I think I need a holiday after a few days skiing in the Alps, and then up to Edinburgh where I was debating in favour of “Helicopter Money” as a central banking tool at Heriot Watt University. I spent a morning at Adam Smith’s old home, Panmure House in Edinburgh – more of which later this week – and the afternoon at Heriot-Watt’s Riccarton Campus – learning about opportunities in Robotics and talking with start-ups in the University’s incubator – some great and very monetizable ideas! I want to talk to clients about all these… there is gold up there in Edinburgh!

The dominant factor for me the last eight days has been weather. Something is awry. More Atlantic storms than ever. First it was rain on the ski-slopes – truly miserable. I can conclusively demonstrate my Ski-gear is not waterproof. Then it was ice and strong winds – which kept most lifts closed. Then it was the weekend storm – which meant missing a truly wretched Rugby Match to get back before the flights were canned. This morning travel up to London was impacted. I squandered another hour of my life waiting for a train that simply disappeared from the schedule moments before it was due, despite assurances it was on time on the website. The next train only went as far as Basingrad, or there was the alternative of a two-hour stand on a stops-everywhere commuter train.

So – this morning’s photo is the view from my home office. Hate me at your leisure.

Markets

I was kind of surprised at the resilience of markets last week. Yet another very strong US Non-Farm Payroll number confirms nothing to worry about in terms of the current US economy…. But.. is that what we should be thinking about? Markets are about anticipating prices tomorrow, not what determined them y’day!

It seems to me the market has lost its critical faculties. Does the market have Alzheimer’s?

I’m reading about a buying orgy in Junk Bonds. No surprise – it’s a market that has been as hot as very hot potato for years now.. breaking every rule we once regarded as sacrosanct about lending to companies with a limited propensity or ability to repay, with increasingly easy borrowing covenants.

Investors seem to be confusing lower and lower yields from low-credit-quality borrowers with reduced risk – perhaps thinking if a CCC issuer only yields 5% then it can’t be that likely to default. Er. No. Relative yields are a dangerous thing – although they yield a substantial spread over treasuries, the risk premium is now so compressed it does not justify the investment any more.. But is anyone listening? Nope.

Default rates are rising – Fitch says 3.3% in 2019 is significantly higher than the non-recession average of 2.4%. As defaults rise, issuance is increasing. Go figure if that is risk healthy. As financially stretched companies pile on leverage from further cheap money – does that make them more or less sustainable? I bet someone will argue its not a real problem because rates will remain zero for ever…

Meanwhile.. Bloomberg carries a story blaming ETFs for the current investment common-sense disconnect: Funds Blame ETFs For Overunning Stock Market. Again. Worth a read if you believe markets are now just price followers than price setters. That would certainly explain Tesla… although I suspect more to that particular peculiar madness of crowds. (And before I get trolled by The Brotherhood of The Blessed Tesla And Musk, I do actually own the stock (yep, a whole 6 shares..)

However, the big story remains Coronavirus….

Clearly the bulls that took markets to new records are not that concerned with the very real economic consequences we are now seeing in China. This morning Bloomberg reports record rises in Chinese food prices – in a nation already factoring the loss of half its protein herd from African Swine Fever. The stories of shuttered factories, empty motorways, villages refusing to allow deliveries, and extended breaks (for instance, Apple’s production partners in Shenzen intend to remain closed), will have massive effects on China consumption patterns and trade. Some expect Q1/Q2 growth to spike down to sub 4%, and with China responsible for 17% of global GDP, that can’t not be significant.

The Coronavirus is now officially bigger and worse than SARS. The fact a British businessman who attended a conference in Singapore appears to have been a “super-carrier” triggering infections across France and in a ski-chalet, will no doubt have the authorities worried. Reports of contagion research say it could peak with 500,000 cases in Wuhan alone by late February – raising issues about the supply of medical equipment, masks and drugs.

Bloomberg reports the virus incubation period of 5.2 days, plus 6.1 days delay to confirm infection – means the rate of potential contagion could be 10 million people at risk in just a few weeks. It’s apparently happening in China. What if/when it happens here? The mortality numbers suggest about 18% of infected patients need treatment for severe or critical symptoms and about 4.3% of those placed in intensive care die.

If the numbers are right, then Chinese hospitals could be overwhelmed in coming weeks – 90,000 patients from 500,000 infections will swamp any medical system. And, that may explain the Chinese rush to build new hospitals 2 weeks ago.  Can you imagine UK or US hospitals dealing with numbers like these.. Probably better you don’t try to…

Back in the unreal world – Ireland.

What are the implications for the UK and Ireland of Sinn Fein’s gains in the Irish elections? Probably not as fearful as some commentators expect. Sinn Fein has modernised itself to appeal to the Irish working class, recasting the choices for Irish votes. Its left the old parties in decay; Fine Gael and Fianna Fail are still arguing to aging supporters about sides in a Civil War fought a 100 years ago..

How will Sinn Fein change the narrative? We’ve always known the largely Catholic republican minority in Norn Iron will exceed Unionist numbers at some point. The IRA mantra “Tiocfaidh ar la” (Our day will come) appears to be coming – but due to the success of negotiation and the peace process rather than thru the gun. Plus, we’ve got considerable concern in the North about leaving the EU.

A United Ireland is a greater likelihood today that ever. The question is whether the political classes in Westminster can accept the change – and deal with Sinn Fein’s likely demands for a border vote in a dispassionate manner. Expect predictable fury from the Norn Iron Taliban.

The economics will be interesting. Unification looks more likely, but can Ireland afford to take on the costs of some form of union with Norn Iron?  New Ireland is going to be a fascinating story.

What will it mean for the UK – losing the North, Scotland looking iffy and even Wales showing increased support for a break from England. I can’t understand it myself. I’m a proud Scot and always considered part of my Country’s gift is the unquestioned right to take the high-road to England to claim fame and fortune!

Bill Blain is a well-known City of London commentator, and has 35 years’ market experience as an investment banker. He currently is Strategist at Shard Capital, a London-based boutique.

Republished from the Morning Porridge by permission.

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