Inflation – Gravitas Spark CrowdFunding

Trump Words Scare But Bonds Are The Real Bully Boys

The flashbacks are coming on strong. Who thought myself and Donald Trump would be ratified for new office in the same week? Not me. Anyway, enough about me… said the Donald never. Seriously, do we really have another four years of these whining streams of consciousness, aka press conferences. As Los Angeles burns and Gaza starves, the world is still digesting The Accused’s quasi-declaration of war on Panama, Mexico, Canada and…… Denmark. Clearly, the Orange Toddler is emboldened, as Putin’s number one fan boy, to threaten the invasion of both Panama and Greenland for “national security” reasons. One could be dismissive of these attention-seeking words of intimidation but this feels different, and probably Putin derived. Hamlet this is not, but Act I of this tragedy was Ukraine. Who knows what Act II could be in a new world order of misinformation, security over-reach and sovereign destruction? Taiwan would top most risk lists. However, Estonia or Finland might disagree, as the Baltic plays host to “infra-destructure” warfare. I might disagree too. There’s a bigger bully boy out there and possibly a reason for hope.

We have written many times before about the perils of depending on “other people’s money”. In most cases, the most catastrophic financial implosions have involved high levels of debt or leverage. However, in certain cases catastrophe has been avoided. The phrase “my word is my bond” speaks to credibility but I’m thinking of a more threatening type of bond today. Recall the famous words of Clinton White House strategist, James Carville….

“I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 baseball hitter. But now I would want to come back as the bond market. You can intimidate everybody.”

Liz Truss might attest to that intimidatory power. Her lettuce-life UK premiership was ended by the UK government debt markets (Gilts) going into freefall after her mini-budget ignored all rational advance warnings and almost blew up the UK pension fund system. The Bank of England saved pension funds with a swift monetary/funding intervention but there was no saving Chancellor Kwasi Kwarteng or his delusional prime minister. Fast forward to 2025, and bond markets for me are the big start-of-year story. And, it’s not looking good for the UK….again. In fact, things have deteriorated since the Truss budget debacle. It appears that an election pitch along the lines of “the other lot are awful, vote for us” is failing to convince the all-powerful debt markets that the new government of Sir Keir Starmer has any credible grip on the economy. Try these bond market data points for starters…

UK government long-term borrowing costs – priced in the 30-year Gilt/bond markets) – are at their highest levels since…. 1998.

UK government medium-term borrowing costs – priced in the 10-year Gilt markets – are at their highest since 2008.

In real terms, this means that the UK government is going to spend more on interest costs than on national education this year. Meanwhile, the politics of the country is consumed by “grooming gang” criminality which has been widely known about since at least 2015 (Jay Report). Oh, and UK Treasury Minister, Darren Jones, has just soothed House of Commons members’ fears saying “it is normal for the price of gilts to fluctuate”. Fluctuate? I can think of other “F” words being used on City financial trading floors right now. However, the ‘reality bite’ of bond markets might not be confined to the UK.

The US government has been racking up monster debts too – just the $34 trillion at the last count. So, for those believing Trump is either going to buy Greenland for trillions of dollars or spend similar amounts on military invasions of US allies (I know, genius stuff), there’s a tiny bond detail which merits some attention. At this week’s US government monthly auction of 10-year bonds/debt instruments traders pushed the yields/costs to be paid by the US government to an 18-year high of 4.68%. It might not look like a particularly big cost but this is the foundation of all pricing in the US house mortgage and car finance markets. So, if the bond markets are threatening mortgage or car financing costs to rise to levels not seen in almost two decades, then be assured that the bond bully boy will trump the fantasy words of Agent Orange. This is an example of debt markets warning about spending inflation and unsustainable government budget deficits. But, there’s another type of warning which the bond markets can deliver.

