What do we know different?
September 14, 2017

Mint - Blain's Morning Porridge

He spoke of lands not far, or lands they were in his mind.

For the avoidance of doubt – the Morning Porridge is unrestricted market commentary, it is not investment advice…

What do we know different this morning? There is apparently nothing to worry about. Everything is coming up roses. These are not the droids you are looking for, says my market guru Steve Previs. All the old market bears, like me, are looking for stuff to grumble about – terrified by the unintended consequences of quantitative easing, caught in the headlights of apparently overbought markets, of whatever else panics them… etc.

But what do we know? We know nothing – the markets continue to make new highs supported by a blaze of good news and positive expectations. The disappointing China data and threat of poor US data are momentary.. apparently.. But, but and but again…  mood and sentiment can change on a dime..I shall crawl back into my pit and ponder..

I could list a whole run of things likely to worry the markets in coming months. As usual, 99 percent of things the market unwisely labels "known unknowns" prove nothing more than wispy worries and momentary concerns – that with the benefit of hindsight we built up out of all proportion.

But, I am still convinced there is trouble ahead in bonds. The fact that countries like Tajikistan and Ukraine are doing blowout deals is one thing – it shows price compression is out of sync and we are approaching a Ukrainian Chicken Farm Moment in the new issue bond market. It's inevitable. The UCFM is an immutable law of bond physics.  

I suspect there is trouble ahead in investment grade as well – which spells trouble for delicate sovereign sentiment. I got lots of positive feedback on my comments on the Austria "2 percent for 100" years deal yesterday, including a very astute observation from a US client as I tried to whet his interest: "So the objective of the European Central Bank is to generate inflation, and you want to sell me a bond yielding effectively nothing for 100 years? Think about inflation and yield curves, and stop wasting my time.."

Conclusion… long-term investor goals and central bank objectives might not always be aligned!

And then there is oil. My colleague Ara Levonian at BGC has been thinking about rising OIL risks out the Middle East. The Qatar/Saudi stand-off is over 100 days old, and could escalate as the lines and alliances are drawn, and US president Trump's been making calls. A failed call last week between Saudi's bright new crown prince and Qatar could signal the next stage is coming – and the concern is a sudden escalation in tension (involving Iran, Turkey on one side vs Saudi, the Emirates and Egypt on other) could trigger an oil price shock.

Meanwhile, I was asking my macroeconomist Martin Malone for his long-term outlook on Oil. I've rather taken the view the US $50 barrel is likely to prove long term, reflecting the new supply balance, the success of the US new producers adapting to the lower price, the need of oil producers to keep selling, and Iran's ability to keep the Saudis under the cosh through cheap production ramping up in the next few years.

Martin's response was interesting: "Why?" Why don't you expect prices to return to a more normal higher level as the global economy normalizes? One of the factors driving growth has been cheap energy – as the global economy recovers.. why would energy prices not also recover..? Higher oil prices could change the global outlook and pummel sentiment. 

Elsewhere, I was struck by one blog commenting: "Pound strength is the dominant theme, even as the UK economic outlook continues to plummet." Does it? Is the UK really in such trouble? Record employment, but weak wage growth. The UK has become a massively more competitive economy since Brexit – car companies and plane makers are opening new plants because UK labour is cheap. (In dollar terms the UK labour force is around 30 percent cheaper than the US!) Although the Bank of England meeting today is predicted to remain on hold re rates, the mood remains hawkish in light of the possibility of wage inflation.

Fears about the UK are based on our current negative "issues" with Europe rather than the positives and continuing inward investment we're likely to see.

The future for Europe and the UK should be bright – separate but close. The UK doesn't want to be part of the European Vision of a unified single state, but we should certainly be mutually supportive. Instead, the divorce is turning messy and it's the kids that will suffer. It's a vision thing.

Our "government" has somewhat misplayed the UK hand. The first thing the new prime minister should have said is "every European living and working in the UK will be welcome to stay and be treated exactly like our own citizens, and in the future Europeans will always be made welcome on these shores". There is still time to make a similar offer. That would not be a bad economic bargain for Britain and Europe.

Instead, Europe is going to put up a wall. It will hurt both ways, but mostly it will hurt Europe's youth. I predict any smart young lad or lass on the Continent will quickly figure out their global prospects are going to be wider and better outside if Europe puts up false walls across the channel. Young Brits are going miss nearly as much. Damn shame…

Enough regret. Positive thoughts as I get on with the day job..

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners





This site, like many others, uses small files called cookies to customize your experience. Cookies appear to be blocked on this browser. Please consider allowing cookies so that you can enjoy more content across globalcustody.net.

How do I enable cookies in my browser?

Internet Explorer
1. Click the Tools button (or press ALT and T on the keyboard), and then click Internet Options.
2. Click the Privacy tab
3. Move the slider away from 'Block all cookies' to a setting you're comfortable with.

Firefox
1. At the top of the Firefox window, click on the Tools menu and select Options...
2. Select the Privacy panel.
3. Set Firefox will: to Use custom settings for history.
4. Make sure Accept cookies from sites is selected.

