Mint - Blain's Morning Porridge
May 19, 2017

Wow. My current bearishness got me well and truly bull-pimp slapped yesterday!

Couple of clients actually called me – rather than just emailing – to tell me how absolutely wrong I was about global markets being on the verge of something quite horrid. I was told the global economy and outlook remains in positive shape: stock markets are not overvalued, stocks have fully discounted Trump, fundamentals remain resolutely bullish, earnings are strong and rising, and broadly that I should shut up and stop upsetting the readership.

"For God's sake Blain.. you are scaring the horses.." said one.

Fair enough… if you wish to believe whatever you wish to believe. Take the blue pill.

But, but and but again…the bottom line is yesterday's slight bounce back in what remain risk-off markets feel about as solidly supported as an alligator in the Washington Mirror Pond.

If there is a theme to what's really going on, it's "tedious inevitability". So, with due respect, "bear" with me (geddit? see what I did there?). Take the red pill, and let's see how deep this rabbit hole takes us.

Before turning our focus towards the veritable cataclysm of tweets out the White House as The Donald petulantly wonders why we all dislike him so, (and we ponder just who is advising him!), perhaps a quick word on Brazil and Europe, and a conspiracy theory around them.

Oh dear. Should we be surprised Brazil has spiralled into yet another fine mess on allegations the government has approved pay-offs? The government may fall, stocks are down 10 percent and bonds got creamed. It's a wake up and smell the coffee moment. Nothing is ever as good as you think – mean reversion is the rule. Without naming any countries by name, but reform and genuine behavioural change are very difficult. If a nation has a history of gross income inequality and a gold medal standard of political corruption, should anyone be particularly surprised when it's all gone turtle again?

And then there is Europe – this morning we're relieved to discover the European Central Bank minutes reveal no doubts at its last meeting about sustaining its buy programmes, even though "the economic risks are moving to a more balanced position." Oh well, if the ECB says the economic risks in Europe are decreasing, then the big trade everyone is propping – buy Europe because it looks cheap - seems to make sense.

Is Europe fixed? I don't think so. Political risk has diminished, but the hard stuff of actually making disparate and unconnected economies work together under common rules and Germany's currency is still very much work in difficult process.

My colleague Steve Previs made an interesting observation this morning: in his nearly two millennia working in markets, he's never ever heard Wall Street's smartest analysts ever share a really good trade idea.

More often they will prop the other side of their trade – so telling folk what wonderful opportunities there are in emerging markets or Europe plays right into their hands, allowing them to buy dollar assets on the cheap while the rest of us think we're making smart plays in places we either don't understand or are essentially unfixable. (You can work out for yourself which is EM and which is Europe. Clue: it really doesn't matter..)

As for Trump? It's highly unlikely he will impeached. However many Capitol watchers say it's going to happen, it's not going to happen. Is it? Definitely Not. Never? Never ever. But, I idly wonder what the odds of a Trump Out/Corbyn In "double" might be = 5000/1 sounds about right? The same as the odds were on Leicester City winning the English top league title at the start of the 2015-16 season.

And if Donald is wondering why we're having a witchhunt, it's not just because we want to roast some marshmallows.

Although markets look to be somewhat risk-on again this morning (although credit liquidity is very thin), there is plenty of evidence of further pain to come. One article the corporate team forwarded to me this morning is from Zerohedge - which is yet another take on when does the China bubble burst?

Meanwhile, one of the big US investment banks has noticed a disturbing trend in collateralized loan obligations. There are more and more companies whose debt is going straight into CLOs – which means greater diversity and differentiation of risk, which should therefore be good for the overall credit strength of the portfolio. However, much of the new issuance is senior only – there is little underlying equity or subordinated debt to absorb losses ahead of the senior debt holders in default.

Banks are lending direct to smaller and risker borrowers. JP Morgan data show an 89 percent increase in senior only borrowers this year. That's US$441 billion of borrowing that's unsupported by loss-absorbing subordinated debt. Banks lend to them because they pay more interest. Doh! Most of that debt is ultimately absorbed by the CLO sausage factories. While I love sausages as much as any hedge fund manager loves the yieldy taste of CLOS it's always a smart idea to understand exactly what is going into them.

Meanwhile, back in the real world. Some of my trades from earlier this week have gone well, but my suggestion Banco Popular might prove more popular than the price action suggested hasn't panned out. The price has crashed back into the 20 percent yield zone as it becomes clear there are limited buyers for the business. Some say Bankia and Santander are still in the frame – but they don't look "enthusiastic". I suspect the likely outcome might prove less attractive to holders with a US asset player stepping into buy just as it spirals. Yet, we are in touch with both buyers and sellers, so if you fancy either capitulating or getting involved, let me know.