Ultra-low interest rates(bond yields) can also point to multi-year stagnation caused by a national (including government) debt crisis. Japan is the classic multi-decade example of minimal GDP growth or inflation and super-low interest rates. But, there’s a new contender for zombie debt stagnation: China. The Middle Kingdom’s $11 trillion government debt market is sending some very strong signals. The gap in costs/yields between the US and Chinese government bond markets is the highest in history. Chinese 10-year bonds are yielding just 1.6%, but the bigger story is in the long-term 30-year bond markets. Japanese 30-year bond yields are now higher than China’s which starkly signals a “Japanification” of the Chinese economy. The credibility of China’s economy is at stake but critically that of President Xi too. Interestingly, Xi’s new nickname on the Chinese internet is “the elementary school student”. Of course, an invasion of Taiwan could distract the Chinese population but there’s also a real possibility bond markets could signal Xi being toppled from power.

As a final thought and one recently raised by David McWilliams in an excellent podcast there could also be a reality check around the tariff threats of the incoming Trump administration. Maybe it’s not quite as bad as invading your allies, but imposing tariffs on your biggest trading partners could prompt a painful bond bite-back. McWilliams makes the very good point that the Chinese and Japanese own/hold trillions of US government bonds. If these trading counterparties sell them as part of a bigger trade tariff war then US government interest costs and US consumer finance costs will painfully spike. US government interest costs already exceed $1 trillion annually which, if it were a standalone government department, would actually outspend the US Defense Department’s annual budget. My money is on financial pragmatism watering down most of the actual tariff outcomes. In fact, another part of the financial world is hinting at Trump threats not quite happening in a different market. Despite the threats to roll back cleantech and renewable initiatives of the Biden administration, it would seem the markets are not quite convinced. Indeed the latest data from Wall Street might surprise; apparently the share price performances of clean energy stocks and fossil fuel stocks are in a statistical dead heat since Election Day (Source: Callaway Climate Insights).

Perhaps there’s a new lesson soon to be learned in geopolitics….

Your words are only as strong as your bonds.

January 9, 2025

Raining Catfights And Dogs On The Trump Victory Trade

You could smell the global fear on Monday. By Friday, that fear mostly wafted around Donald Trump’s Mar-a-Lago compound. Forty five years ago Colonel Kilgore in Apocalypse Now first memorably stated, “I love the smell of napalm in the morning. It smells like victory”. Arguably, the Republican party scribes will recount in time how the smell of ketchup-spattered walls in Florida this week marked the beginning of the end for a once-likely victory for Donald Trump. Tuesday’s Presidential debate watched by an audience of 67 million people was a disaster for Trump, and hailed as a triumph for “dumb as a rock” Kamala Harris. As eminent Bush Republican strategist, Karl Rove, cheekily asked, “What does that make Trump?”. A loser, but possibly there’s a bigger loser out there. It is interesting to note that Colonel Kilgore and Francis Ford Coppola’s Vietnam epic is today viewed as possibly the most powerful “anti-lie” rather than “anti-war” movie of all time. Fast forward to today, and here are a few big lies under pressure in the real world, real money arena of financial markets….

On the debate night, Trump flounced into the post-debate spin room declaring victory and quoting nonsensical Twitter and Fox viewer polls. However, as we always say… opinion is cheap, but investment decisions risk real money. So, it was striking to see the following morning that Trump’s publicly listed vehicle for his Truth Social platform, $DJT, puked 16% of its value and now trades 80% lower than 6 short months ago. It should also be noted that the climate denial Don’s awful performance prompted heavy buying of clean/green energy stocks too; First Solar was up 14%, Enphase Energy up 5% and Sunrun up 10%…in one day. Let’s just say traders had a very different take on Trump’s bloviating spin-room review.

We should also review some of the markets we highlighted in our article back in March “How To Trade A Trump Win”. In brief, we stated that there were three key ‘canaries’ which tracked the major Trump policies:

Tariffs: Trump wants a 10% across -the-board tariff on all imported goods. Tariffs on imports are agreed by all credible economists as inflationary costs borne by the consumer. But…current inflation expectations in the market tracked by bonds, loans and money markets suggest those tariffs ain’t happening. Moreover, the current inflation rate of 2.5% is at a 3-year low. In fact, if one were to step out of the partisan bubble of US politics, one would know that the US is the global superstar in the post-Covid inflation battle.

