Blain: “This Relief Rally Feels Desparate And Too Reliant On The Fed”

Blain’s Morning Porridge, submitted by Bill Blain

“It’s very simple – what most people in this country want is the Single Market..”

Take deep breath. Repeat. Say loudly: “There is nothing to worry about except worry itself.. everything will be alright.” Repeat 3 times.  I find it helps…

Actually… the threat board is curiously calm this morning. The Chinese and Americans are making positive noises about solving the trade disputes. The Fed is being terribly helpful. The market didn’t puke yesterday – but, since I can’t get my Bloomberg to work… who knows….

It certainly feels like the world is slowing down. A host of articles from learned economists, traders and hedgies say so. It’s no wonder clients are telling me they’ve been trying to bid for cheap credit paper, but finding everyone else is also back in the frame and also bidding. I suppose it’s what might be construed as a functional market. More than a few folk think bonds offer good value here.

I’m not so sure about stocks. The recent relief rally feels a little bit desperate and too reliant on the Fed continuing to pony up – meaning its vulnerable to an equally swift repeat selloff if the bad news mounts again. Chartists are more succinct: the numbers say stocks are overbought!

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Let’s move on to Brexit: Rumours Theresa May might have a piece of paper in her hand from Ireland saying “Peace in our time”? Excellent dramatic device to move the debate to a successful conclusion… Dream on…

Who else watched Channel 4’s Brexit: Uncivil War last night? The reviews are slating it, but it was fascinating stuff. It reduced the “end-of-British-civilisation-as-we-know-it” to pantomime buffoonery – but how could you avoid it when Boris Johnson and Michael Gove are main characters…? Every one, absolutely every one, of the central players came out looking stupid – which, if my memory serves me well, is pretty much exactly how it happened.

The key issue on how social media data was trawled, engineered, targeted and wielded with such precision should be at the core of Modern Politics 101 – yet, the programme skated over these critical details, preferring to target cheap laughs at Farage, Banks et al. The programme presented Brexit as a classic British underdog drama; the well-meaning, establishment with hearts-in-the-right-place, correct but essentially amateur Remain campaign floored by the professional, dark and dirty Leave campaign. We should all feel robbed….

No. We should all understand why and how.. and then move on accordingly. 

The central deranged character, Dominix Cummings’ final warning that this has only just begun is particularly pertinent. Populism will change the world. The closing credits hinted it was American money that underlay the social engineering that won Brexit, testing it for Trump’s campaign. It’s not only how we fix a politically broken Britain, but look to European Elections in May.. (Sound of crashing minor chords..)

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All of which segues neatly into my major concern this morning. What’s to like about European bonds? There is a note in the FT suggesting Italy has to raise about Euro 1 bln every working market day through 2019. Headlines this morning are about German industrial production tumbling in November. There are analyst comments about diminishing potential demand for European sovereign debt when Europe is drifting back into recession without ever having got out of the last one. I even noted one piece (which I can’t find this morning..) warning Germany is using the wrong currency which will create massive crisis domestically.

If the ECB can’t buy European bonds…. Who can?

Why would I buy bonds yielding the square root of nothing, backed by promises from governments using someone else’s currency, where the underlying economies are underperforming and mired in red-tape, unreformed institutionalism, and austerity? Just asking… (I would love to quote you European unemployment numbers – but my Bloomberg is still FU. Suffice to say, unlike the Fed, the ECB does not have to worry about an overheated labour market.)

Last week, the Fed demonstrated a nimble set of wheels when Powell announced he’d slow the pace of rate rises – clearly cogent of the economic and confidence risks of a continued stock market meltdown. This morning, the People’s Bank of China slashed reserves ratios to pump money into the system to boost spending in an effort to stimulate the slowing economy. Both the Fed and BoC have the power to do more – slash rates, margins and even relaunch QE.

Compare and contrast with the ECB. Europe’s Central Bank can’t actually change a lightbulb without first commissioning a wait and see if it’s actually broken policy review. It then requires a 80% majority vote to actually change the bulb, before referring it to the LBRA – The Light Bulb Replacement Authority – based in a new purpose built HQ in Lithuania. Heaven help Europe and the Euro if the globe slides into recession or a slowdown.

QE sort of worked in the UK (before we bazooka’d ourselves over Brexit). It worked in US because the Fed made it work alongside everything else it did to get banks lending and the economy working. It utterly failed in Europe because QE became an arbitrage game for the market, while austerity enforced Euro rules ensured it failed across the continent. Doing “”Whatever it Takes” is not a policy – it became a phrase to cover bureaucratic inertia!

Other blogs note the ECB can’t cut rates because they are cut already. They can’t buy more Govt bonds because Italy is a hair’s breath away from Junk and German isn’t issuing enough bonds, so the quotas are full. Its caught and stopped.

I ask again.. why should I buy European bonds?

FINAL QUESTION – Any readers or readers with offices in Sydney? Need a favour, please drop me an email!