Time confirms nature

Mint – Blain’s Morning Porridge

Time destroys the speculation of me, but it confirms nature..

The major oil producers, (Qatar, Saudi, Russia, Venezuela, and Nigeria – accounting for 40% of oil exports (27% of production)) - are sitting down in Doha to “freeze” production. And the market is going … Yee Ha!

That will be interesting. A much more villainous bunch of nations you can’t imagine – and has anyone told the Iranians? Does anyone there really trust the others not to squeeze out a few barrels more to shore up their depleted dollar reserves? Sure, the smaller states would like a token cut to stem supply and start eating into inventories. Yet, the mega-oil states need to keep the spigots turned full-on just to stay still. If you want a discussion on why Saudi or Russia need dollars..

A failure to achieve anything meaningful could send a round of predictably disappointing contagion wobbles around the markets. Not that I quite understand why stocks should rally on the back of higher oil prices which definitionally mean higher costs of production.. hey-ho.. what do  I know?

Meanwhile.. back in the markets, the prices of CoCo AT1 (contingent convertible additional tier one) bonds continue to fascinate me and the markets. I’m trying to work out if there is anything positive to say about CoCos and the muted recovery they’ve posted in recent days. Does this mean the pressure is off for the banks that saw the most dramatic tumbles? Do the slightly better prices mean they are off the hook?

Or does it just mean another bunch of highly speculative buyers who, like moths to a bright flame, are suckered towards a high yield and low price to jump in and buy a financial instrument they really don’t have a clue about.. Hah.. far be it for me to suggest many buyers just don’t understand the optionality and danger of CoCos.. You have been warned often enough!

More to the point, I’m thinking through who the actual holders of CoCos are. Initially, when these Frankenstein monsters of incestuous relationships be-twixt regulators and central bankers were spawned, they were bought by hedge funds and credit funds who claimed to understand them. (A claim I doubt). As CoCos went mainstream and tightened in the past few years, these CoCos were recycled through to real money accounts, and large swathes of the market have now been cycled into the private bank networks. (Even though regulators like the FCA - Financial Conduct Authority - say retail investors should not be allowed to buy them.)

This will get interesting at month-end, and especially quarter-end, when the current holders of the more distressed CoCos are going to wake up to 10-25 point losses on the bonds, triggering fire-sales. My gut feeling is unless something massively implausibly positive happens, we are going to see waves of AT1/CoCo/Sub debt selling in coming weeks. And we’ll see renewed bouts of panic about banks around it.

And of course.. I am not seeing anything on the horizon to make me think the European bank issuers of CoCos are about to tighten…

Sometimes, just sometimes, I pick up financial articles that are so on the ball I just wish I could have written them myself! What’s not to like about a piece with a quality writing, neatly encapsulated ideas, and genuinely useful numbers. So this morning I tip my hat to Edward Robinson of Bloomberg who has summed up everything that worries: The Never-Ending Story: Europe’s Banks Face a Frightening Future.

Let me sum it up in numbers:

100k banking employees laid off;

$63bn in legal penalties;

$420bn in lost stock market value.

Let me sum it up in themes:

Reinvention into crowded markets and doubts on core models;

Obsolete technology infrastructure;

A lack of clarity on capital and regulations;

The rise of “alternative banking”: direct lending, crowd-funding, the blockchain, and fin-tech;

US banks essentially fixed, European banks still busted.

It will take you five minutes to read, and if you are reading it on the executive floor of a European bank (as I know a few readers do), it won’t make your day any better..

Back to the day job..

Bill Blain

44 207 786 3877

44 7770 881033

[email protected]

[email protected]