Oil: The Donald likes to tell voters he’s the fossil fuel industry’s best friend while promising consumers he will cut energy bills by 50%. This is almost as ridiculous as promising to protect cats, dogs and geese in Springfield Ohio, and becoming quite embarrassing for the Trump team on both fronts. Even Homer Simpson could tell you US oil and gas production is at all time highs of 14m barrels per day (vs Saudi Arabia 8m!). Meanwhile, oil costs measured by benchmark Brent Crude prices are back to the same levels seen before Russia’s full invasion of Ukraine in February 2022. Go figure!

Ukraine: Finally, on the subject of foreign policy, and Ukraine in particular, the chances of a Trump victory also look flaky. We flagged the extreme risk of placating Russia – with ceasefire negotiations forced by Trump’s ending of Ukraine military support – and the threat this capitulation posed to eastern European countries like Poland. Well, check out Poland’s stock market; in the last 12 months it has roared upwards by 40% compared to the giddy S&P 500 ‘only’ rising 26%. Smell that Trump capitulation fear? No, me neither.

The financial markets are struggling to believe Trump, and his chances of victory. With less than 60 days left before voting, expect an increasingly panicked Trump campaign team. The meltdown of Trump immigration/racist-in-chief, Stephen Miller, when being caught out on a Venezuela crime statistic lie is one for the ages. And, for pure popcorn moments, keep an eye on the social media spats between rabid Trump surrogate, Laura Loomer, and the more restrained Marjorie Taylor Greene(no really!) and Senator Lindsay Graham. You just couldn’t make it up. Well, Donald could.

September 13, 2024

Countdown To Trend Exhaustion…?

It’s day 96 of my 100-day no alcohol challenge, so who’s counting? I’m certainly not exhausted. Quite the contrary, but recently I have been prone to describe the benefits as “over-rated”. However, this proximity to completion does focus the mind on other things potentially ending in the world of business and investment. In particular, and by pure coincidence, in my day-to-day risk role I’m seeing some multi-year business trends begin to stall or enter new phases of growth. But, first let’s deal with a monetary shift.

The consensus view on inflation and interest rates was that both were on a downward trajectory with central banks promising to cut rates if consumer prices were on track for a more manageable 2% annual growth. Europe seems to be on track, and the ECB just today indicated its rate cut cycle could begin in the summer. If anything, the Fed (FOMC) in the US was going to move before the Europeans, with money market traders heavily betting on a June cut. Ouch! This week’s US inflation report (CPI) caused some real pain for those traders as core CPI came in ‘hot’ at a year-on-year 3.8% rate of price increase. That’s way off a 2% level targeted by the Fed and means a significant reversal in monetary leadership as money markets now price an ECB cut in June, and the Fed to follow suit in September. That’s a big change in expectations.

As always, the cost of money (rates) drives all financial asset prices and this ‘change’ in trend could have an immediate impact on currency markets. Watch the Japanese yen continuing to fall to a 34-year low versus the dollar and Tokyo’s stock market at a 34-year high. A Bank of Japan rate hike might be needed to stabilise its currency, but not necessarily cheered by stock market investors. In fact, the yen-dollar relationship is often used by traders as a proxy measure of ‘risk’. The trend in markets for the last 15-18 months has been ‘risk on’. In other words, asset prices have generally rallied as investor confidence grew. A shift to ‘risk off’ could hurt some of the higher flying assets of recent times. I note Goldman Sachs’ investment division is growing wary of US technology (“Magnificent 7”) but there’s another newer asset class which might also stall its impressive return to form.

Bizarrely, this new asset class was designed and built to escape the scrutiny and influence of the all-powerful global central banks. I’m talking cryptocurrencies and Bitcoin which has quietly risen to its historic pricing highs of $72,000. However, rather than become independent of the traditional global financial system, Bitcoin has become an asset used by traders to increase risk exposure (buy Bitcoin) or reduce risk (sell Bitcoin). So, if ‘risk on’ trends are due a pause or reversal, it will be deliciously ironic that decisions in an office in Nihonbashi, Tokyo, by Bank of Japan officials could drive the price action of cryptocurrencies like Bitcoin. However, cryptocurrencies are not the only technology asset on a serious upward trend but facing a few teething problems. The hottest investment topic on the planet right now is AI. However, like central banking, there seems to be an emerging divergence of fortunes…

