Gliding down the highway
May 10, 2018

Mint - Blain's Morning Porridge

The information's unavailable to the mortal man. We work our jobs, collect our pay, believe we're gliding down the highway….

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

History is a great way to remind ourselves of the mistakes we've made, but I'm not convinced we learn much about the ones we're about to make. Markets – they either love you or loathe you. That's the way many investors feel just now – get it right and smile. Get it wrong and it's Game-over-player-1. Who knows if prices are going either up or down – or how long this sideways slip-sliding continues?

The news is confusing. Some folk say markets are priced for perfection – but I'd say they're pricing for a slap as strategy becomes an increasingly binary-looking call on so many issues: Do stock markets go up or down? Does trade or protectionism win? Is it short covering or a squeeze? Is the news good or bad? Rates, inflation, growth, recession, politics. Sweet Jesus on a Raleigh Chopper. I just don't know.

My macro economist Martin Malone tells me to stop listening to the noise, and focus on the big numbers – with zen-like transcendence, Martin reminds me "in numbers there is truth" and they show a clear strategy: Dump bonds, buy risk.

But…but…and but again. My spidey senses are a tingle. I have a gut feel we're in for a good healthy dose of creative destruction. When the market welcomes a bank being fined US$4.9 billion, that's a good thing???  Or when headlines speak of "Berlusconi green lighting an Italian populist government", the market doesn't panic more? When Argentina inevitably calls in the International Monetary Fund, folk are surprised? What about Malaysia – and what we thought we knew about emerging markets. Wake up and smell the coffee moments all around. It's just noise..

Let's start today with some numbers:

·         Before Lehman's collapse in 2008 the size of the US corporate bond market was US$2.8 trillion, and bond dealers kept inventory of around $260 billion. Today the US bond market is over $5.3 trillion, and dealer inventory is less than $40 billion. 10 percent liquidity wallet then…0.7 percent now. Issuance in 2017 was over $1.7 trillion as corporates binged on cheap money. Hmm.

·         Corporate Bond exchange-traded funds have risen from $20 billion to over $300 billion over the same period.

·         The junk market has been pretty stable at around $300 billion issuance per annum, but as much cash for the weakest companies is now being raised through the leveraged loan – where much of it is packaged into collateralized loan obligations. 

Much of the issuance has come from the telecoms sector – to quote yesterday's Wall Street Journal: "Dish, founded by satellite tycoon Charlie Ergen, may be the canary in the coal mine of the new tech landscape." Junk bond investors have lent his companies more than $20 billion over the past 25 years." Sure enough – the prices of Dish bonds are down 26 percent since their peak!

There is nothing fundamentally wrong with lending money to challenging companies on the basis they pay a premium against the possibility they might go bust. Sure, there is concern that the hunt for yield and yield tourism have distorted markets and broken the relationship between credit and price, while the distortions of cheap quantitative easing money have fundamentally corrupted credit pricing and allowed covenant-lite issuance. Smart investors price it in. 

But, there is something else at play – "the industry's rapid evolution is outpacing Mr Ergen's business strategy.." said the WSJ. 

That's worth thinking about a little more – much of the growth of recent years has been driven by innovation and disruption, especially in anything tech-related. Think about the rise of Facebook, Uber, Amazon, Netflix and even Tesla; it's clear they caused dramatic paradigm shifts, creating whole new industries and sectors. There are dozens of other tectonic movers and shakers in the works. And with every great idea there are appalling ones that suck in the innocent and stupid alike – like cryptocurrencies!

In short, a great tsunami of "Creative Destruction" has already been unleased upon the global economy. I doubt the world has ever experienced such rapid business evolution. Dish is just one example – it thrived, it evolved, but now it's struggling to keep up and develop/protect its niche. Who is next?

What about Facebook? At some point (maybe soon) everyone who wants to be on it will be on it, and the folk Facebook want aren't interested – millennials only use it to communicate with the Bank of Mum and Dad. Or how about Amazon? Fascinating to watch retail behemoth Walmark pounce on the largest Indian net-based seller. And, aside from the obvious financial problems, Tesla ain't going to be the only exciting electric carmaker.

I guess the history lesson here is, like the railways, nothing lasts forever… and the pace of change is quickening..

And on that – it's back to the day job… (the next few days are going to be very busy, so the Porridge will be patchy and possibly lumpy (and nothing Tuesday)!

