We will need Desert Power
December 3, 2018

Blain's Morning Porridge  - 3rd December  2018

"On Caladan we ruled by sea and air power, here on Arrakis we will need Desert Power…" (quote from Dune, by Frank Herbert)

Bit rushed this morning with meetings and updating websites, but markets are opening in a more positive frame. I'd characterize markets this morning as – short-term relief, but still nervous. And there is plenty to be nervous about!

Trump and Xi apparently buried the hatchet in Buenos Ares – fortunately not in each other. They agreed a 90-day stand-down on new tariffs, but the shadow of potential trade war is still lurking if nothing substantive moves forward. It ain't over yet.

The actual wording on car tariffs in the documents and the Trump twitterstorm are somewhat contradictory, but, hey, putting back tariffs is an immediate problem solved – at least till Trump threatens to re-impose them. Trump can wave the agreement at his electorate and soya bean farmers, and the market has taken it as positive. Stocks are lifting… in time to face the next crisis..

I often get accused of being too dark and negative, but a crisis forewarned is one you might just miss. The next trigger for a market slide could take three forms.

1. Market weakness: a number of analyst reports say markets are already thin ahead of year-end and could be vulnerable to a "sell-the-fact" switch into cash from nervous buyers. In effect saying markets remain overbought, despite Trump's de-escalating the immediate tension.

2. Perhaps the damage has already been done – China growth has been slowed by the trade war thus far, and the knock-on effects are discernible across the globe. It's possible we've already set in motion the next slowdown, and anything done now to reverse it is too late. As more and more investors figure the outlook has changed, the implications of a switch from stocks back to bonds (supported by the more doveish recent Fed-speak) could be significant.

3. The third threat is a renewed geopolitical crisis, and that could also be brewing.

This morning's headlines about Qatar upping the ante in the middle East by escalating its undeclared conflict with Saudi Arabia and leaving OPEC (Organization of the Petroleum Exporting Countries), could well be the spark... Although Qatar is a tiny producer in the OPEC whole, stress levels are rising in the Gulf. 

It's looking increasingly probable new lines are being drawn. The Saudis have been blockading Qatar – to little effect – for nearly 18 months. Furthering the fracture between Gulf states, the Saudis find themselves under enormous pressure as a result of the murder of Jamal Khashoggi, and an increasing unwillingness in the west to support politicians willing to pander to his version of state thuggery. (Remember, MbS is not some Oxbridge/Harvard-educated Saudi Prince – he's native domestic product with a strong sense of his family's rights. Not a great mix for the modern age.)

There are two scenarios – some believe the conservative Saudi state will renounce and quietly overthrow MbS, and replace him with a new leader, a more acceptable face for the west to deal with. This looks unlikely as MbS has seized control of the apparatus of state – the press, the religious police, the intelligence services and army, and as proved early this year he's not afraid to shake down his own fellow princelings to pay for it.

At the risk of adding myself to the hit-list, MbS is leading Saudi towards the top of the kleptocracy table. While it looks like leadership has been replaced by blundership, there is a clear trend and method.

It's not hard to see why the man smiling most in Argentina was Russia's President Putin. He's been assiduously courting MbS and his vision. They served notice the world was changing when an unexpected and unholy alliance between Russia and Saudi emerged to set the OPEC production cut agenda last year.

As the west increasingly despairs of dealing with MbS, the Prince has played right into Russia's hands – which has tremendous consequences in terms of occidental investments into Saudi infrastructure and defence projects.

While some think Saudi might not matter as much when the US is now on the verge of switching from net oil importer to exporter, and the west is increasingly headed towards post-carbon economies, a major political shift in Saudi has consequences across western market economies in terms of jobs, prices and confidence. It's worth keeping an eye on!  

Meanwhile… back in Yooorp… As the Brexit debate rumbles on and on and on….I don't suppose we shall be getting any lectures on social cohesion from President Macron. The images from Paris over the weekend were truly shocking. Coming alongside surveys showing he's the least popular French leader since King Rollo sacked Paris, one can't help but wonder why it's looking increasingly likely the next phase of European populism is likely to be someone with Le Pen as a surname…And that's the biggest threat to markets everywhere… Populism!

Out of time..

