Other than the byline-free writers of The Economist nobody seems to get away with reminding readers that “I told you so” although today I feel I have the right to.
ECB President Mario Draghi yesterday gave us an unusually short press briefing in which he was deliberately vague and told us exactly what we should have expected. Pointing in the general direction of the Central Council beginning to discuss a possible future withdrawal of stimulus in autumn but nothing beyond that, we walked away knowing just as much or just as little as we had before. In other words, he added absolutely nothing to the pool of knowledge.
I noted in yesterday’s column “….forget wasting the afternoon trying to weigh what Draghi has to say today against what he said at Sintra – words are cheap - and trade the markets on their merits.” Not that they were particularly revealing either. We might still be a month away from the real dog days of summer but the hound is certainly beginning to wag its tail. So there we are - I told you so.
American life
Yesterday marked the six-month anniversary of the inauguration of Donald Trump as 45th President of the United States and what eventful six months they have been. The Dow has rallied by 9%, the S&P by 8.9% and the Nasdaq by 15.02% and that has to be added to the advanced excitement between election day and inauguration. But what, other than discord, has the presidency given us so far? This was reflected in a small vignette that wondered whether Twitter’s efforts to limit online abuse through its medium would also stretch to the White House?
Sure, we’re only six months into a four-year term but the auspices are not good. On the legislative front, Trump has manifestly failed to unite Republican members of Congress behind himself. The repeal of Obamacare, one of the pillars of his campaign promises, is foundering not on any particular love for the system but on a deep dislike for the brown paper, string and glue replacement solution that is being proposed. Much else of the manifesto is mired in controversy. Make America Great Again, or “Maganomics”, is struggling and with it there are rising doubts over the administration’s ability to introduce the mould-breaking tax and regulation reform that had been promised. Without the proposed changes to healthcare funding and to the corporate tax edifice, the massive infrastructure update – so sorely needed – looks to be dead in the water too. There is, therefore, a risk that the Trump presidency might have failed before it has even properly begun. Add to that the drip, drip of the Russia thing and the picture becomes even more opaque.
The greenback is the one bearing the brunt of global mistrust. In the same six months since the inauguration, the dollar has lost 8.45% to the euro, 7.2% to the Canadian dollar, 4.77% to the Swiss franc and even the Brexit-plagued British pound has risen 1.3% against the US currency. That is not the natural behaviour of a currency in a tightening cycle. The investigation into the Trump campaign is laying bare practices that might be acceptable – or at least not illegal – in the hotel and real estate businesses but that have no place in the political process of a leading democracy, and one that sees itself as the standard setter for the rest of the world. We are not quite at Watergate yet – it was all about the smoking gun – but there are similarities in the way that the Oval Office is dancing around, feigning ignorance and innocence and blaming everybody else.
Borderline
Here’s a question: Is the bond market part of the shadow banking space or not? I picked up an article that observed that an ever-increasing number of corporate borrowers who no longer meet the banks’ ever-more arduous conditions for lending are turning to the high-yield bond markets for funding. This, to be honest, is disgusting, horrible and brings shame beyond description on the regulatory authorities who, in their “jobsworth”-like “cover my arse” approach to regulatory legislation have created a credit monster that risks doing one day to the asset management and pension savings industry what the financial crisis in 2007/2008 did to banks.
My view is that shadow banking includes any type of lending which does not fall within the ambit of banking regulation and that is where the majority of high-yield investors – or lenders if one is more accurate in the use of language – sit. There was once a time when the bond world was split into investment grade – BBB- and above – and speculative grade, BB+ and below. That division defined where managers of discretionary funds – known as the widows and orphans – could invest money at low risk. Through clever structuring – we all remember sub-prime mortgages coming up as AAA – poo has been made to cut like butter and to spread like butter although, if one bites into it, it still is poo.
Perhaps the time has come for us in the West to stop playing holier than thou with respect to China and its banking system and ask ourselves where all our dodgy lending has gone and who will lose money if, as and when it goes sour.
Commercial bankers are trained to ask about any transaction “How much could it cost me?” while investment bankers ask “How much can it make me?”. Pushing lending out of the commercial banks’ reach and into the investment banks’ space – and I include index-addicted asset management in this – the regulators are lining us up for a second round of financial Armageddon. Not today to be sure, not tomorrow, maybe, but the land mines have been planted and nobody is keeping a record of where they have been buried. Boom!
Holiday
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. The BBC reports that today, Friday will be the busiest ever in British airspace as 8,800 flights are scheduled to take families to their manifold holiday destinations in the sun. A year ago sterling was at €1.20 on the nose. Today it is €1.1128. That is about a 7.25% decline in the pound and hence increase in the cost of the holiday. So should we not be expecting a decline in foreign travel rather than an increase? Yeah, yeah, we’ll put it on the credit card…. As with all reality checks, if you don’t want to know the answer, don’t ask the question or as the late, great Robin Williams said “Reality, what a concept!”. Dare I say it again? Boom!