Summer fling don’t mean a thing…

Mint – Blain’s Morning Porridge 

We stayed out till Ten o’clock. Summer fling don’t mean a thing…

And…as far as my holiday entitlement’s concerned, that’s the summer over for another year. What’s changed in the investible world? Lots. And some of it might even be good!

As I slink back into Mint Towers, the world feels a much more confident place. It’s not just the stellar performances of UK Olympians, but a general sense the global level of economic sentiment is rising. Are investors right to show such confidence? 

US: We’ve got Fischer joining the Hawks. The US economy is apparently close to meeting the Federal Reserve’s take-off speed. Expect that rosy view to be confirmed when Fed Chairwoman Yellen speaks on Friday at Jackson Hole, further rising expectations of hikes to come, and widening the attractions of US treasuries (and the dollar) relative to everything and anything else.

Get ready for the great bond rollover say the pundits.. but I wonder. It's more complex than it looks. Rising US rates suggest play the dollar, and treasuries are just about the only place to play dollar liquidity these days. (Or, buying dollar swap hedged bunds and Japanese government bonds..) But, recent numbers suggest global holdings of dollar assets are actually declining! Why? Perhaps investors see a dollar crisis ahead and are factoring in that prices are already utterly distorted to their outlook?

“Stupid” voters remain a serious threat as November approaches – although it sometimes feels like the Trump worries have a touch of pre-Brexit wobbles underlying their current malign influence on markets.

UK: The press and papers have proclaimed Brexit is not the end of the world. Even JP Morgan has held its hand up and admitted such – so much for moving to Paris. However, we’re in a phoney war here. I suspect future ramifications of the Brexit process are still perceived through a glass darkly. And don’t discount renewed pressures pulling apart the UK Conservative party – raising the prospect of some dramatic changes in the UK political landscape...(which may not be a bad thing).

Moreover, Bank of England Governor Carney’s rate cut earlier this month was playing to the expectations gallery. Aside from ripping off savers, what does it achieve? Zero. An unwise move at best that will further fuel financial asset inflation as investors pile cash into assets they believe will benefit from central bank distortion. As I’ve asked before – show me a single new factory that’s been built directly as a result of quantitative easing or zero interest rates.

Europe: If you ever need confirmation of just how effective ultra-accomodative, do-whatever-it-takes monetary policy is.. then look to the European Central Bank’s record in European job creation.. ahem. Purchasing manager indices confirm Europe is going nowhere fast. But perhaps increasing signs of pragmatism about solving the crisis by creating a Europe that actually works? Interesting press conference yesterday… Didn’t know the Italians had an aircraft-carrier...hey-ho.

Or what about the recent oil moves – explain to me please why oil should bounce significantly higher? And even a gentle rise in commodity prices will slow down growth across the globe...requiring a weaker dollar to stimulate it again..

In short, it remains a very complex world.. but the key point is...it feels slightly more confident..

Does that confidence justify current equity prices? And how much will wider bond yields fuel an equity lift-off (if at all)? Financial assets feel very overpriced. As usual I’m thinking about alternatives – where can I garner decent returns from real assets? Time to take a look at things like infrastructure, aviation, shipping and all the other real assets that actually do things that contribute to the economic good.

At the moment I’m looking at short-dated project construction risk over three years at 15%, or solid aviation assets at 7%. Or you could buy 10-yr gilts at close to the square root of a very small number… Call me for which you prefer..

Meanwhile, if you want a nice succinct explanation of what’s going on in terms of Fixed Income market structure – check out this from Bloomberg. Well worth a read: http://www.bloomberg.com/news/features/2016-08-15/the-rise-of-the-buy-side

I do apologise for not reading a single email while on holiday – it turned out I didn’t get very far on my planned summer cruise. I went to see my Mum and Dad instead – it was time very well spent!

Back to the day job!

Bill Blain

Mint Partners