The threat board is looking busy

Markets are digesting what’s been a fascinating week in terms of swings, tensions and threats. Everything from Supply Chains, Taper and Inflation is on the radar as speculative assets swing widely. Maybe it’s time to sit back, step away and take time to consider the macro issues of recovery, and the micro issues about how the pandemic has altered behaviours. The UK’s bounce bank loans could highlight how the world has changed as massive defaults are expected. Meanwhile, the AA goes straight to the top of my list of firms that should be wiped from the face of the Earth…

Blain’s Morning Porridge – 21 May 2021: The threat board is looking busy

“I don’t suppose it’s anything.. Are we expecting any planes from the East this morning?” 

This morning: Markets are digesting what’s been a fascinating week in terms of swings, tensions and threats. Everything from Supply Chains, Taper and Inflation is on the radar as speculative assets swing widely. Maybe it’s time to sit back, step away and take time to consider the macro issues of recovery, and the micro issues about how the pandemic has altered behaviours. The UK’s bounce bank loans could highlight how the world has changed as massive defaults are expected.

Meanwhile, the AA goes straight to the top of my list of firms that should be wiped from the face of the Earth…

That was an interesting week for markets. It’s little wonder it all feels a bit wobbly. What did we learn? At the macro level there are many things beginning to crystalise;

  • There is a clear inflation threat.
  • Expectations are torn between a massive boom on the back of infrastructure and climate-change spending, versus the possibility the pandemic recovery proves transitory and could quickly stall.
  • There is a clear danger of “Taper”; central banks bringing forward plans to scale back QE bond purchases and allow interest rates to move higher – normalising the economy.
  • We’ve seen a sharp rotation out of ‘disruptive innovation’ stocks into fundamentals and areas like renewables.
  • We’ve got potential destabilisation of market confidence as the highly speculative and hope-driven tulip markets in cryptocurrencies and SPACS look to implode.

It’s little wonder we’re seeing a lack of appetite for new risk across the market – although the Oatly IPO did well. Many investors are choosing to step back, watch and wait and see how this will play out. What’s the point piling into a stocks when the market momentum has stalled? Why rush into markets that seem to have run out of steam? Better idea might be to pause, wait and see what happens and what emerges from the ruin of speculative gambling memes, stocks, and fake currencies.

May is traditionally a time for market participants to step back, take stock, take a deep breath, and try to do some serious analysis figuring out STUFF… Like:

  • Which disruptive tech stocks are founded in nonsense, and which are genuine opportunities?
  • Which ones are well managed with deep defensible moats and weed out the opportunists will zero futures?
  • What are the implications for post-pandemic growth from supply-chain breakdowns in everything from cement to micro-chips?
  • What are the long-term implications of greatly increased government debt of economic activity?

However, it’s also time to dive deep into the micro-aspects of the global economy to figure out a key metric;

  • What are the real social and behavioural costs of the pandemic?

We’re all very aware of the damage done to people by lockdown, to their hopes, expectations, relationships, and their finances. For every person that apparently saved money during pandemic, there is little talk about the millions of workers who lost out, and their long-term prospects. I’ve a young friend who flies Dreamliners. He was made redundant, and took a job delivering groceries. He had to find the money to keep his qualifications up to date on the simulator. Now he’s waiting in line as airlines start to slowly rehire. That’s challenging in terms of the reserves of resilience he’s showing his wife and new baby – its tough. Really tough.

I’ve spotted two distinct trends through the past 16 months of pandemic. In our village everyone is friendlier and willing to help each other. But outside, I’ve noticed frustration and fury everywhere – like the guy who drove his car into my chum on his bike, ‘cycling too slow’ he said when arrested. Or the fist fight in the queue to get into B&Q. Or the belief that anything goes – why bother with social mores anymore..

Let me try to explain one aspect of that. When I was young, businesses going bust was not an option. It would destroy reputations. Today.. less so.

There is trouble brewing for British Banks. Chatting to a very well-connected bank manager y’day he told me tales of hair-raising abuse of the government’s Bounce Back Loans (BBLs). These were launched in the early stage of the Pandemic to allow SME’s to borrow funds at ultra-low rates to see them through the period of economic dislocation; 2.5% interest, first 12 months for free.

The banks are not at any immediate risk – the UK’s HMRC is standing security on the loans. But the banks will be expected to chase up defaulted loans. HMRC simply suggests to the lenders that they pursue any loan default via their normal methods, which would include threatening letters, statutory demands, and potentially court action and baliffs. “Whether or not the lenders will find this practical or possible to enforce over such a projected volume of defaults remains to be seen” says a company debt advice site.

There is no personal liability via personal guarantees on the BBLs, but if they have been raised by companies knowing they are insolvent, or to pay off personal loans or other guarantees, or the loan has been otherwise “abused”, then the banks will be expected to chase the borrowers.

