Always answer your phone
March 15, 2018

Mint - Blain's Late Morning Porridge – The Ides of March

Always answer your phone, no matter how high up the corporate food chain you are…

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

Short and late comment this morning. The World is a curiously circular place. Ten years ago the collapse of Bear Stearns and its subsequent rescue by JP Morgan ushered in the panic stage of the Global Financial Crisis. The cataclysm came six months later when Lehman went down. Yesterday, Donald Trump appointed CNBC commentator Larry Kudlow to Gary Cohn's job as director of the NEC. Kudlow was chief economist of Bear when I joined the firm in the early 1990s.

I'm kind of bemused at Kudlow's appointment, but it proves what an adaptable crowd Bear alumni are. Bear was a fantastic place to work. We lacked the glib polish of Goldman Sachs, the white shoe smoothness of Morgan Stanley, the mighty balance sheets of Citi or JP Morgan, and the depth and range of Merrill, but we were united as the smart yappy mammals snapping round the ankles of the Wall Street dinosaurs. Over the next ten years we stole a mighty share of their lunches! We did it with aplomb, style and underlying honesty – we were brutally open with our clients: we would succeed by making their deals successful. It was the best of times, and I'm still in touch with many of my clients from these days. 

When I was there, the mantra of Ace Greenberg ran the firm – absolute honesty on the trading floor and instant death to anyone skirting the rules. His "Memos from the Chairman" were classic: look after the pennies and the dollars will come, hire PSD graduates: "poor, smart and a deep desire to get rich", and whenever you receive a paperclip in the post, save it up to send back to a client. We calculated not buying paperclips saved Bear about $100 per annum, but, heck, it worked! 

The question today is could it all happen again? Bear Stearns was brought down by the same collapse in confidence caused by the mortgage shock that sank so many of other financial institutions. Back in 2007 the banks were loaded to the gills with leveraged product on the back of the "originate to sell" model – RMBS (residential mortgage-backed securities), CDOs (collateralized debt obligations) and the many leveraged derivatives of these "toxic" investments.

Today? The world has changed. Draconian capital regulations and the "hunt for yield", (caused by central bank zero and negative interest rate unconventional monetary policies), means most of the risk is more broadly spread across the whole financial environment. Ultimately all the risks laid off by banks and other originators reside somewhere – in insurance companies, hedge funds, credit funds and our pension savings. Risk does not disappear. It just gets spread around – meaning everyone hurts. 

A decade of unconventional monetary policy has changed the investment equation – yields are low and spreads between risk asset classes are compressed to levels that simply don't make risk-sense to those of us who remember the 1980s and 90s. Quantitative easing has caused inflation – just not where you were looking for it. It is abundantly visible in inflated stock and bond prices. On the other hand – unconventional monetary policy in the form of QE and low interest rates worked. It kept the financial markets functional.

Now we have synchronized global growth (editor's note: if you ignore the collapse of Toys R Us, Maplins Electronics, plummetting profits at John Lewis and the storm clouds gathering over the parent company of Bargain Booze). Estimates all point to continued strength through the next few years. We expect 20 percent gross national product growth over the next dive years – in theory more than enough to justify current investment valuations. Unconventional is the watchword for the next few years – when else have you seen a nation slashing taxes at the same time as its central bank is considering hiking rates? Or when else has an economy like China successfully moved from export-led to a consumption-driven model? Populism – the like of which elected Trump – means fiscal policy is back in vogue – infrastructure spend even as the economy recovers?

Yet there are significant risks – liquidity is a major one. Yesterday I read that not a single Japanese government bond traded on the Japan bond market. Back when I were young we were trading trillions of yen per day. Now the Bank of Japan owns most of the market. There is no guaranteed liquidity in any bond market – the banks don't take market-making risk if they don't have to. Capital can be arbitraged far more cleanly away from underwriting market risks. Once more let me remind you: the New York Stock Exchange has 27 doors saying "Entrance". There is only one marked "Exit".

Then there is geopolitics. While Trump is getting away with it thus far, at what point do roadblocks arise as he tries to discipline multiple countries from a USA perspective? What are the risks the Chinese stage a treasury fire sale and buyer-strike (Clue: it's far less likely than feared as there is literally nowhere else to park their dosh, but it is still a fear). Then we have politics – what are the implications of populism and the long-term threat of increasing income inequality?

These are just the known threats. What about the "no-see-ums"? Every ten years or so something whaps markets like a well wielded wet kipper across the face. Maybe it's a regional crisis, or a financial instrument class exploding, a taper tantrum, an investment bubble like dotcoms or tulips, or a deeper than expected bear reversal. Confidence is a very fickle thing.

There are a number of known-market truths – like "countries can't go bust" that have been brutally exposed over the centuries. Maybe it will be European sovereign credits? Who knows? What else is wobbling and we just ain't aware of it yet?

What I do know is people who say: "this time it's different", are invariably wrong. I shall have a quiet toast to Bear later today..

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners





This site, like many others, uses small files called cookies to customize your experience. Cookies appear to be blocked on this browser. Please consider allowing cookies so that you can enjoy more content across fundservices.net.

How do I enable cookies in my browser?

Internet Explorer
1. Click the Tools button (or press ALT and T on the keyboard), and then click Internet Options.
2. Click the Privacy tab
3. Move the slider away from 'Block all cookies' to a setting you're comfortable with.

Firefox
1. At the top of the Firefox window, click on the Tools menu and select Options...
2. Select the Privacy panel.
3. Set Firefox will: to Use custom settings for history.
4. Make sure Accept cookies from sites is selected.