Have a great weekend, and let's see what fresh hell we face on Monday…

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners





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Wow. My current bearishness got me well and truly bull-pimp slapped yesterday!

Couple of clients actually called me – rather than just emailing – to tell me how absolutely wrong I was about global markets being on the verge of something quite horrid. I was told the global economy and outlook remains in positive shape: stock markets are not overvalued, stocks have fully discounted Trump, fundamentals remain resolutely bullish, earnings are strong and rising, and broadly that I should shut up and stop upsetting the readership.

"For God's sake Blain.. you are scaring the horses.." said one.

Fair enough… if you wish to believe whatever you wish to believe. Take the blue pill.

But, but and but again…the bottom line is yesterday's slight bounce back in what remain risk-off markets feel about as solidly supported as an alligator in the Washington Mirror Pond.

If there is a theme to what's really going on, it's "tedious inevitability". So, with due respect, "bear" with me (geddit? see what I did there?). Take the red pill, and let's see how deep this rabbit hole takes us.

Before turning our focus towards the veritable cataclysm of tweets out the White House as The Donald petulantly wonders why we all dislike him so, (and we ponder just who is advising him!), perhaps a quick word on Brazil and Europe, and a conspiracy theory around them.

Oh dear. Should we be surprised Brazil has spiralled into yet another fine mess on allegations the government has approved pay-offs? The government may fall, stocks are down 10 percent and bonds got creamed. It's a wake up and smell the coffee moment. Nothing is ever as good as you think – mean reversion is the rule. Without naming any countries by name, but reform and genuine behavioural change are very difficult. If a nation has a history of gross income inequality and a gold medal standard of political corruption, should anyone be particularly surprised when it's all gone turtle again?

And then there is Europe – this morning we're relieved to discover the European Central Bank minutes reveal no doubts at its last meeting about sustaining its buy programmes, even though "the economic risks are moving to a more balanced position." Oh well, if the ECB says the economic risks in Europe are decreasing, then the big trade everyone is propping – buy Europe because it looks cheap - seems to make sense.

Is Europe fixed? I don't think so. Political risk has diminished, but the hard stuff of actually making disparate and unconnected economies work together under common rules and Germany's currency is still very much work in difficult process.

My colleague Steve Previs made an interesting observation this morning: in his nearly two millennia working in markets, he's never ever heard Wall Street's smartest analysts ever share a really good trade idea.

More often they will prop the other side of their trade – so telling folk what wonderful opportunities there are in emerging markets or Europe plays right into their hands, allowing them to buy dollar assets on the cheap while the rest of us think we're making smart plays in places we either don't understand or are essentially unfixable. (You can work out for yourself which is EM and which is Europe. Clue: it really doesn't matter..)

As for Trump? It's highly unlikely he will impeached. However many Capitol watchers say it's going to happen, it's not going to happen. Is it? Definitely Not. Never? Never ever. But, I idly wonder what the odds of a Trump Out/Corbyn In "double" might be = 5000/1 sounds about right? The same as the odds were on Leicester City winning the English top league title at the start of the 2015-16 season.

And if Donald is wondering why we're having a witchhunt, it's not just because we want to roast some marshmallows.

Although markets look to be somewhat risk-on again this morning (although credit liquidity is very thin), there is plenty of evidence of further pain to come. One article the corporate team forwarded to me this morning is from Zerohedge - which is yet another take on when does the China bubble burst?

Meanwhile, one of the big US investment banks has noticed a disturbing trend in collateralized loan obligations. There are more and more companies whose debt is going straight into CLOs – which means greater diversity and differentiation of risk, which should therefore be good for the overall credit strength of the portfolio. However, much of the new issuance is senior only – there is little underlying equity or subordinated debt to absorb losses ahead of the senior debt holders in default.

Banks are lending direct to smaller and risker borrowers. JP Morgan data show an 89 percent increase in senior only borrowers this year. That's US$441 billion of borrowing that's unsupported by loss-absorbing subordinated debt. Banks lend to them because they pay more interest. Doh! Most of that debt is ultimately absorbed by the CLO sausage factories. While I love sausages as much as any hedge fund manager loves the yieldy taste of CLOS it's always a smart idea to understand exactly what is going into them.

Meanwhile, back in the real world. Some of my trades from earlier this week have gone well, but my suggestion Banco Popular might prove more popular than the price action suggested hasn't panned out. The price has crashed back into the 20 percent yield zone as it becomes clear there are limited buyers for the business. Some say Bankia and Santander are still in the frame – but they don't look "enthusiastic". I suspect the likely outcome might prove less attractive to holders with a US asset player stepping into buy just as it spirals. Yet, we are in touch with both buyers and sellers, so if you fancy either capitulating or getting involved, let me know.

Have a great weekend, and let's see what fresh hell we face on Monday…

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners



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