The remarkable feature of the AI investment boom, compared to crypto and metaverse, is the sheer scale of investment. It’s not just hype. Nvidia, the $2 trillion poster child of AI and manufacturer of the chips powering AI learning models, is booking real orders and reporting real 6-fold revenue growth in little more than 12 months. However, the future ‘winners’ in providing these AI services are less visible. Of course, Big Tech, with Amazon, Microsoft and Google leading the charge, are busy building or acquiring chips, talent, language models, data and technologies to win the AI race. This race requires vast amounts of investment capital and the smaller players are beginning to struggle. Once upon a time, London-based StabilityAI had raised $100 million at a $1 billion ‘unicorn’ valuation but has ended up with a CEO/founder departure, a Getty Images lawsuit, $99 million of debt and just $11m of revenues. A recent Forbes article suggested the firm had run out of cash to pay its Amazon(AWS) cloud computing bills. Clearly, the overall AI investment trend is intact but it is important to understand the nuances and risk-shifts within that structural story. Now, for an excellent example of that point.

The simultaneous growth of global GDP and an ageing demographic has ensured a steady flow of pensions and savings capital into equity markets. This has resulted in long-run returns for investors in developed equity markets of 6-7% per annum over the decades. However, as the investment pool of retirees increases my little ‘risk radar’ is seeing a problem and a solution. Firstly, many readers will be aware of the Irish stock exchange(ISEQ) and the mighty London Stock Exchange (LSE) losing constituent companies to other major exchanges(NYSE, Nasdaq) or publicly listed companies being bought out by private capital. Only this week we were forced to ponder a scenario where the LSE could possibly lose FTSE 100 index titans, Royal Dutch Shell (move to a higher valuation US stock market listing) and BP (reports of a bid from Adnoc, Abu Dhabi’s national oil company). From a simple numbers perspective, the investment opportunity pool on a public market/exchange (LSE) is not just shrinking by hundreds of billions (in market capitalisation) but also potentially losing two of the 5 biggest income generators (dividends) for pensioners in the UK. That’s a problem. Now, the solution.

Jamie Dimon, CEO of JP Morgan, in a recent CNN interview highlighted the same problem; at its peak in 1996 the US had 7,300 publicly listed companies. Today that number is 4,300. However, like AI, investment capital might just have shifted into a different corner of the same opportunity pool. In fact, it has. The number of US companies backed by private equity firms has grown from 1,900 to 11,200 over the last two decades (Source: JP Morgan). So, the solution for investors is to expand their investment horizons into private equity funds, private buy-out deals, EIIS investments etc. Until incentives are improved for companies to go public (regulation, quarterly reporting burdens, costs, PR etc), this public-private shift will continue and investors/pensions will have to find opportunities and income/dividends in private companies. Bluntly, the future is bright, but it’s private. And, it is no accident that Spark Private Portfolio investors are currently being offered an exclusive opportunity to expand their portfolios into an interesting private healthcare buy-out deal. Unsurprisingly, the most valuable private companies right now are very much looking at the future – check out Open AI ($100 billion ) and SpaceX ($180 billion) – but what about that other Musk combination of new tech and transport, Tesla?

Tesla’s 30% share price decline in 2024 might be perceived as a Musk-specific governance issue but the entire electric vehicle sector (EV) is encountering some growing pains. Check out these headlines:

EV Sales Revved Up. Now Buyers Are Pumping The Brakes – Barrons

Ford to delay rollout of new electric pickup and SUV as EV sales slow – The Guardian

China’s first quarter EV sales growth slowest in a year – Reuters

As the benchmark player, Tesla’s poor recent results and actual year-on-year sales decline in the US prompted the commentariat to quickly ask whether this was an EV market blip or something more structural. From this Dublin desk, and a country with an abysmal track record on timely infrastructure modernisation, it looks like the charging infrastructure (not enough charge points on routes) for the EV revolution is due some catch up globally. In particular, US consumer surveys continue to cite charging/range anxiety as a factor. More short-term factors probably include high interest rates (falling soon?), consumer expectations of continued manufacturer discounting and new super-cheap Chinese alternatives. This all sounds very familiar to long term observers of global durable goods manufacturing cycles, and with so many companies investing to win the EV landgrab, there will be casualties among manufacturers. Just ask the computer chip industry. In fact, that industry gives us a chance to conclude on a positive note.

