economy it helped put into sonambulance!!! (But no doubt Mario Draghi will get any credit…)

(More to the point, here we are debating meaningless ECB action while the other major central banks are looking at how they exit the low rate environment – don’t forget the Fed meets the week after next and may well shock us. )

As I’ve written many times, I am wholly unconvinced by many European banks – they’ve been in survival mode so long that not taking risk and covering up losses has become their learned behaviour. They aren’t going to fuel recovery.

All this got me thinking about Europe – for the last six years of global financial crisis, Europe has struggled to put together its finances and realised one key to that is a “unified” banking system. Today, the energy threat (exacerbated by Ukraine) has come to the fore, and new energy is suddenly a core European policy concern. Gradually, and by default, Europe is being forced to pull together, gluing itself together in the wake of repeated waves of crisis!

Is it going to succeed? The history of the US suggests a diverse new nation can, but that was effectively one people speaking the same language. If Europe is going to pull together, you can’t ignore the fact that Brussels is the modern Babel, and a Greek has precious little cultural heritage in common with a Swede. I think that’s well illustrated by the emergency summit in Brussels on the Ukraine – Europe is not speaking with one voice. Sure, €11bn is on offer to Ukraine, but how to deal with Russia is a fractured cacophony of contradictions – like the French selling the Ruskies helicopter carriers, Germany and energy, and the UK keeping the London house rally on course. (US readers – Sarcasm alert.)

Tomorrow we will have moved on the US payrolls report – the ISM number at 51.6 yesterday was a bit of a shocker. On the other hand.. the US is still growing! Polar vortex etc etc..

Back in the credit markets, I’m getting serious scared by just how hot the New Issue market is. Everything is bid higher, oversubscrtibed and squeezed. We’re even seeing it in the SSA market where historically tight spreads raise serious issues about value.

When a quasi-Austrian name can tighten guidance from 13 to 10, and then see the bonds trade up to 8 (bet that makes no sense at all to my equity readership), then you have to wonder what’s the story.

The AT1/CoCo market saw one of its busiest days yesterday with three new deals hitting the market – we’re busy in all of them. 

Finally, apparently Sarcasm was brought to Britain by the Danes in their Viking Days.. Not only purveyors of fine pillage, rapine, plastic bricks, bacon and quite good political drama, but it's good to know the Danes have contributed to global humour. Anyone who thinks they are a just a variety of North Germans has missed the point. Perhaps we should send more Danes to the US to spread the sarcasm gene?

Bill Blain

0207 786 3877

[email protected]

[email protected]

 

Related articles

Mongo only pawn in game of life

Sell Bonds, Buy Diamonds...

Blain Is Back