The Silly, the Uncertain and The Time to Look Elsewhere moments around us..

Blain’s Morning Porridge – September 27^th 2021 – The Silly, the Uncertain and The Time to Look Elsewhere moments around us..

“The heat of autumn is different to the heat of summer. One ripens apples. The other turns them to cider.”

This morning: It’s silly season in the UK as the queues lengthen at petrol stations, raising fascinating questions about how the pandemic has changed behaviours, the pricing of corporate credit and equity fundamentals. In Europe the power vacuum left by the last days of Merkel is set to deepen. China’s property meltdown should be making investors look elsewhere and into new Emerging Markets for future growth.

On Friday I asked where the equinoxal gales were? They are here this morning.. Puppy-dog was having a great time as every falling leaf became a new toy to be chased and ripped to shreads…

Silly?

Silly sums up the mood in the UK as the entirely unnecessary Petrol Shortage dominates the news flow. Silly is confirmed by the number two news story being contestants on Strictly catching Covid! Silly is No 3 story being some bubbling Irish Whack-***k player tearfully apologising for being beaten by the Americans. This morning I drove She-Who-Is-Mrs-Blain to the station – and looked into Tescos. There was a 2 hour queue for car-juice at 6 am. With 30 miles of diesel left, the Rangey will be sitting on the drive till this is resolved.

There is no petrol shortage but now we have one. How did it happen? According to the Brexit supporting Torygraph a Remoaner pressure group started the rumour the forecourts would soon run dry because of the post-Brexit shortage of HGV drivers. HGV union reps are saying the warned the Government this would happen months ago.

The fervid mood of imminent panic is likely to darken. Expect a run on Christmas. When we can’t get our turkeys it will be yet another government failure to anticipate a looming crisis. Boris’ will be at personal fault as the blonde Grinch that sank Christmas. The misery quotient will darken and consumers will see it as all further evidence of deep weakness in the economy – political failure capping economic malaise and imminent stagflation. They are already changing their consumption patterns in anticipation of further supply chain shortages, energy price inflation, tax hikes, the ending of £20 per week universal credit and furlough programmes triggering a wave of redundancy across the nation.

The brutal reality of the roots of the UK’s cascading logistical crisis are probably behavioural.

The functioning of the economy is the sum of every transaction taking place within it. Just like the proverbial Hong-Kong butterfly, small behavioural changes can trigger massive societal consequences. I suspect we will soon discover that during the pandemic a large number of highly trained, qualified HGV drivers and trainees worked out they could earn more, work fewer hours and spend more time with their families by doing deliveries for Amazon and other parcel companies.

That’s equally true across the hospitality industry. Who wants to work in a minimum wage environment, running larger Covid risks, being harassed by customers while the owners nick the tips? There are better jobs elsewhere.

To get people to deliver food to the supermarkets, and staff to serve us.. we need to make their jobs rewarding and remunerative. That is not the case today. And it probably means costs will rise – triggering further consequences. Happy well paid restaurant staff are unlikely to remain happy when their workplaces close because no-one can afford to eat out.

The bottom line is credit investors need to be thinking about what the shortage of key staff means for future profitability of established sectors, and what the lack of profitability means across industry for new firms. In terms of equity fundamentals – we’re all aware the world has changed faster in terms of tech adoption, but now we are seeing how quickly works and consumers respond to a changing economic landscape.

Uncertain?

This morning’s photo is of German politicians. Can you name them? No? You probably can’t.

A German chum tried to explain German politics to me last week. First thing is – there is nothing to worry about – Angela Merkel isn’t going anywhere soon. Second thing is not to worry about the difference between left and right between SDP and CDU – they are equally badly led by party bureaucrats, and may yet come to a power-share. The ones to worry about are the Greens – and they will be the likely King-Makers, and the AfD who are a menace.

It will take months for the Germans to do the backroom deals necessary for establishing the next Government. Olaf Scholz of the Social Democrats looks to have won the largest share of the popular vote by a gnat’s crotchet, but the Christian Democrats Armin Laschet is also trying to put together an electoral pact – despite his party’s worst ever showing. All of which gives enormous power to the Greens, FDP and the far-right AfD in making demands of any potential partner.

Key for markets is how pragmatic the coalition building process will be. Merkel’s government brought exactly the right kind of dull, boring and predictable negotiating stance to Yoorp – facilitating the rise of Brussels hegemony and the empowerment of the ECB post the 2008 banking crisis. Germany’s willingness to support debt mutualisation and state aid across the EU is not a given under a new coalition. While German politicians wrestle a coalition agreement into place – they aren’t addressing the issues challenging Germany both domestically and in global markets. Meanwhile Europe lacks a figurehead – which is probably great news for Christine Lagarde!

Time to look Elsewhere?

As the Chinese property sector unravels, there is a very interesting quote from Goldman Suchs on Bloomberg: “The risks of contagion and further slowing in the property sector are genuine… for the rest of emerging markets, what matters more is the negative impact on Chinese growth, and by extension commodity prices, and whether policy makers step in to offset those downside risks.”

There is a general assumption that if China slows, then the rest of the developing world will slow around it. With banks now predicting Chinese growth tumbling as low as 4% in coming years (BankAmerica just cut its estimates from 6.2% to 5.3%), that’s bound to impact commodity prices. Its bad news for oil and Australia, but will it stop Asian nations like Indonesia, India and Taiwan grabbing an increasing global market share – undoing the perception China leads Asia?

The perception China is Asia and will continue to dominate global growth is widely held across markets. It’s been fuelled by China’s Belt and Road development financing – that China outward investments give it control over markets from the Yellow Sea to the Med. The reality is China has pumped billion of debt-diplomacy cash into the Indian Ocean and Africa – but will see only limited return on much of it – especially as its own economy restructures. Belt and Road feels distinctly yesterday.

Opportunities across Emerging Markets are likely to get far deeper analysis in coming years. One of the nations the Goldman report references as a likely beneficiary of a defocus on China is Egypt – it’s the most populous Arab state with an economy that weathered Covid well. Its also attracted support from the IMF for its development of “human capital” – raising the prospects for the population while successfully industrialising and building new infrastructure.

The widespread perception in the West towards Egypt is that it’s a nation with ongoing political challenges, an economy hamstrung with red-tape and potential corruption, with a high degree of potential instability. It might be time to do a rethink.

In my day-job financing real-world real-assets I’m working on a massive Egyptian deal – as a result I’ve been surprised at the way Government and the economy is adapting. As the Suez Canal incident earlier this year showed, it’s also a key economic junction. I can’t say anything else about the deal publically at the moment, but if you want to learn more – give me a private shout.

Five Things To Read This Morning

WSJ – Credit Investors Follow The Workers

BBerg – Europe’s Energy Crisis Is Coming for the Rest of the World, Too

BBerg – If Anybody Can Lead Europe After Merkel, It’s Super Mario

FT – Top Investors split on direction of “tempestuous” China markets

WSJ – Corporate Buyout Loans Near Highs of 2007

Video – Blain’s Morning Porridge on UK Green Gilts

https://staging.morningporridge.com/videos/

https://www.youtube.com/watch?v=tI2mLGKRRu4&t=19s

Out of time, and back to the day job,

Bill Blain

Strategist, Shard Capital