Safari Browser
1. Click Safari icon in Menu Bar
2. Click Preferences (gear icon)
3. Click Security icon
4. Accept cookies: select Radio button "only from sites I visit"

Chrome
1. Click the menu icon to the right of the address bar (looks like 3 lines)
2. Click Settings
3. Click the "Show advanced settings" tab at the bottom
4. Click the "Content settings..." button in the Privacy section
5. At the top under Cookies make sure it is set to "Allow local data to be set (recommended)"

Opera
1. Click the red O button in the upper left hand corner
2. Select Settings -> Preferences
3. Select the Advanced Tab
4. Select Cookies in the list on the left side
5. Set it to "Accept cookies" or "Accept cookies only from the sites I visit"
6. Click OK

Mint - Blain's Morning Porridge

He spoke of lands not far, or lands they were in his mind.

For the avoidance of doubt – the Morning Porridge is unrestricted market commentary, it is not investment advice…

What do we know different this morning? There is apparently nothing to worry about. Everything is coming up roses. These are not the droids you are looking for, says my market guru Steve Previs. All the old market bears, like me, are looking for stuff to grumble about – terrified by the unintended consequences of quantitative easing, caught in the headlights of apparently overbought markets, of whatever else panics them… etc.

But what do we know? We know nothing – the markets continue to make new highs supported by a blaze of good news and positive expectations. The disappointing China data and threat of poor US data are momentary.. apparently.. But, but and but again…  mood and sentiment can change on a dime..I shall crawl back into my pit and ponder..

I could list a whole run of things likely to worry the markets in coming months. As usual, 99 percent of things the market unwisely labels "known unknowns" prove nothing more than wispy worries and momentary concerns – that with the benefit of hindsight we built up out of all proportion.

But, I am still convinced there is trouble ahead in bonds. The fact that countries like Tajikistan and Ukraine are doing blowout deals is one thing – it shows price compression is out of sync and we are approaching a Ukrainian Chicken Farm Moment in the new issue bond market. It's inevitable. The UCFM is an immutable law of bond physics.  

I suspect there is trouble ahead in investment grade as well – which spells trouble for delicate sovereign sentiment. I got lots of positive feedback on my comments on the Austria "2 percent for 100" years deal yesterday, including a very astute observation from a US client as I tried to whet his interest: "So the objective of the European Central Bank is to generate inflation, and you want to sell me a bond yielding effectively nothing for 100 years? Think about inflation and yield curves, and stop wasting my time.."

Conclusion… long-term investor goals and central bank objectives might not always be aligned!

And then there is oil. My colleague Ara Levonian at BGC has been thinking about rising OIL risks out the Middle East. The Qatar/Saudi stand-off is over 100 days old, and could escalate as the lines and alliances are drawn, and US president Trump's been making calls. A failed call last week between Saudi's bright new crown prince and Qatar could signal the next stage is coming – and the concern is a sudden escalation in tension (involving Iran, Turkey on one side vs Saudi, the Emirates and Egypt on other) could trigger an oil price shock.

Meanwhile, I was asking my macroeconomist Martin Malone for his long-term outlook on Oil. I've rather taken the view the US $50 barrel is likely to prove long term, reflecting the new supply balance, the success of the US new producers adapting to the lower price, the need of oil producers to keep selling, and Iran's ability to keep the Saudis under the cosh through cheap production ramping up in the next few years.

Martin's response was interesting: "Why?" Why don't you expect prices to return to a more normal higher level as the global economy normalizes? One of the factors driving growth has been cheap energy – as the global economy recovers.. why would energy prices not also recover..? Higher oil prices could change the global outlook and pummel sentiment. 

Elsewhere, I was struck by one blog commenting: "Pound strength is the dominant theme, even as the UK economic outlook continues to plummet." Does it? Is the UK really in such trouble? Record employment, but weak wage growth. The UK has become a massively more competitive economy since Brexit – car companies and plane makers are opening new plants because UK labour is cheap. (In dollar terms the UK labour force is around 30 percent cheaper than the US!) Although the Bank of England meeting today is predicted to remain on hold re rates, the mood remains hawkish in light of the possibility of wage inflation.

Fears about the UK are based on our current negative "issues" with Europe rather than the positives and continuing inward investment we're likely to see.

The future for Europe and the UK should be bright – separate but close. The UK doesn't want to be part of the European Vision of a unified single state, but we should certainly be mutually supportive. Instead, the divorce is turning messy and it's the kids that will suffer. It's a vision thing.

Our "government" has somewhat misplayed the UK hand. The first thing the new prime minister should have said is "every European living and working in the UK will be welcome to stay and be treated exactly like our own citizens, and in the future Europeans will always be made welcome on these shores". There is still time to make a similar offer. That would not be a bad economic bargain for Britain and Europe.

Instead, Europe is going to put up a wall. It will hurt both ways, but mostly it will hurt Europe's youth. I predict any smart young lad or lass on the Continent will quickly figure out their global prospects are going to be wider and better outside if Europe puts up false walls across the channel. Young Brits are going miss nearly as much. Damn shame…

Enough regret. Positive thoughts as I get on with the day job..

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners



Free subscription - selected news and optional newsletter
Premium subscription
  • All latest news
  • Latest special reports
  • Your choice of newsletter timing and topics
Full-access magazine subscription
  • 7-year archive of news
  • All past special reports
  • Newsletter with your choice of timing and topics
  • Access to more content across the site