La torre yo soy
November 27, 2017

Mint - Blain's Morning Porridge

El castillo, la torre yo soy, la espada que guarda el caudal...

For the avoidance of doubt – the Morning Porridge is unrestricted market commentary freely available to all qualified investors on an unsolicited basis. It is not investment advice…

Going to be short comment this morning. Yet again my Monday morning train back to the London smoke was massively delayed by "signalling problems" and congestion. WTF! They spent the summer rebuilding Waterloo and it just doesn't work. Did they have signalling problems like this in the 1920s when the number of trains was greater? Apparently not…

Back in the functional world. Another massive shopping day – Cyber Monday. Let's see if the declining footprint into US malls confirms the end of retail and tomorrow belongs to Amazon, eBay and Tencent? Suspect so… (Personally, I'm furious as I bought a new evening suit recently and picked it up Friday to discover even a proper West end tailor was having a "Black Friday sale". I won't be going back there again!).

Looks like I got Germany wrong. My predictions Angela Merkel would find herself trapped into a difficult minority or a convention-defying second election look increasing unlikely as she is now thrashing out a "Grand Coalition" CDU deal with the SDP. My "bad".The membership of both parties apparently support it. I read a single member of her own party who dared to call for her resignation was subsequently booed down by the mob of enthusiastic Merkelistas.

The market is welcoming the news as far more positive for Germany than the earlier Jamaica Coalition, and positive for Europe as a reinvigorated Merkel will re-engage with Macron's France to solve Europe's many problems with sprinklings of German good fairy dust.

Huh. I'll reserve judgment. I suspect the path to a German coalition will remain fraught and distracting for some time to come. Moreover, although a new coalition will happen, I reckon that far from being positive, Germany is going to be one of the big negatives pulling down Europe next year. Everyone is talking about how strong European growth is – it's not; across the soft underbelly of the continent it's anaemic at best with massive unsolved youth unemployment. Except for Germany, European growth is positive, but constrained and lethargic.

In contrast, German is on fire – witness last week's confidence numbers and the recent growth numbers. How long before the Bundesbank is demanding rate hikes to cool the overheated economy?

| suspect that far from Germany engaging closely with Macron's European vision, self-interest will see Germany diverge further from Europe as political necessity dictates a harsh German line on further austerity and reform demands upon the rest of Europe. Banking union is a non-starter before non-performing loans are sorted. Higher rates to suit Germany spell slowdown in Germany's European satellites.

Meanwhile, reading through the stockpicker comments this morning, none of them sounds particularly convinced on further upside from here, but all report strong sentiment indicators as the buying wave continues. My colleague Steve Previs notes the VIX hit 8.56 on Friday – a record low.

I'm still struggling to understand just how the market remains so convinced to the upside. Sure, we've got growth and it's been a strong year, but that's never sustained. Financial gravity dictates a sell-back at some point.

The numbers this year have been spectacular – according to my macroeconomist, Martin Malone, through 2017 risk assets (stocks, and residential real estate) have delivered some US$23 trillion of upside. That's incredible! Meanwhile, monetary and fiscal policy, economic growth and global fixed income (risk free bonds) have delivered $15 trillion. Global gross domestic product has grown $5 trillion to $80 bn. (The value of global residential housing has added $10 trillion to $210 trillion!)

What's not to like? The International Monetary Fund has update growth projections twice, and the Economist Intelligence Unit upgraded growth on Saturday.

But these gains also highlight risks. Can the $13 trillion gain in global stocks be maintained – and would a correction tumble global sentiment? Full employment (at least outside Europe) will prove inflationary. And there are just so many things visible on the threat board from Saudi, China, Brexit, Washington and oil. Perhaps it's the things not yet on the threat boards we should worry about – the no-see-ums, like the high-yield bond bubble!

Out of time and back to the day job!

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners





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Mint - Blain's Morning Porridge

El castillo, la torre yo soy, la espada que guarda el caudal...

For the avoidance of doubt – the Morning Porridge is unrestricted market commentary freely available to all qualified investors on an unsolicited basis. It is not investment advice…

Going to be short comment this morning. Yet again my Monday morning train back to the London smoke was massively delayed by "signalling problems" and congestion. WTF! They spent the summer rebuilding Waterloo and it just doesn't work. Did they have signalling problems like this in the 1920s when the number of trains was greater? Apparently not…

Back in the functional world. Another massive shopping day – Cyber Monday. Let's see if the declining footprint into US malls confirms the end of retail and tomorrow belongs to Amazon, eBay and Tencent? Suspect so… (Personally, I'm furious as I bought a new evening suit recently and picked it up Friday to discover even a proper West end tailor was having a "Black Friday sale". I won't be going back there again!).

Looks like I got Germany wrong. My predictions Angela Merkel would find herself trapped into a difficult minority or a convention-defying second election look increasing unlikely as she is now thrashing out a "Grand Coalition" CDU deal with the SDP. My "bad".The membership of both parties apparently support it. I read a single member of her own party who dared to call for her resignation was subsequently booed down by the mob of enthusiastic Merkelistas.

The market is welcoming the news as far more positive for Germany than the earlier Jamaica Coalition, and positive for Europe as a reinvigorated Merkel will re-engage with Macron's France to solve Europe's many problems with sprinklings of German good fairy dust.

Huh. I'll reserve judgment. I suspect the path to a German coalition will remain fraught and distracting for some time to come. Moreover, although a new coalition will happen, I reckon that far from being positive, Germany is going to be one of the big negatives pulling down Europe next year. Everyone is talking about how strong European growth is – it's not; across the soft underbelly of the continent it's anaemic at best with massive unsolved youth unemployment. Except for Germany, European growth is positive, but constrained and lethargic.

In contrast, German is on fire – witness last week's confidence numbers and the recent growth numbers. How long before the Bundesbank is demanding rate hikes to cool the overheated economy?

| suspect that far from Germany engaging closely with Macron's European vision, self-interest will see Germany diverge further from Europe as political necessity dictates a harsh German line on further austerity and reform demands upon the rest of Europe. Banking union is a non-starter before non-performing loans are sorted. Higher rates to suit Germany spell slowdown in Germany's European satellites.

Meanwhile, reading through the stockpicker comments this morning, none of them sounds particularly convinced on further upside from here, but all report strong sentiment indicators as the buying wave continues. My colleague Steve Previs notes the VIX hit 8.56 on Friday – a record low.

I'm still struggling to understand just how the market remains so convinced to the upside. Sure, we've got growth and it's been a strong year, but that's never sustained. Financial gravity dictates a sell-back at some point.

The numbers this year have been spectacular – according to my macroeconomist, Martin Malone, through 2017 risk assets (stocks, and residential real estate) have delivered some US$23 trillion of upside. That's incredible! Meanwhile, monetary and fiscal policy, economic growth and global fixed income (risk free bonds) have delivered $15 trillion. Global gross domestic product has grown $5 trillion to $80 bn. (The value of global residential housing has added $10 trillion to $210 trillion!)

What's not to like? The International Monetary Fund has update growth projections twice, and the Economist Intelligence Unit upgraded growth on Saturday.

But these gains also highlight risks. Can the $13 trillion gain in global stocks be maintained – and would a correction tumble global sentiment? Full employment (at least outside Europe) will prove inflationary. And there are just so many things visible on the threat board from Saudi, China, Brexit, Washington and oil. Perhaps it's the things not yet on the threat boards we should worry about – the no-see-ums, like the high-yield bond bubble!

Out of time and back to the day job!

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners



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