I return from a short trip to one of the more remote parts of the northern Italy where I found myself lodging in a hilltop village in the stunningly beautiful Monferrato region.
The fact that I was without internet was not due to the remoteness – I had a strong 4G mobile signal, something I fail to find in large parts of London as well as the UK’s industrial Midlands – but because the IT contracted consultant never returned calls and never showed up. Like the Vatican, he seems not to think in days but in centuries.
Having popped into Milan by the most immaculate train service and having enjoyed, overlooking the Duomo, what I think might have been, gramme for gramme, the most expensive meal I have ever eaten, going back into the hills of the Monferrato was like switching centuries. It took me back to my own memories of being taken to Italy in the early 1960s when at any time of day there were men sitting outside village bars watching the world go by. The same men are, fifty years on, still there. Same clothes, same drab colours, same unshaven faces.
Milan might be buzzing and might be one of the most stylish places on the planet but just 100-odd kilometres away there are communities where half the properties are still vacant and derelict from the migrations to the New World of the post-war period and from the latter wave at the end of the 1960s. Some trades only open four days a week as owners are obliged to earn money elsewhere as the local economy is not strong enough to support the old family business or restaurant. Small enterprise premises are surrounded by barbed wire clad fences with electric gates more redolent here of embassy car parks because crime remains rife and everything and anything that can be stolen and flogged for cash and is not under lock and key will be. Yet through the middle of all this runs a high-grade three-lane autostrada connecting Milan, Turin and Genoa that is largely empty.
Coming home and fighting my way down the massively overcrowded M40 from Birmingham airport towards the Cotswolds I wondered what is preferable: 20th century infrastructure with 21st century labour laws and working practices or 21st century infrastructure with 20th century working laws and practices? Italy in the 1970s did what Greece tried to do in the 1990s, which was to launch the great leap forward by creating the infrastructure upon which a modern economy could be built. Visit modern, thriving Milan and you won’t ever understand why the county is in such a mess. Go off the beaten track, turn your watch back 50 years and then you might. What at first instance looks quaint transmutes into, at second viewing, a huge drift anchor on the country and its economy. And this, remember, is in the rich north, not the poverty trap of the Mezzogiorno. Bypassed by the benefits of globalisation and left to rot, these are the areas the increasing wealth-gap pushes voters to the like of 5 Star and Bepo Grillo or the Lega Nord.
SOVEREIGN RINGS
But back to today. Marcus Ashworth of Bloomberg’s Gadfly column wrote a very interesting piece on the impending avalanche of long-dated borrowing by the European sovereigns, a market which has been hamstrung by the perceived uncertain outcome of French elections. He wrote: “Now that Marine Le Pen is firmly out of the picture, the political environment is more relaxed and investors may be tempted back by the higher yields on offer for longer maturities. This might prompt European sovereigns to test the waters in the syndicated market, a relatively new venue for governments that lets them raise big amounts in one go. The alternative is the drip-feed of auctions.”
I beg to differ. Not all that many years ago all but the US Treasury issued through syndicates. National treasuries would speak to syndicates of primary dealers who would gauge demand and pricing and who would feed back to the issuers. Well into the 1990s even German Bunds were issued through syndicates at predetermined prices and who can forget the “Bonistücke”, bonds offered by the government to investors at a special discount, contingent on them not being sold again within a one year lock-in period.
It is the free-for-all auction process that is the new kid on the block and one that works fine in rampant bull market, which the bond market has been for the past few decades of falling inflation and falling bond yields but which will now begin to struggle when total return, the aggregate of coupon and price-appreciation, is left with bugger all of the former and even less of the latter. Nearly 10 years of ruthless price manipulation by the authorities while squeezing out market practices that have evolved naturally and organically over centuries might yet come back to bite debt-fuelled government spending in the butt. The cul-de-sac does not only look as though it narrows in the distance; it actually does.
So while there is still talk of the corporate bond market moving away from syndication and towards auction-based issuance – something I fervently oppose for reasons often discussed on these pages – I gather that government funding agencies, the vanguard of pure auction-based distribution, might be considering reversing the process and turning the clock back. Interesting and worth tracking over the coming months.
SNAP!
Thursday was a funny day on Wall Street where the old and the new both took a spanking. Snap, floated on March 2 at US$17 and, pardon the pun, snapped up by millennials and driven to a high of US$29.44 within just two days, lost 21% on poor quarterlies which were abysmally presented by one arrogant little CEO, Evan Spiegel, who effectively told his shareholders that he didn’t give a fig for what they were thinking. Millennial “FU2” culture gone mad.
On the other side of the docket the grand old ladies of retail, the department stores, got crushed on Macy’s continuing decline. Shares fell 17% to US$24.35, their lowest level since 2011 as the business model of the department store struggles to find a purpose in a world dominated by Walmart, TJ Maxx and Amazon. JC Penney and Nordstrom fell in sympathy and ahead of their own reports. The rats are leaving the sinking ship and they are taking the plug with them. But think not only of the stores themselves but of the REITs and the CMBS borrowers whose shopping malls are based on a barbell structure with a monstrously large department store unit at each end. The global financial crisis was triggered by lenders underestimating the risks embedded in real estate deals they were buying. The US, and some but to a lesser extent Europe, is covered in shopping malls built for a world that is fading and for a generation of baby boomers that is losing purchasing power as it increasingly relies on declining defined contribution pension incomes. Macy’s could prove to be the canary in the commercial real estate coal mine.
Alas, it is that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. After two months of dry weather it began to rain here yesterday. I think it might be too late for my crop of peas but other parts of the veggie garden will be heaving a sigh of relief. I should be outside dancing in the rain and thanking the gods for much-needed precipitation but I’m not as I’m off to a motoring event tomorrow. Hypocrisy, I suppose, begins at home.