Had history been democratic
March 11, 2019

Blain's Morning Porridge

"Had history been democratic, there would have been no farming or industrial revolution.. "

Apologies for lack of Porridge last week.. But, even from the top of the Alps I heard the people cheer as my prediction the European Central Bank would cough up more free money for European banks (TLTRO III) came about. While Europe's economy remains caught on the buffers, how long before the ECB surrenders completely and just hands everyone helicopter loads of money to get Europe working again? Or works out the brutal truth – the euro is the problem.  Under the current European financial regime, the reality is the ECB will never, ever, never be able to normalize or tighten rates – which is a wonderful thing for markets!

Hand the banks loads of free money! As the European economy is so dire, then what else can banks spend their free money on except buying more European sovereign bonds? We all know the ECB will step up and buy them back in a crisis! So, on with the party hats and buying boots, and scoop up European bonds. What's not to like about the ECB's money tree?

(And with hints the US may be slowing as the deficit rises and job creation wobbles… maybe time to buy bonds anyway…) 

Meanwhile, I wonder how much free ECB money the new German megabank – the well signposted merger of Deutsche and Commerzbank - will need. It's interesting to see the Germans embrace the modern banking concepts we so conclusively proved pre-2007: 1+1 bad banks = 1 good bank (see HBOS/Lloyds or ABN/RBOS for the mathematical proofs), or the old adage "Big Banks aren't Too Big To Fail"…. (US readers – Sarcasm Alert!; a bit like the Black Alert on Star Trek Discovery). Next thing the Germans will be recommending some politician to chair the new bank's board, because that always ends well…. (again.. Sarcasm Alert).

Back in the real world. What's on the agenda this week? Joy oh joy, a whole series of Brexit votes. Pass me the sharpened razor. Please make it stop.

I did try to keep up with Brexit.. but a week on the Italian slopes crystallized some views for me: UK politics has become "Italianized": 

First, parties (or groups within parties) no longer expect to win, compromise is out of reach, so the goals of politicians are to ensure no one else wins either - the result is the politics of chaos. 

Second, as politics becomes a zero-sum game, the functions of state fall into the hands of the "uncivil services" whose economic goals are to preserve their status quo in terms of increased wages, job security, high pensions, their degree of regulatory oversight and long-term "capture of the state". (This works well in countries like Belgium or Holland where years of no-governments have no discernible effect. Doesn't work so well where the people have voted against the will of the civil service establishment..)

I'm hardly the first observer to suggest the UK civil service hasn't exactly embraced Brexit with enthusiasm. If they did, it would mean welcoming extra work and uncertainty… which are double-plus-un-good as far as bureaucrats are concerned. An article in yesterday's Sunday Times by a secret civil servant suggests the inherent inbuilt civil service resistance to Brexit has been deliberate and designed to ensure chaos. It looks like they have succeeded. Sure, it's an unsigned article - so open to the charge of fake news - but it did make me think. 

It would appear the Bank of England is equally complicit in the civil service state capture - this morning's news in the Financial Times that banks have been told to batten down the hatches, and increase their holding of easy to sell assets ahead off the now inevitable financial and market Armageddon after March 29, is just the sort of comment to make everyone happy and secure about the future. Not.

I think I've lost sight of whether Brexit is a good or a bad thing for the UK economy – when faced with uncertainty it's natural to favour the conservative choice of no-change over risk (then again, notes the editor from the sidelines, for many who voted Leave it was NOT an economic proposition but a social one).

While most of the big investors we talk to are pretty sanguine about Brexit and believe it will make little real change – and may be a slight positive for UK – all are now appalled by the implications of broken politics on the UK.

As one fund manager asked me via email: What's the difference between a one-party state or a state run by an unelected bureaucracy? To be fair, he was writing about Junker's EU, rather than the UK's civil service takeover!

All we want on Brexit is closure.. get it done, and get it done in a fashion where the pain is sharp and short so we can all get on with our lives again. Unfortunately, it's become emotional and the time for comprise has long gone. Just like divorce. And just like post-divorce, the sun will rise again on March 30.

More dangerous is the risk to the UK may be a refinement of Italianization! Another article I read over the weekend was in the FT: "Italy set to formally endorse China's Belt and Road Initiative".

Basically, it's the Chinese state capture of Italy, a move that is panicking Brussels as Italy goes its own way to allow China to invest via its "infrastructure diplomacy" into Italy. As we're increasingly aware, China has an agenda - witness the new container port on the East Coast of Africa where only Chinese ships have access. As China expands its global infrastructure and financial networks, what are the risks a desperate UK gets sucked in? (another editor's note: anyone seeking to understand modern China's economics in practice might be well advised to read the book by Joe Bennett: Where do underpants come from? Published by Simon and Schuster, it is an enthralling read).

Just a few weeks ago I was contrasting the European/Anglo Saxon/occidental approach to the information available over the net – anguishing about personal privacy and human rights. The Chinese have no such compunctions and are perfectly willing to use surveillance tech to control their population. 

I have a MUST-READ book to recommend - The Age of Surveillance Capitalism by Shoshana Zuboff. She makes a very powerful case that surveillance capitalism has effected a coup upon the human race - seizing information to predict, sell and modify our behaviours to make the owners of surveillance capital (private or state) the most powerful in economic history. Surveillance capitalism has the potential to change and impose a new collective order based on total certainty – which we already may be part of without actually realizing it.

And remember, after all, that the Thought Police took out Winston Smith when he finally realized that he loved Big Brother… 

Back to normal service and market commentary tomorrow!

