What is the Plan in Yoorp?

Blain’s Morning Porridge – March 12 2021:  Whats the Plan in Yoorp?

“Fog in Channel. Europe cut off.”

This morning: What is going on in Europe? The political and economic options are limited, the outcomes predictable, and none of them are good. But don’t worry – Europe can always blame the UK and AstraZeneca.

On the back of news of collapsing trade between Europe and the UK due to Brexit, I wish I could work out what’s going through the collective mindset of the European Commission and the European Central Bank regarding how they now intend to turn Europe into a major growth economy of economies, create jobs and wealth, foster social cohesion, and become a third force for moderation in geopolitics. What’s the plan I wonder… do they care to share it?

To give Europe some credit, it’s done remarkably well holding together these last 12 years, creating an increasingly connected European state without the tedious need of anyone actually voting for it.  Political and Economic compromises have been made, but the whole thing has muddled through rather well – give or take suboptimal growth being hamstrung by the construct of the Euro.

Since 2012, when Europe’s central bank finally cottoned on to the crisis then enveloping European bond markets, the ECB has have had but one policy: keep Interest Rates at zero and below, and wait, hope, and pray for recovery and inflation to discount down the debt. They are still waiting. As far as I can work out…. that’s about the sum of the economic side of the plan. Hope is never a strategy, and monetary mismanagement without some fiscal common sense to back it up looks an unlikely route to success.

On the political side of the equation, for years the EC bumbled along as a rest home for “shunky retreads”. (I just love that description by the Australian Ambassador of the qualities required to become one of Europe’s unelected leaders.) Its’ main purpose was to ensure everyone got a fair chance to milk the teats of Brussels tax-free salaries and ensure the Germans didn’t cotton on the fact they were paying for much of it.

Meanwhile, the big dogs of European politics: Merkel and various Frenchmen and occasional Italian got on with the real business of Europe, which was broadly the Germans making quite clear they weren’t going to pay for it – while everyone else tried to ensure they did. The poor Brits really didn’t get it – their role was to pay and keep paying.

But things are gradually changing. Brexit has got the EC retreads all excited. They are very keen to show they have powers and are not afraid to use them…. They intend to keep punishing the Brits to dissuade any other nations in the Euro gulag from any thoughts of a similar exit. And, they are doing a damn fine job of it too…. Europe must be terribly pleased as Brussels announces its latest quotas of not letting in British fish, meat, or anything else… and sets new levels of Beastliness to Brits – B2B as its known in the Kommission.

Everyone thinks it was the sainted Mario Draghi saying he would magically “do whatever it takes” that was the trick that saved Europe and the Euro. In reality it was a far more complex game of financial card sharping and a masterclass in political distraction as he persuaded the Germans to support it.

Back in the early 2010s Yoorp was in deep crisis. The markets confidently expected the Euro to implode. Greece was a basket case. Italian bond yields were heading stratospheric and utterly unsustainable. Ireland was going to default. Portugal was on the verge of bankruptcy. Spain, and even France looked wobbly. We talked about the impossibility of the Germans ever agreeing to a bailout of Club Med.

Then came the first genius moment: the ECB announced it was making unlimited repo facilities available to banks.

I was on a Bloomberg, (or maybe it was CNBC?), show as it happened. I immediately opined it was a buy signal for European government bonds. The German bank analyst sitting next to me demurred and told the audience that was rubbish, “this is a carefully considered ECB plan to stabilise and assist banks” he sagely pronounced. After all, that’s exactly what the German politician being interviewed had just said.

I shook my head and smiled in that way that clearly conveyed he was a simpleton. I  explained: “Bollchocks…. Here’s how it plays from here: banks will use the repo to use their government bonds as collateral to buy more government bonds, which they will use as collateral to borrow even more more money to buy more government bonds to use as more more collateral. Simples. This is the moment to buy European govt bonds.”

The analysts flustered and fluffed and came out with some line about the direct funding of European sovereign debt was not something the ECB would do. I shrugged and said.. sure… but watch bond yields and Bund spreads vs France, Spain and Italy. We did, and we’ve been watching them ever since and making lots of money off the ECB’s magic money tree.

Well done Draghi. It largely worked, but the one thing the magic money tree has most definitely not done is drive any European recovery, jobs, yoof employment or social stability.. But hey-ho, the ECB says it will happen… if we just unlock some inflation.. and don’t tell the Germans.

We are now into an era of ECB never-ending QE Infinity. Yesterday Christine Lagarde, ECB head girl, continued in the same vein as her predecessor and now Italian prime minister Draghi, pulling the wool over the Germans eyes. She is accelerating purchases under the €1.85 bazillion Pandemic/Permanent emergency purchase programme – buying back bonds at a “significantly higher pace” in coming months/years/centuries to limit any rise in European bond yields.

