Another round of tariff slapping
April 4, 2018

Mint - Blain's Morning Porridge

The Texan turned out to be good-natured, generous and likable. In three days no one could stand him

The Morning Porridge is unrestricted market commentary freely available to all investors on an unsolicited basis. It is not investment research. 

Another round of tariff slapping as Donald's White House hits China with 25 percent on 1,300 more products. It won't improve the US trade deficit and won't make many friends, but it's there on page 217 of the "Art of the Deal": keep up the pressure and remind them of the risks. The papers say the Chinese ambassador smirked saying: "it's only polite to reciprocate". He won't be getting out the Ferrero Rocher then?

But… trade wars are nothing to worry about. On the first proper day trading in Q2, the market rallied (OK, in the last 90 minutes), the S&P is back above the 200-day moving average (the Danger, Will Robinson, Danger level), the dollar remains constructively weak, oil prices aren't about to shock us, bond yields remain low, and the fundamentals remain as sound as a pound. Move along there…nothing to see..

Except, of course, for the horrible foreboding sense that something is happening and we don't know what it is? We might hope stocks are a buy here, that treasury yields aren't going to suddenly spike higher, or there are no inflation shocks just around the corner. Hope is never a strategy. It's never the things you expect that get you. It's the no-see-ums…and they are probably sitting there in plain sight.

One of my clients brought a great note to my attention yesterday on the credit market – warning about just how big and risky the booming corporate bond market might be. Sure, we have concerns – especially in terms of over-levered zombie companies that could tumble from investment grade to junk in a flash of the US Federal Reserve's funding rate. But it's even more complex than that – it's also a question of where corporate risk resides, and who understands the risks.

It used to be that most corporate debt was held by banks, who had legions of analysts, risk managers and lending officers who lent to corporates, watched the covenants, and pulled the strings. Then we had capital regulations. The banks quickly arbitraged these to retain the returns and shift the risk via the originate to sell model of the nineties and noughties. (Very lucrative it was..) And then came the Global Finance Crisis that nearly slaughtered the global financial system. The regulatory kick back against the banks has been extraordinary – but once again has unintended consequences.

Most corporate lending risk has been shunted out of the banks and into the investment sector. Corporate bond markets have boomed. Private placement financing direct from business to private capital providers has expanded even faster! The search for returns means everyone is looking for the next start-up, crowdfunding, lending opportunity. When you see a well-known fund manager pitching her crowdfunding platform (companies we've carefully selected) on the television, you have to stop and wonder. Some of the new funding is excellent. Some, like deals financed on the back of "initial coin offerings", make very little sense at all.

Yet the ongoing hunt for yield – itself an unintended consequence of central bank unconventional monetary policy (QE) – means everyone everywhere wants to find the magic new investment. Last year private equity managers were sitting on over US$2.8 trillion, but are still looking to put $1 trillion of that pile that's uninvested to work! 

It used to be "corporate risk" was considered esoteric. Back in the 80s, 90s and into the 00s, most investors stuck to AAA and no lower. Now there is over $2.5 trillion of BBB-rated debt – a rise of $1.2 trillion in just five years. These are investment grade names a mere rating tick away from becoming speculative junk, yet the spreads on near-junk and high-yield have never been so tight!

An article in the Wall Street Journal yesterday said: "American corps have never carried so much debt (relative to gross domestic product) before… and the overall quality of this credit has never been so low." Guess who is holding that debt? Pension funds, Insurance companies…what's going to happen if the bubble bursts? And where are they going to go…which is why I suggest you keep my mobile phone number somewhere…

I suppose I should really comment on the do-it-yourself Spotify initial public offering yesterday. It worked…the investment banks got around $30 million in fees rather than a multiple of that, and the company looks to be work around $26 billion. I'm not a buyer. Spotify has to make money from its streaming – Amazon Prime and Apple don't – for them it's part of the overall customer service. And since I just bought a Home-Pod for the flat, I'm cancelling Spotify and switching back to iTunes…

Back to the day job..

