They howled out for more
December 15, 2017

Mint - Blain's Morning Porridge

When the band finished playing they howled out for more...

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…

Let me apologise for the lack of morning porridge this week. I blame the Gods – they hate me! First they decided to screw up my trains earlier week – standing all the way from Southampton to London made writing the Porridge difficult. Then I got struck down by a horrible case of Manbola – the evolved version of Manflu – which is so awful even my wife (who also caught it) admitted to being mildly put-out. When even women admit a cold has got them down, you know it's serious!

But on to the important stuff! It's traditional to end the year with an outlook on what the next is likely to bring. We don't think 2018 is going to be the End of the World. There will be opportunities and mistakes. Winners and grinners, and more than a few losers. Sure, we're looking forward to the new MiFID II (markets in financial instruments directive II) regime – isn't everyone? (US readers…..)

Our broad brush picture is a continuation and acceleration of the Global Macro Alignment theme – a stronger global economy, cautious normalization, continued upside for risk assets (stocks and alternatives), but a negative outlook for the bond markets with rates set to rise as central banks pull back from distortion. They will remain nervous about financial market instability.

If things wobble, them my personal view is the high-yield market is where we will see the most dramatic losses start in bonds. We still see a strong chance of equity market correction – and will buy into it because the global economy is expanding. Our big Macro Threat for the coming year is resurgent inflation – how quickly will it mount and will it take out market sentiment?

The devil is in the detail. We're positive across all the developed economies and expect to see growth expectations raise. Although the US, UK and Europe will be moving into normalization with tightening, while inflation remains sub-2 percent Japan will continue its ZIRP (zero interest rate policy) which is massive yen negative and therefore stock positive – my Japan-watching macro man Martin Malone is calling for further massive gains in Japan stocks. 

A number of clients are also positive on Europe. Despite my scepticism, I can see why. Finally it looks like the European employment crisis is being addressed – unemployment is set to fall below 8 percent in 2018. That is still intolerably high in social terms, but it's a massive improvement on where we were. All the other growth drivers for Europe are now positive – strongly suggesting the European Central Bank will ease back on quantitative easing and tighten policy. Rates will probably not rise immediately – but the hints will be there.

The US remains problematical – where are tax reform, protectionism, Trump and all that going to lead us? In the UK it's a balancing act on Brexit uncertainties, and inflation driven by the weak currency. In both case I doubt the authorities will risk market instability though rash action.

Through the coming year, I'll be providing free and open commentary on these themes on a daily basis through the Morning Porridge. We've checked and it's going to be MiFID 2-compliant. The aim of the legislation is to make markets transparent – that's what I've always looked to do! 

I opened a Christmas card this morning from an old market mate in Switzerland this morning who wrote: "2018 might be quite an exciting year!" 

If it's anything like 2017, then he's going to be right – but the past is not necessarily a guide to the future. I don't think I've ever seen so many extraordinary events in a single year – and remember I've been in markets since 1985! 

I guess one theme for 2017 has been: New disruptive technology + massive global central bank liquidity + global interconnected markets. That's glib enough to explain some of it.. But much of the stuff that happened is completely off the wall, but how markets react tell us lots about market phycology and what drives investors in times of ongoing yield repression (QE & ZIRP), too much money chasing too few assets, and massive FOMO (Fear of missing out):

·         Markets remain distorted: ten years after the crisis began, global bank QE has added some US$2 trillion to markets, causing severe distortion effects to leap from countries and across asset classes.

·         Common sense is an uncommon commodity: Theresa May chucking away her political majority and plunging the already difficult Brexit talks into a mire with the Northern Irish Taliban.

·         The markets have no memory: Argentina – a country we reckon goes bust every 18 years, successfully issuing a 100-year century bond.

·         Equity and debt are not aligned: Junk bond issuers selling massively oversubscribed $1 billion deals, the sole purpose of which is to pay a dividend to the private equity owners! 

·         Never mind what it is – Just buy: greed and avarice is alive and well as speculators pile into the Bitcoin Ponzi – convinced they know what it is. They don't. Never buy stuff you don't understand.

·         An illustration of real value: Earlier this year I was asked to find a buyer for some bonds guaranteed by the Scottish government. The lack of interest demonstrates clearly the significance of confidence in government. 

·         What is it worth?: Salvator Mundi, a painting that may be tangentially by Leonardo sells for $450 million, funded by a Saudi Prince – who is desperately trying to reform his country while shaking down its business classes to pay for it..

I suppose I could add lots more to that list…but let's just think about a few threats for the coming year.

In Europe we've got downside from German Politics, the Italian Elections, Separatism in Spain (and maybe Italy), and Brexit, upside from renewed Federalism from France and the German SDP, plus a recovering economy taking some of the pressure off. I guess we will crawl our way around these.

In the States there is a question of where Trump is headed. Tax reform? And what will the new Federal Reserve head do. And what about China?

Sell bonds and buy risk assets – stocks and alternatives.. Can it really be that simple?

Elsewhere? Who knows, who can tell..  Anyone for the last mince pie?

So nothing left for 2017, except to say Have yourselves a Merry Christmas and a Guid and Prosperous New Year! 