If anyone doubted the Bidenomics manufacturing revolution in the US, then this week was seismic. Taiwan’s chip manufacturing giant, TSMC, confirmed an expansion of its capital investment in the electoral swing-state of Arizona. The new TSMC investment number is $65 billion compared to an initial plan of $40 billion and will result in 3 chip factories being built in the state. Critically, a mix of US government grants and loans offered to TSMC will add up to a whopping $11 billion of investment incentives. That’s great news for Arizona, albeit TSMC might have to plan for male-only recruitment. It looks like the AI chips of the future will be built in Arizona, but the state’s Supreme Court is definitely searching for the past. In imposing a total state-wide ban on abortion this week, the state’s highest court had to travel back in time to revisit supportive legal text in the statute books from …..1864. Now, that is exhausting.

April 12, 2024

Five Numbers Say Don’t Give Up….

Perhaps it’s the prospect of beginning a 100 day no-alcohol stint which is causing, on my part, a sudden obsession with numbers. Then again, it could be just a time thing. I mean, who knew one of the World Darts finalists would be younger than the iPhone? Or, that just 9% of UK voters believe Brexit is going to plan? Well, probably the rest of the world knew that a policy to sanction your own economy more heavily than Russia was going to end in tears. However, the rest of the world should drop the sermons-in-smug and pay attention to the first of five key numbers we are watching in 2024….

Climate Crisis: The temporary visit on November 17th of global temperatures more than 2 degrees above pre-industrial averages is a five-alarm-bell ringing of an existential crisis for the planet. Given we have been in perpetual storm mode since late November, and the storm-naming cycle is already past “H” with Storm Henk, there is a personal sense that bad news could be good news. In particular, catastrophe losses in the insurance and capital markets could focus political leaders’ minds on the sheer cost of loose non-urgent language in the recent Cop 28 commitments.

Bond Markets: We regularly remind readers that the cost of money (interest rates) is the critical driver of ALL asset prices. The number which caught the eye this week was that bond prices (which fall when interest rates/yields rise) have been in negative territory for 41 consecutive months – the longest ever draw down in history. And, forgive the repetition, but again bad news might actually be good news for bond prices. In other words, a slower economic environment and some employment weakness could be the trigger for global central banks to ease interest rates and allow bond prices recover.

Venture Capital: In the Spark world of start-ups we are always watching the private markets as well as the more liquid (and better performing) public equity markets. The S&P 500 might have sucked in AI-excited investment and delivered 25% gains in 2023, but for younger companies access to capital was far more difficult. The VC data research team at PitchBook reckons global VC funding fell to $345 billion in 2023, down from $531 billion the previous year. In private equity, deployment of capital dropped by 29% and exit activity was down by 26%. That’s the worst combined performance since 2016. However, the silver lining in these numbers is that funding activity has shifted away from more mature private opportunities to early-stage, seed-type investments. In fact, two in every three deals done were in early-stage companies.

Cleantech: While Tesla is overtaken by Chinese rival, BYD, as the top electric vehicle(EV) producer globally, there is strong evidence that Europe is ramping up its capabilities in the EV ecosystem. Buck Consultants have published research forecasting the installation of 250 EV battery gigafactories in Europe by 2033. This won’t be a huge surprise to those who have seen McKinsey estimates of annual cleantech spend until 2050 exceeding $6 trillion. Imagine investing more than the entire GDP of Japan every year…..for decades.

Democracy: Of course, investment in our survival and a phasing out of fossil fuels can only happen with strategic political leadership. The shift to right-wing populism has been a striking feature of the global political landscape in recent years but 2024 is truly the “Year of The Vote”. The US and UK are high profile elections on the horizon but the global stakes are much much higher than that. Seven of the ten most populous countries in the world, with a combined 4 billion voters, go to the polls in 2024. That’s 46% of the world’s population, or 54% of global GDP, deciding where we go next. Oh, and don’t forget European/MEP elections this year too.

