I will be your honey bee

Mint – Blain’s Morning Porridge

Show me round your fruit cakes, cause I will be your honey bee

I’ve spent the last two weeks in a curious limbo: two weeks of Jury Service in Southampton, but coming up to the office when not required in the courtroom – which it turns out was all of the time! A number of trials didn’t happen, while others were delayed. Over six days, I saw the inside of a court-room for five minutes – when I wasn’t picked for the jury! (I wonder if the copy of the Torygraph tucked under my arm was a problem?) So I spent most of the time waiting, and getting a chance to catch up on some reading. I’m not disheartened – the judicial system works!

Back to normal service. A classic start to the day comment comes from my colleague in BGC, Kevin Humphreys: “Despite a continuation of the mixed data run from the euro area, too many negative macroeconomic factors to list and geopolitical factors stacking up faster than unused sunbeds on a Turkish beach, it would appear that the front ends of European rates markets are, for once, heading into today's European Central Bank meeting with their sensible hats on (and sunscreen where appropriate)”.

I’m not entirely sure which “sensible” hat the ECB will be wearing...extending the QE window and dabbling with the eligibility criteria? Does the word “fudge” mean anything in Brussels anymore? 

I would suggest listening carefully for what the ECB says about growth prospects. It would be interesting to catch some clues on what their Plan B is – on the basis whatever it is they’ve been doing re extraordinary monetary and zero interest rate policy hasn’t worked, so how do they accommodate growth focused fiscal policy, political pressures (like Italy), and growth? But don’t hold yer hats! I suspect a shift in the ECB and the implications thereof will fill the next part of 2016. Watch this space.

Back in the UK, our new Premier is on her first charm offensive through Europe. Good luck to her. Yesterday’s first date with Frau Merkel seems to have gone well – but I wasn’t sensing a meeting of minds or any particular sisterhood between them.. Again..watch that space for clues on how Brexit develops.

I get the sense the markets have largely got over the Brexit shock – everyone has got their cautious buying boots on, but there is more than a little uncertainty.

For instance, I happened to catch the news last night and there was a piece about the slowdown in UK home construction. In economic mythology, home building has traditionally been one of the drivers of UK recovery – famously in the 1930s. Film of modern brick factories switching off their kilns presented a picture of the UK economy in post-Brexit meltdown.

Hence a number of blogs are pondering fiscal spending in the UK – what can be done to boost the economy by pumping it? Phil the Spreadsheet Hammond (today's Chancellor of the Exchequer) is said to be a man that understands the concept. And last week the Bank of England didn’t slash rates, but is saving its ammunition. I suspect a co-ordinated spending binge is on the way. Whoopee… but what will it mean for markets?

Policy always works best when it's pointing in the same way as sentiment – one such area could be property. According to the news reports the property markets are in collapse – despite the fact we still lack housing across the country, sterling is incredibly attractive to foreign investors, and the Brexit vote did not mean we all stopped talking English and started eating foreigners overnight. Basically, more than one smart buyer knows the apparent collapse of property will likely prove a screaming buy!

Going back to the news, the TV reporter then interviewed the Chief Executive Officer of a large housing association – who came over extremely well describing his company's success managing the construction of new residential units. It was clear this was a guy who understood not only the housing association sectors role in “social housing” provision but also the possibilities of new approaches to housing in the UK: financing the building of new housing stock: rent it and sell it, build more.

Over the last couple of months, I’ve also spent time with some of the smarter property analysts at leading UK funds – many of whom see exactly the same opportunities. The issue is getting finance to these associations (and others in the property sector) to invest! Guess what: it’s classic “alternative finance”: banks aren’t lending in the space, but plenty of others are looking for the long-term proper yield assets these represent!         

One problem is confused UK regulation of the housing space – issues like planning, but while the housing associations are charged with providing new housing they are hamstrung by regulations that don’t allow them to invest their resources outside narrow social housing definitions.

It’s a complex area (too big a topic to describe in the Porridge), but one that is worthy of some thought – the UK is short of housing, there isn’t a developed rental market to the same extent as elsewhere and there are smart people who understand and know what’s required…to me, that spells opportunity.

Meanwhile...all eyes on HSBC this morning. We’ve all read the reports alleging shenanigans in the foreign exchange markets. Reports describe the alleged felony as classic “ramping” and front running – but the real issue is HSBC and its relationship with the US authorities. This could be horribly serious and damaging. The Sword of Damocles was hanging over HSBC re a number of outstanding money-laundering and mortgage abuse issues they’d managed to avoid prosecution on.

It is likely the outcomes won’t be pretty. For the last few years major banks have been managing themselves to avoid regulatory crisis (rather than growth). When they get hit by an event like this, the consequences could be huge. I suspect we’re seeing the tip of an iceberg here…

Out of time and back to the day job…

Bill Blain

Mint Partners