It's certainly going to be "interesting"

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners, London





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Mint - Blain's Morning Porridge

When the band finished playing they howled out for more...

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…

Let me apologise for the lack of morning porridge this week. I blame the Gods – they hate me! First they decided to screw up my trains earlier week – standing all the way from Southampton to London made writing the Porridge difficult. Then I got struck down by a horrible case of Manbola – the evolved version of Manflu – which is so awful even my wife (who also caught it) admitted to being mildly put-out. When even women admit a cold has got them down, you know it's serious!

But on to the important stuff! It's traditional to end the year with an outlook on what the next is likely to bring. We don't think 2018 is going to be the End of the World. There will be opportunities and mistakes. Winners and grinners, and more than a few losers. Sure, we're looking forward to the new MiFID II (markets in financial instruments directive II) regime – isn't everyone? (US readers…..)

Our broad brush picture is a continuation and acceleration of the Global Macro Alignment theme – a stronger global economy, cautious normalization, continued upside for risk assets (stocks and alternatives), but a negative outlook for the bond markets with rates set to rise as central banks pull back from distortion. They will remain nervous about financial market instability.

If things wobble, them my personal view is the high-yield market is where we will see the most dramatic losses start in bonds. We still see a strong chance of equity market correction – and will buy into it because the global economy is expanding. Our big Macro Threat for the coming year is resurgent inflation – how quickly will it mount and will it take out market sentiment?

The devil is in the detail. We're positive across all the developed economies and expect to see growth expectations raise. Although the US, UK and Europe will be moving into normalization with tightening, while inflation remains sub-2 percent Japan will continue its ZIRP (zero interest rate policy) which is massive yen negative and therefore stock positive – my Japan-watching macro man Martin Malone is calling for further massive gains in Japan stocks. 

A number of clients are also positive on Europe. Despite my scepticism, I can see why. Finally it looks like the European employment crisis is being addressed – unemployment is set to fall below 8 percent in 2018. That is still intolerably high in social terms, but it's a massive improvement on where we were. All the other growth drivers for Europe are now positive – strongly suggesting the European Central Bank will ease back on quantitative easing and tighten policy. Rates will probably not rise immediately – but the hints will be there.

The US remains problematical – where are tax reform, protectionism, Trump and all that going to lead us? In the UK it's a balancing act on Brexit uncertainties, and inflation driven by the weak currency. In both case I doubt the authorities will risk market instability though rash action.

Through the coming year, I'll be providing free and open commentary on these themes on a daily basis through the Morning Porridge. We've checked and it's going to be MiFID 2-compliant. The aim of the legislation is to make markets transparent – that's what I've always looked to do! 

I opened a Christmas card this morning from an old market mate in Switzerland this morning who wrote: "2018 might be quite an exciting year!" 

If it's anything like 2017, then he's going to be right – but the past is not necessarily a guide to the future. I don't think I've ever seen so many extraordinary events in a single year – and remember I've been in markets since 1985! 

I guess one theme for 2017 has been: New disruptive technology + massive global central bank liquidity + global interconnected markets. That's glib enough to explain some of it.. But much of the stuff that happened is completely off the wall, but how markets react tell us lots about market phycology and what drives investors in times of ongoing yield repression (QE & ZIRP), too much money chasing too few assets, and massive FOMO (Fear of missing out):

·         Markets remain distorted: ten years after the crisis began, global bank QE has added some US$2 trillion to markets, causing severe distortion effects to leap from countries and across asset classes.

·         Common sense is an uncommon commodity: Theresa May chucking away her political majority and plunging the already difficult Brexit talks into a mire with the Northern Irish Taliban.

·         The markets have no memory: Argentina – a country we reckon goes bust every 18 years, successfully issuing a 100-year century bond.

·         Equity and debt are not aligned: Junk bond issuers selling massively oversubscribed $1 billion deals, the sole purpose of which is to pay a dividend to the private equity owners! 

·         Never mind what it is – Just buy: greed and avarice is alive and well as speculators pile into the Bitcoin Ponzi – convinced they know what it is. They don't. Never buy stuff you don't understand.

·         An illustration of real value: Earlier this year I was asked to find a buyer for some bonds guaranteed by the Scottish government. The lack of interest demonstrates clearly the significance of confidence in government. 

·         What is it worth?: Salvator Mundi, a painting that may be tangentially by Leonardo sells for $450 million, funded by a Saudi Prince – who is desperately trying to reform his country while shaking down its business classes to pay for it..

I suppose I could add lots more to that list…but let's just think about a few threats for the coming year.

In Europe we've got downside from German Politics, the Italian Elections, Separatism in Spain (and maybe Italy), and Brexit, upside from renewed Federalism from France and the German SDP, plus a recovering economy taking some of the pressure off. I guess we will crawl our way around these.

In the States there is a question of where Trump is headed. Tax reform? And what will the new Federal Reserve head do. And what about China?

Sell bonds and buy risk assets – stocks and alternatives.. Can it really be that simple?

Elsewhere? Who knows, who can tell..  Anyone for the last mince pie?

So nothing left for 2017, except to say Have yourselves a Merry Christmas and a Guid and Prosperous New Year! 

It's certainly going to be "interesting"

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners, London



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