So, we can perhaps understand why financial markets are opening up 2024 in a jittery manner. However, as Sergeant Kenneth “Hutch” Hutchinson departs in his iconic red Gran Torino for his celestial precinct in the sky, I’m hopeful that young companies and young voters can put the five numbers above on the right trajectory. In particular, we must hope that younger voters reject the fear fraudsters and focus on the sustainability of their own future. Dare we suggest that the temperatures of both hate and climate are the key dial-down numbers to their survival, and engagement? Or, as David Soul might sing, “Don’t Give Up On Us Baby…”

January 5, 2024

Inflating Expectations

It’s Groundhog Day again at the European Central Bank. Was it only nine months ago the ECB declared an end to its easy money policy of Quantitative Easing (QE)? Well, trade wars and a manufacturing downturn have raised the imminent spectre of German recession and forced the ECB to embark on a new round of QE purchases and even more negative interest rates. And…we haven’t even mentioned Brexit.

It all sounds so painfully Japanese and this can easily conjure up images of a lost generation of low-interest rates, large debt mountains and stubbornly low inflation. However, there is a suspicion the central banks already know this new round of QE will be as equally ineffectual as previous monetary interference. The new ingredient in the stimulus mix could be governments willing to initiate fiscal spending programmes and abandon budgetary discipline. Do we dare imagine the return of a long lost financial phenomenon which we touched upon in a previous article “Five Market Risks”? Yes, whisper it here…. Inflation could make a comeback. It’s a possibility rather than a nailed on probability but we see a number of conditions and indicators which suggest business owners and investors should have inflation on their risk radar.

We are fans of data here and financial markets are excellent real-time indicators of investor expectations. So, let’s start with gold which has traditionally been used as a hedge against the dwindling purchasing power of currency; in other words, inflation. The gold price has been hitting six-year highs in recent times which is interesting as one would have thought the collapse in interest rates and a whopping $16 trillion worth of negatively yielding bond yields would be pointing to a very subdued inflation environment. What is noteworthy is that when bonds were last seen at very negative yields in 2016 the gold price did not break out as they have on this occasion. Note, inflation kills the value of bonds as well as the purchasing power of cash.

Another data point from industry also caught our eye. There is no doubt global manufacturing is in quasi-recession so it is somewhat surprising wage inflation in the US is now hitting a 4% cruising speed. There is a growing sense that income inequality needs to be urgently addressed as the rise of nationalist populist politics reflects restless electorates being “left behind” by technology, asset inflation and urbanization. Wage inflation can be expected to pick up as the 1% try to quell a political backlash.

A less constructive type of inflation can also be expected to raise its profile. Supply chain management and global trade has been the driver of the global economy for decades but messy trade wars and Brexit will introduce new costs into global logistics. These costs will inevitably be put through to consumers/customers and drive inflation statistics.

A more difficult data point to quantify at this point is the effect of potential fiscal stimulus by governments in dealing with a slower economic cycle. Arguably, the US with its ballooning budget deficit and the UK in Boris-electioneering mode have already embarked on a “bread and circuses” campaign which even Caligula would appreciate. All that’s missing in these campaigns is horses being appointed to senate and cabinet positions, albeit this can’t be ruled out just yet. For a bit of Teutonic sanity and the critical piece in the fiscal pie the world waits for Germany to finally spend. Early soundings from Berlin are encouraging and lead us to our final indicator of ‘something different this time’.

As the ECB confirms further cuts in interest rates one would expect European bank share prices to be on a firm downward trajectory this week. We couldn’t be more wrong. The European banks’ index is up almost 10% in September! That is noteworthy and like the gold price was not the experience in 2016 when global interest rates were plunging. The most dangerous words in the investment lexicon are “this time it’s different” and this writer has no doubt central banks acting with monetary policy alone will confirm Einstein’s theory on repetition and insanity. However, governmental interference for good(fiscal stimulus) and bad(trade wars) could change the outcome this time. Gold and bank share prices are already behaving differently but it will take time for political and trade mists to lift and reveal the new world order and change expectations.