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners





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Mint - Blain's Morning Porridge

The Texan turned out to be good-natured, generous and likable. In three days no one could stand him

The Morning Porridge is unrestricted market commentary freely available to all investors on an unsolicited basis. It is not investment research. 

Another round of tariff slapping as Donald's White House hits China with 25 percent on 1,300 more products. It won't improve the US trade deficit and won't make many friends, but it's there on page 217 of the "Art of the Deal": keep up the pressure and remind them of the risks. The papers say the Chinese ambassador smirked saying: "it's only polite to reciprocate". He won't be getting out the Ferrero Rocher then?

But… trade wars are nothing to worry about. On the first proper day trading in Q2, the market rallied (OK, in the last 90 minutes), the S&P is back above the 200-day moving average (the Danger, Will Robinson, Danger level), the dollar remains constructively weak, oil prices aren't about to shock us, bond yields remain low, and the fundamentals remain as sound as a pound. Move along there…nothing to see..

Except, of course, for the horrible foreboding sense that something is happening and we don't know what it is? We might hope stocks are a buy here, that treasury yields aren't going to suddenly spike higher, or there are no inflation shocks just around the corner. Hope is never a strategy. It's never the things you expect that get you. It's the no-see-ums…and they are probably sitting there in plain sight.

One of my clients brought a great note to my attention yesterday on the credit market – warning about just how big and risky the booming corporate bond market might be. Sure, we have concerns – especially in terms of over-levered zombie companies that could tumble from investment grade to junk in a flash of the US Federal Reserve's funding rate. But it's even more complex than that – it's also a question of where corporate risk resides, and who understands the risks.

It used to be that most corporate debt was held by banks, who had legions of analysts, risk managers and lending officers who lent to corporates, watched the covenants, and pulled the strings. Then we had capital regulations. The banks quickly arbitraged these to retain the returns and shift the risk via the originate to sell model of the nineties and noughties. (Very lucrative it was..) And then came the Global Finance Crisis that nearly slaughtered the global financial system. The regulatory kick back against the banks has been extraordinary – but once again has unintended consequences.

Most corporate lending risk has been shunted out of the banks and into the investment sector. Corporate bond markets have boomed. Private placement financing direct from business to private capital providers has expanded even faster! The search for returns means everyone is looking for the next start-up, crowdfunding, lending opportunity. When you see a well-known fund manager pitching her crowdfunding platform (companies we've carefully selected) on the television, you have to stop and wonder. Some of the new funding is excellent. Some, like deals financed on the back of "initial coin offerings", make very little sense at all.

Yet the ongoing hunt for yield – itself an unintended consequence of central bank unconventional monetary policy (QE) – means everyone everywhere wants to find the magic new investment. Last year private equity managers were sitting on over US$2.8 trillion, but are still looking to put $1 trillion of that pile that's uninvested to work! 

It used to be "corporate risk" was considered esoteric. Back in the 80s, 90s and into the 00s, most investors stuck to AAA and no lower. Now there is over $2.5 trillion of BBB-rated debt – a rise of $1.2 trillion in just five years. These are investment grade names a mere rating tick away from becoming speculative junk, yet the spreads on near-junk and high-yield have never been so tight!

An article in the Wall Street Journal yesterday said: "American corps have never carried so much debt (relative to gross domestic product) before… and the overall quality of this credit has never been so low." Guess who is holding that debt? Pension funds, Insurance companies…what's going to happen if the bubble bursts? And where are they going to go…which is why I suggest you keep my mobile phone number somewhere…

I suppose I should really comment on the do-it-yourself Spotify initial public offering yesterday. It worked…the investment banks got around $30 million in fees rather than a multiple of that, and the company looks to be work around $26 billion. I'm not a buyer. Spotify has to make money from its streaming – Amazon Prime and Apple don't – for them it's part of the overall customer service. And since I just bought a Home-Pod for the flat, I'm cancelling Spotify and switching back to iTunes…

Back to the day job..

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners



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