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners





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Mint - Blain's Morning Porridge

The information's unavailable to the mortal man. We work our jobs, collect our pay, believe we're gliding down the highway….

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

History is a great way to remind ourselves of the mistakes we've made, but I'm not convinced we learn much about the ones we're about to make. Markets – they either love you or loathe you. That's the way many investors feel just now – get it right and smile. Get it wrong and it's Game-over-player-1. Who knows if prices are going either up or down – or how long this sideways slip-sliding continues?

The news is confusing. Some folk say markets are priced for perfection – but I'd say they're pricing for a slap as strategy becomes an increasingly binary-looking call on so many issues: Do stock markets go up or down? Does trade or protectionism win? Is it short covering or a squeeze? Is the news good or bad? Rates, inflation, growth, recession, politics. Sweet Jesus on a Raleigh Chopper. I just don't know.

My macro economist Martin Malone tells me to stop listening to the noise, and focus on the big numbers – with zen-like transcendence, Martin reminds me "in numbers there is truth" and they show a clear strategy: Dump bonds, buy risk.

But…but…and but again. My spidey senses are a tingle. I have a gut feel we're in for a good healthy dose of creative destruction. When the market welcomes a bank being fined US$4.9 billion, that's a good thing???  Or when headlines speak of "Berlusconi green lighting an Italian populist government", the market doesn't panic more? When Argentina inevitably calls in the International Monetary Fund, folk are surprised? What about Malaysia – and what we thought we knew about emerging markets. Wake up and smell the coffee moments all around. It's just noise..

Let's start today with some numbers:

·         Before Lehman's collapse in 2008 the size of the US corporate bond market was US$2.8 trillion, and bond dealers kept inventory of around $260 billion. Today the US bond market is over $5.3 trillion, and dealer inventory is less than $40 billion. 10 percent liquidity wallet then…0.7 percent now. Issuance in 2017 was over $1.7 trillion as corporates binged on cheap money. Hmm.

·         Corporate Bond exchange-traded funds have risen from $20 billion to over $300 billion over the same period.

·         The junk market has been pretty stable at around $300 billion issuance per annum, but as much cash for the weakest companies is now being raised through the leveraged loan – where much of it is packaged into collateralized loan obligations. 

Much of the issuance has come from the telecoms sector – to quote yesterday's Wall Street Journal: "Dish, founded by satellite tycoon Charlie Ergen, may be the canary in the coal mine of the new tech landscape." Junk bond investors have lent his companies more than $20 billion over the past 25 years." Sure enough – the prices of Dish bonds are down 26 percent since their peak!

There is nothing fundamentally wrong with lending money to challenging companies on the basis they pay a premium against the possibility they might go bust. Sure, there is concern that the hunt for yield and yield tourism have distorted markets and broken the relationship between credit and price, while the distortions of cheap quantitative easing money have fundamentally corrupted credit pricing and allowed covenant-lite issuance. Smart investors price it in. 

But, there is something else at play – "the industry's rapid evolution is outpacing Mr Ergen's business strategy.." said the WSJ. 

That's worth thinking about a little more – much of the growth of recent years has been driven by innovation and disruption, especially in anything tech-related. Think about the rise of Facebook, Uber, Amazon, Netflix and even Tesla; it's clear they caused dramatic paradigm shifts, creating whole new industries and sectors. There are dozens of other tectonic movers and shakers in the works. And with every great idea there are appalling ones that suck in the innocent and stupid alike – like cryptocurrencies!

In short, a great tsunami of "Creative Destruction" has already been unleased upon the global economy. I doubt the world has ever experienced such rapid business evolution. Dish is just one example – it thrived, it evolved, but now it's struggling to keep up and develop/protect its niche. Who is next?

What about Facebook? At some point (maybe soon) everyone who wants to be on it will be on it, and the folk Facebook want aren't interested – millennials only use it to communicate with the Bank of Mum and Dad. Or how about Amazon? Fascinating to watch retail behemoth Walmark pounce on the largest Indian net-based seller. And, aside from the obvious financial problems, Tesla ain't going to be the only exciting electric carmaker.

I guess the history lesson here is, like the railways, nothing lasts forever… and the pace of change is quickening..

And on that – it's back to the day job… (the next few days are going to be very busy, so the Porridge will be patchy and possibly lumpy (and nothing Tuesday)!

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners



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