Safari Browser
1. Click Safari icon in Menu Bar
2. Click Preferences (gear icon)
3. Click Security icon
4. Accept cookies: select Radio button "only from sites I visit"

Chrome
1. Click the menu icon to the right of the address bar (looks like 3 lines)
2. Click Settings
3. Click the "Show advanced settings" tab at the bottom
4. Click the "Content settings..." button in the Privacy section
5. At the top under Cookies make sure it is set to "Allow local data to be set (recommended)"

Opera
1. Click the red O button in the upper left hand corner
2. Select Settings -> Preferences
3. Select the Advanced Tab
4. Select Cookies in the list on the left side
5. Set it to "Accept cookies" or "Accept cookies only from the sites I visit"
6. Click OK

Mint - Blain's Late Morning Porridge – The Ides of March

Always answer your phone, no matter how high up the corporate food chain you are…

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

Short and late comment this morning. The World is a curiously circular place. Ten years ago the collapse of Bear Stearns and its subsequent rescue by JP Morgan ushered in the panic stage of the Global Financial Crisis. The cataclysm came six months later when Lehman went down. Yesterday, Donald Trump appointed CNBC commentator Larry Kudlow to Gary Cohn's job as director of the NEC. Kudlow was chief economist of Bear when I joined the firm in the early 1990s.

I'm kind of bemused at Kudlow's appointment, but it proves what an adaptable crowd Bear alumni are. Bear was a fantastic place to work. We lacked the glib polish of Goldman Sachs, the white shoe smoothness of Morgan Stanley, the mighty balance sheets of Citi or JP Morgan, and the depth and range of Merrill, but we were united as the smart yappy mammals snapping round the ankles of the Wall Street dinosaurs. Over the next ten years we stole a mighty share of their lunches! We did it with aplomb, style and underlying honesty – we were brutally open with our clients: we would succeed by making their deals successful. It was the best of times, and I'm still in touch with many of my clients from these days. 

When I was there, the mantra of Ace Greenberg ran the firm – absolute honesty on the trading floor and instant death to anyone skirting the rules. His "Memos from the Chairman" were classic: look after the pennies and the dollars will come, hire PSD graduates: "poor, smart and a deep desire to get rich", and whenever you receive a paperclip in the post, save it up to send back to a client. We calculated not buying paperclips saved Bear about $100 per annum, but, heck, it worked! 

The question today is could it all happen again? Bear Stearns was brought down by the same collapse in confidence caused by the mortgage shock that sank so many of other financial institutions. Back in 2007 the banks were loaded to the gills with leveraged product on the back of the "originate to sell" model – RMBS (residential mortgage-backed securities), CDOs (collateralized debt obligations) and the many leveraged derivatives of these "toxic" investments.

Today? The world has changed. Draconian capital regulations and the "hunt for yield", (caused by central bank zero and negative interest rate unconventional monetary policies), means most of the risk is more broadly spread across the whole financial environment. Ultimately all the risks laid off by banks and other originators reside somewhere – in insurance companies, hedge funds, credit funds and our pension savings. Risk does not disappear. It just gets spread around – meaning everyone hurts. 

A decade of unconventional monetary policy has changed the investment equation – yields are low and spreads between risk asset classes are compressed to levels that simply don't make risk-sense to those of us who remember the 1980s and 90s. Quantitative easing has caused inflation – just not where you were looking for it. It is abundantly visible in inflated stock and bond prices. On the other hand – unconventional monetary policy in the form of QE and low interest rates worked. It kept the financial markets functional.

Now we have synchronized global growth (editor's note: if you ignore the collapse of Toys R Us, Maplins Electronics, plummetting profits at John Lewis and the storm clouds gathering over the parent company of Bargain Booze). Estimates all point to continued strength through the next few years. We expect 20 percent gross national product growth over the next dive years – in theory more than enough to justify current investment valuations. Unconventional is the watchword for the next few years – when else have you seen a nation slashing taxes at the same time as its central bank is considering hiking rates? Or when else has an economy like China successfully moved from export-led to a consumption-driven model? Populism – the like of which elected Trump – means fiscal policy is back in vogue – infrastructure spend even as the economy recovers?

Yet there are significant risks – liquidity is a major one. Yesterday I read that not a single Japanese government bond traded on the Japan bond market. Back when I were young we were trading trillions of yen per day. Now the Bank of Japan owns most of the market. There is no guaranteed liquidity in any bond market – the banks don't take market-making risk if they don't have to. Capital can be arbitraged far more cleanly away from underwriting market risks. Once more let me remind you: the New York Stock Exchange has 27 doors saying "Entrance". There is only one marked "Exit".

Then there is geopolitics. While Trump is getting away with it thus far, at what point do roadblocks arise as he tries to discipline multiple countries from a USA perspective? What are the risks the Chinese stage a treasury fire sale and buyer-strike (Clue: it's far less likely than feared as there is literally nowhere else to park their dosh, but it is still a fear). Then we have politics – what are the implications of populism and the long-term threat of increasing income inequality?

These are just the known threats. What about the "no-see-ums"? Every ten years or so something whaps markets like a well wielded wet kipper across the face. Maybe it's a regional crisis, or a financial instrument class exploding, a taper tantrum, an investment bubble like dotcoms or tulips, or a deeper than expected bear reversal. Confidence is a very fickle thing.

There are a number of known-market truths – like "countries can't go bust" that have been brutally exposed over the centuries. Maybe it will be European sovereign credits? Who knows? What else is wobbling and we just ain't aware of it yet?

What I do know is people who say: "this time it's different", are invariably wrong. I shall have a quiet toast to Bear later today..

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners



Free subscription - selected news and optional newsletter
Premium subscription
  • All latest news
  • Latest special reports
  • Your choice of newsletter timing and topics
Full-access magazine subscription
  • 7-year archive of news
  • All past special reports
  • Newsletter with your choice of timing and topics
  • Access to more content across the site