Yep. It’s really, really important the ECB keeps European bond yields low. Because low bond yields have done so much to generate zero growth, create zero jobs, and done nothing to solve Club Med yoof unemployment. As Europe’s collective growth rate has limped along for the past 10-years, zero interest rates, ECB limits on spending and ECB policies have achieved the grand sum of a word that sounds like duck all. But it has held the Euro together and keep the ECB biggies in tax-free jobs.

Almost as an apparent after-thought the EBC has effectively seized financial sovereignty from European states. Keeping interest rates unfeasibly low has kept the Euro nice and cheap for German exporters, while crushing the hopes of other European nations to adjust their economies to catch up Germany. The ECB also controls the disbursement (through the European Commission, so un-ably led by VDL) of the €750 bln recovery funds.

450 million happy smiling flag-waving Yooropeans are eternally grateful to the ECB for its dedication to keep doing the same thing in the vain hope it might finally work. Just like they are delighted with the success of the EC in managing Yoorp’s vaccine rollout.

Facts is facts… but Europe is not about to knock the socks off with the kind of Economic recovery we are now seeing in the US. Even in Brexit Britain recovery took a 3% dunt from the Christmas lockdown, but we’re on course for effective economy-wide vaccination and reopening this half of 2021.

Of course, we won’t be going on holiday in Europe, because they will be into a fourth wave and banning us from their beaches, even calling it the British variant, to make quite clear it is not the EC’s fault for its vaccine rollout or the ECB’s ongoing monetary hopes.

Meanwhile… Back in Covid land…

I was surprised when a headline flashed across the screens: “Denmark Suspends AstraZeneca Vaccine Over Blood Clot Concerns”. Wow. That must be serious. Something must be well awry for the Danes to be concerned. Europe’s most laid-back nation doesn’t get het up about nothing – or so I thought.

The Danes are sensible people. I doubted they would be given to slavishly following the dictates of the EU Brusselocracy to talk down the UK’s successful vaccination programme. I immediately called one of my sailing chums, who in addition to being a top vascular surgeon, recently manged to get together the 26 separate pieces of paper required to evidence his qualifications to stick needles in people’s arms as a Covid Vaccinator.

He was equally surprised, commenting how unlikely it would be if Denmark’s tiny population revealed a serious blood issue which hadn’t been evidenced in the over 15 million dozes of the vaccine administered in the UK. Then he called back to say there had been 2 cases and death of an Austrian with multiple thrombosis 10 days after getting the AstraZeneca jab.

The fact is a 60-year old Dane has died after getting the shot from a blood clot. 5 million Europeans have been vaccinated with the AstraZeneca drug. There have been a shocking, staggering 30 cases of obstructive blood clots among these 5 million. Which is a statistically incoherent connection – it’s absolutely in line with what you would expect to see in the general population said the European Medicines Agency, adding the benefits outweigh any risk.

But with all the fake news surrounding the efficacy of AstraZeneca, the drug company’s difficulties in delivering doses, and Europe’s bumbling vaccine rollout… Give a good dog a bad name and it sticks – would seem to be the European policy. The Danes have banned it for at least 14 days – to be on the safe side.

For the record, I recently got the AstraZeneca jab and had no side effects. This weekend, in protest at the Danish decision, I shall be cooking vitamin Pig from this Island for breakfast, and not doing anything with lego… and to show just how concerned I am I won’t watch anything with Sandi Toksvig in it. (The delightful and very funny Danish TV presenter is a national treasure here in the UK.. but she’s on the wrong side now…)

Meanwhile, there are over 10 million doses of the AstraZenaca vaccine sitting in the US because the US has not approved it. The American’s have declined to let the drug maker deliver them to Europe. European Commission Kommissars say that is clear evidence of the UK deliberately stopping the export of the vaccine to Yoorp… apparently.

A bunch of things to read, watch and listen to…

Blain’s Morning Porridge Podcast is back – you can listen to it form the website and it will be up on Spotify and, soon, Apple!

Shard Lite-Bite Video: Bill Blain and Shard CIO Mike Hollings discuss markets..

Spectator: The SNP’s foray into High Finance has come at a big price

FT – UK Exports to EU slump as Brexit hits trade

WSJ – Grab in talks to go public in $40 bln SPAC

Very out of time, have a great weekend (the first weekly Morning Porridge round up will hit your desk tomorrow!) and its back to the day job for me..

Bill Blain

Shard Capital