A sign from above
March 21, 2019

Blain's Morning Porridge

"On the wings of a snow-white dove, he sends his pure sweet love, a sign from above…." 

To make it easy, the lyrics this morning are from the only band that might possibly understand the world at present – Madness. (And, I'm in not just referring to yesterday's US Federal Reserve action, Brexit shenanigans, European gloating, but just about absolutely everything I can see from the window of Shard Mansions..)

Jay Powell has set free the white doves of lower rates for longer for ever? Fair enough, the Fed says it won't hike this year, and maybe not next year either. And that's the gospel truth right up to the moment it's not…which might come on the back of a global recovery, positive global politics, better weather, the end of trade tensions or whatever. But for now.. all is calm..

Smart move - the bottom line is the Fed was under no pressure to tighten in the current economic environment and amidst the current destabilizing uncertainty – BUT, it did face a massive distraction if it acted aggressively. 

The lack of ecstatic overreaction to "lower for longer" in global stock and bond markets  demonstrates an equal lack of conviction among investors. I don't think they buy the no upside risk arguments. What the market perceives is the Fed is signalling a "tactical" delay of tightening policy – so not much really changes.

While the Fed can say is its decision was data dependent – hence all the dot-plot mumbo jumbo, the market is rightly sceptical. Underneath the noise, the global economy may be far stronger than we think. But, for the moment, Trump will be suitably thankful the Fed is being so patriotic and supporting the stock market.

Maybe Mr Powell really buys into the currently popular Trumponomics theory that: "No matter how distorted by QE and buybacks, and how overpriced the stock market is, the economic health of the nation depends on it remaining unfeasibly high..", but I doubt it.  

The details of yesterday's Fed comments were in its plans for the balance sheet – it's going to focus on its portfolio of treasuries (not replacing mortgage-backed paper – thus giving banks something to go fund..), and retain longer duration matching rather than stick to short-term T-Bills. The effect: a flatter curve as lower long-term rates stimulate other forms of long-term investment.

Powell has played it right. Use the current trade and economic hiatus to pander to Trump by announcing a rate standstill, and tinkering with the Fed balance sheet wind-down to keep the economy on course. Nice. They are all set to resume the normalization when the numbers tell them to do so.

Are there upside risks? Has anyone looked at the Baltic Dry Index lately? I used to refer to it often – BDIY Index on Bberg. Although it's a theoretical index of global freight prices, it provides a pretty useful indicator on the state of global trade. It's been in steep decline since the start of the trade war, but it recently bottomed and is staging something of a mild recovery.. It's pretty clear that sentiment in global trade is pretty close to bottom. If that recovers…expect an inflationary pressure increase. 

And what chance of an ease in global geopolitical tensions driving economic activity higher? There I am not so convinced. The China-US spat is not going anywhere soon. There are two views on the Middle Kingdom: 1) that China can afford to play hard ball longer than the US, or 2) XI has a weaker hand than we think, facing domestic political pressure which will increase as the economy slows, therefore he needs an early deal. Trump is betting on 2. Let's see.

And then there is Brexit. Who knows? I don't think Europe telling Parliament to accept a deal it's already voted down twice was a smart comment – it plays right into the hands of the loony right. It increasingly looks like a vengeful Europe is quite prepared to throw us into a no-deal Brexit unless we play to their rules.

Fair enough, Europe's got lots of other problems it needs to focus on…and if the European blundership can conveniently blame perfidious Albion for all the problems…so much the better. "Quel fromage" as the French don't often say…

Out of time, and back to the day job..

Bill Blain

Shard Capital





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Blain's Morning Porridge

"On the wings of a snow-white dove, he sends his pure sweet love, a sign from above…." 

To make it easy, the lyrics this morning are from the only band that might possibly understand the world at present – Madness. (And, I'm in not just referring to yesterday's US Federal Reserve action, Brexit shenanigans, European gloating, but just about absolutely everything I can see from the window of Shard Mansions..)

Jay Powell has set free the white doves of lower rates for longer for ever? Fair enough, the Fed says it won't hike this year, and maybe not next year either. And that's the gospel truth right up to the moment it's not…which might come on the back of a global recovery, positive global politics, better weather, the end of trade tensions or whatever. But for now.. all is calm..

Smart move - the bottom line is the Fed was under no pressure to tighten in the current economic environment and amidst the current destabilizing uncertainty – BUT, it did face a massive distraction if it acted aggressively. 

The lack of ecstatic overreaction to "lower for longer" in global stock and bond markets  demonstrates an equal lack of conviction among investors. I don't think they buy the no upside risk arguments. What the market perceives is the Fed is signalling a "tactical" delay of tightening policy – so not much really changes.

While the Fed can say is its decision was data dependent – hence all the dot-plot mumbo jumbo, the market is rightly sceptical. Underneath the noise, the global economy may be far stronger than we think. But, for the moment, Trump will be suitably thankful the Fed is being so patriotic and supporting the stock market.

Maybe Mr Powell really buys into the currently popular Trumponomics theory that: "No matter how distorted by QE and buybacks, and how overpriced the stock market is, the economic health of the nation depends on it remaining unfeasibly high..", but I doubt it.  

The details of yesterday's Fed comments were in its plans for the balance sheet – it's going to focus on its portfolio of treasuries (not replacing mortgage-backed paper – thus giving banks something to go fund..), and retain longer duration matching rather than stick to short-term T-Bills. The effect: a flatter curve as lower long-term rates stimulate other forms of long-term investment.

Powell has played it right. Use the current trade and economic hiatus to pander to Trump by announcing a rate standstill, and tinkering with the Fed balance sheet wind-down to keep the economy on course. Nice. They are all set to resume the normalization when the numbers tell them to do so.

Are there upside risks? Has anyone looked at the Baltic Dry Index lately? I used to refer to it often – BDIY Index on Bberg. Although it's a theoretical index of global freight prices, it provides a pretty useful indicator on the state of global trade. It's been in steep decline since the start of the trade war, but it recently bottomed and is staging something of a mild recovery.. It's pretty clear that sentiment in global trade is pretty close to bottom. If that recovers…expect an inflationary pressure increase. 

And what chance of an ease in global geopolitical tensions driving economic activity higher? There I am not so convinced. The China-US spat is not going anywhere soon. There are two views on the Middle Kingdom: 1) that China can afford to play hard ball longer than the US, or 2) XI has a weaker hand than we think, facing domestic political pressure which will increase as the economy slows, therefore he needs an early deal. Trump is betting on 2. Let's see.

And then there is Brexit. Who knows? I don't think Europe telling Parliament to accept a deal it's already voted down twice was a smart comment – it plays right into the hands of the loony right. It increasingly looks like a vengeful Europe is quite prepared to throw us into a no-deal Brexit unless we play to their rules.

Fair enough, Europe's got lots of other problems it needs to focus on…and if the European blundership can conveniently blame perfidious Albion for all the problems…so much the better. "Quel fromage" as the French don't often say…

Out of time, and back to the day job..

Bill Blain

Shard Capital



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