A world of fears...and Malbec rules

Mint - Blain’s Morning Porridge

It’s a world of laughter, a world of tears. It’s a world of hopes and a world of fears..

For the avoidance of doubt – the Morning Porridge is unrestricted market commentary freely available to all qualified investors on an unsolicited basis. It is not investment advice…

It’s a US holiday and markets will be thin through today. To show my solidarity with our American cousins, I’m off for a proper lunch with clients in the West End and Malbec rules* will probably apply.

What happened in China this morning? Stocks down sharply (the steepest decline this year), on the back of rising inflation worries. Dong! – that strikes a chord. It seems yesterday’s Porridge – dealing with the threat of an inflation shock – was perfectly timed. Suddenly everyone is waking up to the I-threat. 

China is in sharp focus – bond yields keep climbing despite the People's Bank of China's injection of liquidity. My colleague Ara Levonian downstairs on the BGC floor points out we’ve got over US$1 trillion of Chinese corporate debt coming up for refinancing next year. Put all the clues together: an inflationary environment, supply-side policies driving up wages and inflation, rising rates, and a large number of highly geared companies facing rate risk? 

Do you think it might end up messy? (Messy? Yes, but terminal probably not...the Chinese can press the money spigot again and again.)

And how different is the US? That’s why I’m watching the high-yield market – that’s where the bond supernova is going to erupt. Just like the next Icelandic volcano we can feel the high-yield market spluttering beneath our feet as an ominous cloud of steam rises above the glacier….

I wonder if I should send the Federal Reserve a “No S*it Sherlock” award for pointing out in the Open Market Committee minutes that signals confirmed a “potential build-up of financial imbalances”. A December hike is pretty much nailed on.

On the inflation theme, I got an absolutely classic email yesterday from a reader whom I don’t actually know, but had picked up my comments on some financial wire. Thanks Geoff! His thesis is the global authorities have been spinning us a line when it comes to inflation – pointing out in 1971 it would have taken a low-wage worker two hours and ten minutes to afford a ticket to the then new Disneyland. Disney prices have experienced 8 percent year-on-year inflation since the park opened. The same ticket will now require seven hours and 20 mins work – and they are still playing that damn tune. (The lyrics would almost be profound if the tune wasn’t so inane!) 

Geoff went on to point out: “The Indians shamefacedly admit their inflation is 9 percent-13 percent - they are the only honest country on the planet!”

Meanwhile, in a galaxy far far away. The big talking point in the UK budget was housing – and the laudable efforts of the government to try to solve the housing problem. There are actually a whole series of problems including supply and affordability.

I suspect cutting stamp duty to help first-time buyers will simply drive up prices in the starter home sector. And £300k is still a heck-of-an-ask for millennials looking to get on the housing ladder. Unless Daddy is very successful banker or you just inherited some dosh – where is average millennial going to find a £60k deposit?

Alongside the “Help to Buy” schemes, is it time to tweak property lending rules at the banks perhaps? Some of the decision-making in property lending defies belief. I have a chum who has been paying her mortgage off without any stress after she and her partner split a few years back. After completing all the legals and getting everything signed, she’s gone to her bank to put the mortgage in her sole name. The bank told her she had to remortgage –so she applied and guess what – despite having no arrears and a good credit score, the bank have turned her down. What is she now supposed to do? It’s just stoopid.

We speak to a large number of property professionals. Knight Frank is part of our parent company group. Developers, specialized commercial and residential lenders, real money property teams, housing associations and builders are all on our regular call list. The real issue most of them reference when discussing the UK housing market and the dearth of new builds is the blockages in the system – especially the planning process. 

Every single professional I’ve spoken to in the UK housing sector complains about the planning process – not necessarily that it’s too restrictive, but that it’s just too damn slow and not-fit-for-purpose.

I’ve some experience in this – we submitted plans to our council for pre-planning advice three months ago, and our architect got told this week the team still hadn’t had time to consider them. We’re hoping to develop our home because the stamp duty we’d have to pay to buy a step-up property is just stupid money!

No comment tomorrow – I’m speaking at a breakfast organized by Heriot-Watt University – which spent the early 1980s attempting to educate me. I’m looking forward to it immensely. I shall be reminding the audience of the very first thing Professor Keith Lumsden said at my very first economics lecture in 1980: “Economics is the study of horror comics, switchblade knives and pornographic literature.”

Dang, but he was right!

Back to the day job…

* Malbec Rules: If drinking Malbec at lunch: do not return to office, do not pass go, do not collect £200 and go straight to bed..

Bill Blain

Head of Capital Markets / Alternative Assets