Mint - Blain’s Morning Porridge
It’s a beautiful positive morning here in London.
Oh.. the market isn’t jumping for joy? Why? It it realising Trump’s tax reform plans are just words? No matter how much the US needs to tear up the tax codes and start from a rationale beginning, it's never going to happen in the way Trump’s financial goon-squad opened with yesterday. It might be the art of the deal, but it's the beginning of further long-drawn discussions as the Republican president of the USA negotiates with the Republican party of the US. The Democrats must be wetting themselves.
Trump came to Washington to clean up the swamp - but finds himself up to his eyeballs in the alligators he blithely assumed would be on his side. When are the next elections? Re-election is the only thing likely to motivate Republican house members to get on the programme – they’ve got to start delivery of the Trump jump promises pretty soon. The US desperately needs tax reform, and who knows…eventually some compromise on the tax codes might be arrived at…but I’m not holding my breath.
The big somnambulant moment today will be the European Central Bank and subsequent Draghi press conference. What will he say to guide us forward? Despite the better economic signals and finally some European inflation creep, they will be careful not to undermine expectations at this stage – but it’s going to be all change later this year (or next!). Normalisation will come to Europe – perhaps sooner than some folk think.
Meanwhile, the story from the corporate bond markets is an awful lot of money chasing very few deals. I’m told a massively oversubscribed issue for Brussels Airport isn’t a signal of over-exuberance (not ever close to a Ukrainian Chicken Farm Moment), but just pent-up demand and the ECB still buying. Which also underlies Netflix’s debut euro deal...sure it’s a European company so it will make the ECB buy list.
What’s really going on between markets and the global economy? A graph prepared by my macro man Martin Malone shows the massive bound in G4 stock markets (US, Europe, UK and Japan) since the crisis, while bonds have also rallied. That’s very confusing to the conventional market mind. If rates are falling the economy is in trouble, but rising stocks say boom times! Global commodities remain subdued and global freight rates remain troubled. Since the global economy has been struggling to crawl its way out of the economic mire of the 2007-08 global financial crisis, many believe we’re due a recession/correction just out of exhaustion.
One answer is distortion – G4 bond rates remain artificially low as central bank balance sheets are either still expanding or remain huge. This year, despite the announced end to much quantitative easing, G4 central banks have grown their balance sheets another US$1 trillion – via ongoing QE and safe corporate bond purchases. One major effect of distortion is to drive investors up the risk curve in search of better returns. When former government bond portfolio managers find themselves active players in emerging markets and junk…that’s likely to be something that doesn’t play out particularly well.
On the macro front, my colleague Martin remains massively bullish, adding the likely positive effects of Brexit, Trump and (soon) Macron in driving growth and stable markets. Martin's pretty positive on the underlying fundamentals for most of Europe, the UK and US.
Which leaves me wondering how any asset manager is going to deliver me decent safe returns when distortion remains a dominant factor, bond yields remain so low, and the stock markets look a tad overloaded? My stockpicking chum Steve Previs says we’ve still got one more upwave to come before stocks reverse and go bearish.. hmm… Rule 12: better to miss the last 5% of a rally than catch the first 20% of a crash!
I’m thinking – as I always am – about how to create decent returns uncorrelated from the distortion risks across the financial asset classes (bonds and stocks). Which is why I’m always looking at real assets and real returns. This morning we’re going out with a new diversified senior deal in the UK renewable green energy space. If you want to know more.. you know who to call (although I am going to be out of office seeing clients most of today and tomorrow!)
No porridge tomorrow, so have a great May Day weekend. Bandiera rosa etc…
Head of Capital Markets/Alternative Assets