The obvious way out for SME owners finding themselves swamped by the costs of the pandemic, the lost business, keeping up payments on previous loans and leases, is to declare themselves insolvent. The question is – just how many genuine honest companies will, and how many SMEs will have fraudulently abused the loans? And how many firms will now see insolvency as a costless exit?

My bank manager chum was telling me of BBLs taken out in March where the owner has already transferred all the cash out the business into personal accounts and declared insolvency. He said loan officers are being stonewalled when they ask about repayment plans – SME owners figuring that if everyone is defaulting, then the banks can’t chase them all..

The problem for banks will be knock-on. If firms default on BBLs, and declare insolvency then the problem cascades across all loans – crashing the credit quality of bank lending books. “There are hundreds of firms we expect will just give up…” he told me – talking about his small region. The micro issue of a host of SMEs collapsing has enormous consequences up the chain for employment and growth.

At the macro-level there are clear business and market risks, but if the pandemic has also impacted behaviours at the micro level and change how investors and entrepreneurs view responsibility – what does that mean for the future?

Meanwhile… a rant about the AA

The Modern World is difficult to understand. Something that has zero utility is worth billions, while utilities we rely on are disregarded.

It all became a bit clearer y’day when stuff went wrong in terms of my car. I was recently admiring a nicely restored 15 year Defender. It would cost me around £35k – and that’s mates rate. Defenders are lovely – if you never drive more than a few miles. My still state-of-the-art, 50K milage, extremely comfortable, middle-aged Range Rover with the big engine is worth less than half the Defender and can do absolutely everything it can do….

Except.. there is nothing you can’t fix on a Defender without a spanner, a persuader (hammer), screwdriver and a well placed kick. The Range Rover has more computing power than a bitcoin miner, and what goes on under the bonnet is a complete mystery that only a few adeptus mechanicus acolytes understand. (For anyone over 35, that’s a Warhammer reference…)

Things started to unravel after I took our puppy to his training class. While pootling along in the traffic the car had a blip – I could feel it losing power, and some threatening lights came up on the dashboard. I crawled along a few hundred meters and turned into the parking lot of the local station to call the AA.

They used to call the UK’s Automobile Association the fourth Emergency Service. There were films featuring brave AA patrolmen fighting through blizzard and storm to rescue the poor car driver with a flat tyre of battery. Their advertising claims they can fix most problems in less than 30 minutes. After a few moments their phone service sent me a text which linked to a whole series of questions about where I was, the nature of the emergency and my membership and contact details. It then responded that I had to call a number. So I did.

I hung on for 20 minutes waiting to be picked up. Eventually some utterly disinterested woman picked me up. Her first question was “who was driving the car…” I told her I was.. “Well you’re not covered. You’ve applied on your Mrs N Blain’s membership.” I explained that’s my wife and we have family membership.. No dice.

She offered me the option of joining the AA at some day-light robbery emergency rate plus a £95 first call-out and she couldn’t guarantee when the car would be picked up for delivery to a garage if there was a problem. Because I wasn’t a member, that would be an extra charge. Oh, and she couldn’t do anything unless it was my wife applying – and since she was in her office (on a call) my only real option if I wanted AA assistance was to join myself – on the emergency rate plus full rate call-out charges.

She was ever so smug.

I declined and explained I was going to write about them this morning and would be writing to their chief executive explaining why, after respecting the AA for my whole life, I would now be making it my life’s mission to destroy them. The last company I cursed like that was We-Work. They are doomed.

After calling round local garages and discovering there were no pick-up trucks available, I decided to try starting the car again. No sign of a problem. I drove it round to our rather excellent local Landrover chap – his yard full of everything Land Rover have ever made. He called me back couple of hours later after tinkering with manifold pressures and reckoning it might be an intermittent fault, maybe caused by the recent rain getting inside the electrics (not a great advertising coup for go-anywhere Range Rover), so he’s going to take it for a spin today to figure what’s happening.

Let’s see how expensive its going to be…

Five Things to Read This Weekend

FT – Sunak Ready to Reap Windfall from economic rebound

BBerg – Crypto-crash shows billions erased in flash liquidations

BBerg – The push to push up corporate taxes will end up cutting them

WSJ – Biden tax plan to target crypto

Torygraph – Revolution on Railways

Have a great weekend, out of time and back to day job

Bill Blain

Shard Capital


  1. Bill, I have a friend who owns a 53 plate Range Rover Vogue. Like travelling in a rather nice sitting room powered by a huge and thirsty petrol engine. Blessed with more unreliable electronics than it seems possible to build into one vehicle and forever throwing up weird mechanical wobblies. But, but, but he loves the beast and is mechanically ‘adept’ enough to keep it running. Over the last few years he must have replaced virtually everything except the body shell and engine block. Whenever I suggest he should buy something reliable (like my Mitsubishi Barbarian) he just gives me a strange condescending look. Oh well….

  2. If it’s a diesel it may be the particulate filter could be clogged up if only used it to pootle round. Goes into limp home mode. Needs a good blast on the motorway to activate the pyrolytic function.

Comments are closed.