Bill Blain

Strategist

Shard Capital





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Blain's Morning Porridge  - 3rd December  2018

"On Caladan we ruled by sea and air power, here on Arrakis we will need Desert Power…" (quote from Dune, by Frank Herbert)

Bit rushed this morning with meetings and updating websites, but markets are opening in a more positive frame. I'd characterize markets this morning as – short-term relief, but still nervous. And there is plenty to be nervous about!

Trump and Xi apparently buried the hatchet in Buenos Ares – fortunately not in each other. They agreed a 90-day stand-down on new tariffs, but the shadow of potential trade war is still lurking if nothing substantive moves forward. It ain't over yet.

The actual wording on car tariffs in the documents and the Trump twitterstorm are somewhat contradictory, but, hey, putting back tariffs is an immediate problem solved – at least till Trump threatens to re-impose them. Trump can wave the agreement at his electorate and soya bean farmers, and the market has taken it as positive. Stocks are lifting… in time to face the next crisis..

I often get accused of being too dark and negative, but a crisis forewarned is one you might just miss. The next trigger for a market slide could take three forms.

1. Market weakness: a number of analyst reports say markets are already thin ahead of year-end and could be vulnerable to a "sell-the-fact" switch into cash from nervous buyers. In effect saying markets remain overbought, despite Trump's de-escalating the immediate tension.

2. Perhaps the damage has already been done – China growth has been slowed by the trade war thus far, and the knock-on effects are discernible across the globe. It's possible we've already set in motion the next slowdown, and anything done now to reverse it is too late. As more and more investors figure the outlook has changed, the implications of a switch from stocks back to bonds (supported by the more doveish recent Fed-speak) could be significant.

3. The third threat is a renewed geopolitical crisis, and that could also be brewing.

This morning's headlines about Qatar upping the ante in the middle East by escalating its undeclared conflict with Saudi Arabia and leaving OPEC (Organization of the Petroleum Exporting Countries), could well be the spark... Although Qatar is a tiny producer in the OPEC whole, stress levels are rising in the Gulf. 

It's looking increasingly probable new lines are being drawn. The Saudis have been blockading Qatar – to little effect – for nearly 18 months. Furthering the fracture between Gulf states, the Saudis find themselves under enormous pressure as a result of the murder of Jamal Khashoggi, and an increasing unwillingness in the west to support politicians willing to pander to his version of state thuggery. (Remember, MbS is not some Oxbridge/Harvard-educated Saudi Prince – he's native domestic product with a strong sense of his family's rights. Not a great mix for the modern age.)

There are two scenarios – some believe the conservative Saudi state will renounce and quietly overthrow MbS, and replace him with a new leader, a more acceptable face for the west to deal with. This looks unlikely as MbS has seized control of the apparatus of state – the press, the religious police, the intelligence services and army, and as proved early this year he's not afraid to shake down his own fellow princelings to pay for it.

At the risk of adding myself to the hit-list, MbS is leading Saudi towards the top of the kleptocracy table. While it looks like leadership has been replaced by blundership, there is a clear trend and method.

It's not hard to see why the man smiling most in Argentina was Russia's President Putin. He's been assiduously courting MbS and his vision. They served notice the world was changing when an unexpected and unholy alliance between Russia and Saudi emerged to set the OPEC production cut agenda last year.

As the west increasingly despairs of dealing with MbS, the Prince has played right into Russia's hands – which has tremendous consequences in terms of occidental investments into Saudi infrastructure and defence projects.

While some think Saudi might not matter as much when the US is now on the verge of switching from net oil importer to exporter, and the west is increasingly headed towards post-carbon economies, a major political shift in Saudi has consequences across western market economies in terms of jobs, prices and confidence. It's worth keeping an eye on!  

Meanwhile… back in Yooorp… As the Brexit debate rumbles on and on and on….I don't suppose we shall be getting any lectures on social cohesion from President Macron. The images from Paris over the weekend were truly shocking. Coming alongside surveys showing he's the least popular French leader since King Rollo sacked Paris, one can't help but wonder why it's looking increasingly likely the next phase of European populism is likely to be someone with Le Pen as a surname…And that's the biggest threat to markets everywhere… Populism!

Out of time..

Bill Blain

Strategist

Shard Capital



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