Bill Blain

Shard Capital





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Blain's Morning Porridge

"Had history been democratic, there would have been no farming or industrial revolution.. "

Apologies for lack of Porridge last week.. But, even from the top of the Alps I heard the people cheer as my prediction the European Central Bank would cough up more free money for European banks (TLTRO III) came about. While Europe's economy remains caught on the buffers, how long before the ECB surrenders completely and just hands everyone helicopter loads of money to get Europe working again? Or works out the brutal truth – the euro is the problem.  Under the current European financial regime, the reality is the ECB will never, ever, never be able to normalize or tighten rates – which is a wonderful thing for markets!

Hand the banks loads of free money! As the European economy is so dire, then what else can banks spend their free money on except buying more European sovereign bonds? We all know the ECB will step up and buy them back in a crisis! So, on with the party hats and buying boots, and scoop up European bonds. What's not to like about the ECB's money tree?

(And with hints the US may be slowing as the deficit rises and job creation wobbles… maybe time to buy bonds anyway…) 

Meanwhile, I wonder how much free ECB money the new German megabank – the well signposted merger of Deutsche and Commerzbank - will need. It's interesting to see the Germans embrace the modern banking concepts we so conclusively proved pre-2007: 1+1 bad banks = 1 good bank (see HBOS/Lloyds or ABN/RBOS for the mathematical proofs), or the old adage "Big Banks aren't Too Big To Fail"…. (US readers – Sarcasm Alert!; a bit like the Black Alert on Star Trek Discovery). Next thing the Germans will be recommending some politician to chair the new bank's board, because that always ends well…. (again.. Sarcasm Alert).

Back in the real world. What's on the agenda this week? Joy oh joy, a whole series of Brexit votes. Pass me the sharpened razor. Please make it stop.

I did try to keep up with Brexit.. but a week on the Italian slopes crystallized some views for me: UK politics has become "Italianized": 

First, parties (or groups within parties) no longer expect to win, compromise is out of reach, so the goals of politicians are to ensure no one else wins either - the result is the politics of chaos. 

Second, as politics becomes a zero-sum game, the functions of state fall into the hands of the "uncivil services" whose economic goals are to preserve their status quo in terms of increased wages, job security, high pensions, their degree of regulatory oversight and long-term "capture of the state". (This works well in countries like Belgium or Holland where years of no-governments have no discernible effect. Doesn't work so well where the people have voted against the will of the civil service establishment..)

I'm hardly the first observer to suggest the UK civil service hasn't exactly embraced Brexit with enthusiasm. If they did, it would mean welcoming extra work and uncertainty… which are double-plus-un-good as far as bureaucrats are concerned. An article in yesterday's Sunday Times by a secret civil servant suggests the inherent inbuilt civil service resistance to Brexit has been deliberate and designed to ensure chaos. It looks like they have succeeded. Sure, it's an unsigned article - so open to the charge of fake news - but it did make me think. 

It would appear the Bank of England is equally complicit in the civil service state capture - this morning's news in the Financial Times that banks have been told to batten down the hatches, and increase their holding of easy to sell assets ahead off the now inevitable financial and market Armageddon after March 29, is just the sort of comment to make everyone happy and secure about the future. Not.

I think I've lost sight of whether Brexit is a good or a bad thing for the UK economy – when faced with uncertainty it's natural to favour the conservative choice of no-change over risk (then again, notes the editor from the sidelines, for many who voted Leave it was NOT an economic proposition but a social one).

While most of the big investors we talk to are pretty sanguine about Brexit and believe it will make little real change – and may be a slight positive for UK – all are now appalled by the implications of broken politics on the UK.

As one fund manager asked me via email: What's the difference between a one-party state or a state run by an unelected bureaucracy? To be fair, he was writing about Junker's EU, rather than the UK's civil service takeover!

All we want on Brexit is closure.. get it done, and get it done in a fashion where the pain is sharp and short so we can all get on with our lives again. Unfortunately, it's become emotional and the time for comprise has long gone. Just like divorce. And just like post-divorce, the sun will rise again on March 30.

More dangerous is the risk to the UK may be a refinement of Italianization! Another article I read over the weekend was in the FT: "Italy set to formally endorse China's Belt and Road Initiative".

Basically, it's the Chinese state capture of Italy, a move that is panicking Brussels as Italy goes its own way to allow China to invest via its "infrastructure diplomacy" into Italy. As we're increasingly aware, China has an agenda - witness the new container port on the East Coast of Africa where only Chinese ships have access. As China expands its global infrastructure and financial networks, what are the risks a desperate UK gets sucked in? (another editor's note: anyone seeking to understand modern China's economics in practice might be well advised to read the book by Joe Bennett: Where do underpants come from? Published by Simon and Schuster, it is an enthralling read).

Just a few weeks ago I was contrasting the European/Anglo Saxon/occidental approach to the information available over the net – anguishing about personal privacy and human rights. The Chinese have no such compunctions and are perfectly willing to use surveillance tech to control their population. 

I have a MUST-READ book to recommend - The Age of Surveillance Capitalism by Shoshana Zuboff. She makes a very powerful case that surveillance capitalism has effected a coup upon the human race - seizing information to predict, sell and modify our behaviours to make the owners of surveillance capital (private or state) the most powerful in economic history. Surveillance capitalism has the potential to change and impose a new collective order based on total certainty – which we already may be part of without actually realizing it.

And remember, after all, that the Thought Police took out Winston Smith when he finally realized that he loved Big Brother… 

Back to normal service and market commentary tomorrow!

Bill Blain

Shard Capital



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