How do you hold a moonbeam in your hand?

Mint – Blain’s Morning Porridge

Believe me, I would rather be writing about life on the inside of ping-pong ball than trying to second guess what’s going to happen re Greece.. BUT BUT and BUT Again.. Whilst everyone is watching the bright young Greek idealists batter against the monolithic bureaucracy of Brussels and wondering if the banks are about to go pop, there are much more important and really critical things going on in terms of growth, stock upside and bond downside potential.

One aspect is the developing reversal in bonds, the other is rising global GDP upside shock. Get over Greece, but first…Number one headline on CNCB – “Bond Strategist says Get Out Of Bonds” caught my eye this morning.

Back to Greece.. this morning’s rumours say Greece will accept a six-month extension – they don’t say who offered it! Cease the panic. The balance of probabilities is there will be A Compromise. (There won’t be a Greek solution - nothing short of a rift in the very fabric of space/time whipping Greece back to December 1999 - before the advent of the euro - could even get close to a solving the ridiculous notion Greece and the euro were meant for each other.)

If I had to guess there is an 80% probability Greece will get some form of accommodation on this latest debt crisis. I’m almost tempted to say selectively buy. If Europe is smart they will open to the idea of a sensible debt restructuring that addresses the current reality. With the Greek economy in near meltdown, an imminent run on the banks threatening capital controls, and the tax take collapsing, Greece desperately needs certainty to move forward. The more I think about it, the idea of switching into GDP-linked bonds is an attractive option. (I wrote about the pros of Greek GDP bonds couple of weeks ago – happy to revisit that if anyone is interested.)

The fly in the ointment is politics. Germany, Finland (looming election) and Holland have to look tough on Greece and the causes of Greece. So, in return for a compromise, the Greeks have to show they are prepared to accept the consequences of having joined the euro without leaving their own electorate dejected. That should be possible – it’s in the interests of the rest of Europe to be supportive.

There is, of course, the possibility my confidence in Europe’s ability to paper-over-the-gaping-credibility-gap-of-Greece is misfounded and Varoufakis or someone else may still say something profoundly stupid to snatch catastrophic defeat. In which case expect capital controls slapped on the Greek banks, and a slide into mayhem.. at which point I shall be reminding everyone the EFSF holds EUR 142 billion of Greek debt (44% of the total), and how Germany and France are on the wire for some 80% of that… Hey-ho indeed.

The bottom line is that if Greece does go wrong – it will go properly wrong.. and don’t be in the least surprised to see it drag the whole of Europe back into crisis.. but, I think it’s unlikely.

Fortunately, Greece is not the only thing that matters – but the way markets are shrugging off the uncertainty and known unknowns is very positive. Of course, the likelihood that Greece will be solved doesn’t mean it's joy unlimited out there. But lots of good things are happening – just not to Greece and probably not to global bond markets.

Since the start of February, US treasuries have copied the rise in January rise in JGB yields – reversing much of the Nov-Jan rally. Martin Malone, our wayward Macro genius, reckons the next few weeks will be critical in the NORMALISATION of rates. Watch and listen very carefully to what Fed speakers say in coming speeches – we could see a series of multiple hikes coming.  Tonight’s FOMC minutes are critical for guidance on how they may plan to hike 3-4 times in each of 2015 and 2015!

We warned a few weeks ago to look out for improving global growth numbers as a signal the bond rally will stall – and sure enough that is exactly what we are now seeing. Depressingly low German GDP expectations and business confidence numbers are now rising – fuelled by the lower euro. (Perversely, that may make things difficult for peripheral Europe as their attempts to reform and catch up Germany become even more difficult – but that’s another story!) Everywhere in Europe (except France) is finally showing some green shoots – hence the rise in European stocks.

More worrying is how big and when the reversal in bonds comes – or does it? Lots of folk suggest deflation/low inflation means nothing to worry about. Temporary. Be Worried. The market has very much moved into a bond bear phase. Sell bonds. Buy stocks.

Of course, there are lots of other threats out there. The fact Merkel’s attempt to be the peacemaker in Minsk last week has been unsubtly overturned doesn’t help. Putin succeeds in driving a wedge between Germany and the US, and paints himself as the reasonable party. Not a great result – and it will weaken Merkel in Europe as she was seen to act outside the EU framework.

And finally – sorry for no porridge last few days, but rugby on Sunday in Scotland meant a bit of a trip getting home Monday. Great Scotland performance – but we lost again due to silly moments and inexperience.. but who cares.. we’re playing watchable rugby again!  

Out of time.. 

Bill Blain

44 207 786 3877

44 7770 881033

[email protected]

[email protected]