“We changed again, and yet again, and it was now too late and too far to go back, and I went on. And the mists had all solemnly risen now, and the world lay spread before me.” ― Charles Dickens, Great Expectations

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September 12, 2019

Five Market Risks You Might Not Read About This Weekend

The Bojo and Trump show is exhausting. The good news is that Sharpie-scribbled weather maps and fainting police have ensured our ribcages are now incapable of further shock and comic torture. The serious market risks associated with trade wars and a chaotic Brexit will receive more media coverage this weekend but not much will surprise.

In fact, the sheer incompetence of the protagonists has resulted in more positive developments in both the US-China trade dialogue and Westminster. A check of the price charts for the S&P 500 and Sterling (GBP) for the past week will confirm increasing optimism. However, shocks are by definition events not yet considered by market participants. Looking past trade wars and Brexit there are five potential risks which probably won’t get headlines in the coming days but might genuinely surprise.

A Dollar Shortage

It might sound strange that a currency which accounts for 62% of global central bank reserves would be in short supply. However, companies(ex banks) in emerging markets had borrowed $3.7 trillion US dollars by the end of last year according to the Bank for International Settlements. That’s double the levels in 2010 and as the economic cycle slows the US dollar is unhelpfully climbing to new valuation highs versus it’s trading partners’ currencies in emerging markets. Suffice to say debtors are struggling to find/earn the dollars to service debts. The default worries surrounding borrowers like Argentina and China’s Evergrande Group are real-time illustrations of distress in funding markets. To add to these worries there are reports that in recent days an unidentified bank requested a $870m facility from the Federal Reserve. That’s not normal.

European Banks

Negative rates are crushing European banks already struggling with challenged balance sheets. A German economy slipping into recession as data suggested this week could be the final nail in Deutsche Bank’s coffin. Not surprisingly the CEOs of both Deutsche Bank and UBS have pleaded with banking authorities to consider alternatives to negative interest rates as monetary stimuli. European banks are into the ICU phase and it’s possible some won’t make it into 2020.

Saudi Turmoil

There has been more intrigue this week within the royal House of Saud. Ahead of the IPO of the state oil company, Aramco, Mohammed Bin Bonesaw has removed the chairman of the company which will only increase tensions between various factions within the royal family. Growing awareness of climate change and pressure on oil prices won’t help IPO valuations and the royal family’s ability to bribe its citizens and pay protection money to the US. The Saudi story has “coup” written all over it.

EurFired!

The Brexit story had its own “coup” this week as the move to prorogue Westminster resulted in a counter-coup by the opposition, potentially removing by law the ability of the government to leave Europe without a deal. Interestingly, there has been market chat in recent days that Europe has given up on the UK and possibly could cut and run. Yes, the reality TV show “Brexit” could have a “EurFired!” punchline with Europe refusing any extension, citing the need for certainty and the paralysing effect of Brexit on investment and policy decisions across the trading bloc.

Inflation

The headlines keep highlighting the $16 trillion worth of sovereign bonds currently trading with negative yields. The consensus view is that this is signaling lower growth, or worse, in the future. Implicit in that scenario is very low inflation. But, but there is another scenario. Check out the latest data in the US. Job growth and manufacturing activity has materially weakened. Well, there’s your low growth scenario. Now here’s the twist. Trump Tariffs(yes, they must be branded) are pushing inflation(CPI data) to 6-month highs and wage inflation is now cruising along at a 4.2% annualized rate! If Fed Chair, Jay Powell, thinks he has problems with the Orange Toddler right now we shudder to think what he will make of a dreaded stagflation scenario.

None of the above events are high probability forecasts. In the investment world, they would be considered “tail risks”. However, for pure devilment this writer would hazard one strong long odds tip for the weekend. Prepare for the possibility for Boris de Pfeffel Johnson’s resignation on Monday morning and his place in history as Great Britain’s shortest-serving Prime Minister; the previous record was George Canning who served for just 115 days. By George, that would be a story!