Blain’s Morning Porridge – Sept 23 2020 – Laughing Shall I Die

“I would worry less about the gods and more about the fury of a patient man.”

As the market sort of rallies on the back of Fed Head Jerome Powell suggesting the lack of US stimulus might be a problem, thereby anticipating a new stimulus will come – for that is the way markets think. Meanwhile, there are a number of themes discernible amongst the noise that is the Market this morning…

Follow the money: Ragnar acts…. 

The Norwegians are pivoting their $1.15 trillion pension fund away from European stocks towards US equites. The FT says the Nogs are going to cut Europe from 33% to 26.5% while raising US allocations to 48%. “Better represents the distribution of value creation” said the Minister of Finance. It makes sense: US stocks represent some 65.5% of global market cap. Europe? Not so much. Yet Europe was 50% of Norway’s equity allocation as recently as 2012.

The timing is significant. There is much talk about how overvalued US stocks look and how Federal government stimulus, over-easy policy by the Fed, and Donald Trump’s constant talking-up of US Stocks and tax-handouts, have boosted US valuations and driven the continuation of a 11-year bull market. On the other hand, it’s been NIRP (Negative interest rates), QE Infinity and “do-what-ever-it-takes” that’s stopped European stocks and sovereign debt tumbling into the abyss these last few years.

The US has posted positive growth. Europe… less so.

Whatever, it’s an “Ouch” moment for Europe. The announcement was wrapped up in diplomatic flannel, but it’s clear the Nogs don’t have much faith in European recovery prospects, or believe Europe is relatively undervalued compared to the US – a common investment theme in European Investment Bank “research”in recent months…

Interesting fact – during the last unpleasantness with Germany, the Norwegian Government based itself in Edinburgh, at Riccarton which is now Heriot-Watt University’s campus. As a result my student days involved carousing with lots of wild Nog students – they are brilliantly bad and funny people. Celebrating their national day was something on an eco-hazard. I called one of my Norwegian chums to ask his view on the portfolio shift. (He’s a banker.. but definitely would have been a Viking in a former life.)

He told me the “team” (the fund and politicians) are concerned about the Norwegian economy being too closely aligned with the faceless bureaucracy of Brussels the reality of the Japanification of Europe and low growth prospects. They need growth to continue the shift of their economy towards a more global and sustainable perspective. Politically they remain neutral.

It’s fascinating to get an outsider’s view. There are three problems in Europe likely to lead to continued underperformance relative to the US and Asia:

i) The inability of EU member states to reconcile domestic policy agendas with real fiscal union hampers effective recovery at the regional level. There are serious issues in terms of delivering regional policy goals – including endemic corruption in parts of East and South Europe. These need strong domestic government, rather than centralised power projection from Brussels.

ii) The ECB’s ineffectual and unreliable tinkering with increasingly ineffective monetary stimulus is doing little to address long-term growth and employment outside Germany. Its simply sustaining what is broken, rather than replacing it. The current debate about ending QE Infinity early sums up the lack of direction and clear objectives within the ECB.

iii) While Europe is sinking, there are more attractive relative opportunities elsewhere. It makes sense to move.

There is a fourth issue, which is apparently causing concern at the political level. Some Norwegian politicians are increasingly “unhappy” at the way Norway is increasingly painted as some kind of vassal state by Brussels in terms of being “subject” to EU laws and paying for the privilege of access. They see the EU’s domestic leaders as distracted and focused internally on issues like the pandemic, immigration and employment, while the EU is effectively run by an unelected clique of officals in Brussels focused on the preservation of the union – which isn’t reflecting tensions building up between the states and the union. The way the relationship with Norway has been used to justify the EU’s position re Brexit negotiations has particularly jarred some politicians in Oslo.

While one Norwegian banker is not representative of the entire nation – he makes a lot of sense. It’s a single perspective, but the Norwegians have faith in the global economy, but not so much in Europe.

European Banks

10 years ago I wrote that HSBC was my “banker stock”. It was then the European bank we’d always be able to rely on and the one European financial institution I was confident of getting my money back from. I invested heavily in deeply discounted HSBC pref notes at the depth of the 2008/09 banking crisis – confident they wouldn’t need a bail-out. It was a great trade.

Today, HSBC heads my list of stocks to avoid – utterly. It’s facing an irrecoverable multiple whammy of irreconcilable issues:

· It’s going to take massive Pandemic bad-loan provisions – the $11 bln it was talking about earlier this year are going to look a massive underestimate.

· It’s a tech dinosaur plagued by legacy systems that need replacement and reinvention and internal bureaucracy – while new nimble digitally based Fintechs are set to eat it’s lunch.

· It’s got the looming political crisis in Hong Kong, the source of the bulk of its profits that have subsidised its lacklustre global efforts for years. It’s likely to suffer massive disruption if the HK$ currency peg breaks, trigger massive corporate defaults. Its corporate reputation is tarnished as a result of the China trap.

· It’s top of the Chinese government sh*t list as the easy name to hit. It’s likely to be put on the new “unreliable entity list” for perceived collusion with the US over Huawei and as a bargaining chip.

What makes me smile is HSBC’s claim to be the best bank to advise clients on ESG (Environmental, Social and Governance issues.) That’s a bad joke. ESG is not just about the environment – it’s about how firms treat people, customers and staff. HSBC is the only major UK bank that is taking advantage of the UK pensions act 2011 to reduce contracted staff pensions via clawbacks. It’s shaping up to be an enormous “Social” ESG failure – a bank that apparently is willing to inflict harm and damage on its own staff at the end of their careers doesn’t care much for stakeholder society. And it’s a reason HSBC service is so appalling – staff morale has collapsed in the face of redundancies and the pensions issue. Clients looking for ESG advice should be looking at HSBC as a warning… not a teacher.

As for Governance, that’s another terrible black mark. For the last 12 years HSBC has been walking on regulatory tenterhooks – terrified if it made another mistake on money laundering then it would attract the full ire of the SEC and other regulators. In the noughties it made the mistake of assuming putting the Hexagon logo on some newly acquired Mexican banks somehow made them pristine. Nope. They simply legitimised drugs money. For the next decade their board was compromised by the fear of another mistake. It caused management paralysis from the top – culminating in a serious of mistakes like the appointment of the short-lived John Flint as CEO and the disastrous continuation of internal appointments to senior roles. The genetics of HSBC’s management remain about as diverse as a family of one-eyed hillbillies – but considerably less talented.

And now… it turns out HSBC “multi-year journey” to cleaning up its act re money laundering and other nefarious banking practices were equally dire. As the BBC highlighted on Panorama earlier this week – it deals with some shady characters.

HSBC remains a massive sell for the reasons listed above. It’s not a recovery stock. It’s not going to be a bargain – because every single one of these issues is going to get worse. Not better. It’s a massive short.

Tesla Battery Day

I don’t need to say much about Tesla’s much anticipated battery day. As we all know Elon Musk is a master of the “Overpromise and Underdeliver” school of stock-market hype. His preferred mode is to make the same promise again and again, state the downright obvious as if was some deep insight, and keep saying these things again and again in the hope investors don’t notice and think it done.

Yesterday’s battery day saw Tesla announce they will make batteries cheaper and better. They will launch a $25,000 affordable car! Fantastic. What stunning insights into Tesla’s path to riches.

Darn… I can’t just leave it like that. Tesla admitted it doesn’t actually have new battery designs or a new manufacturing process to make them. Musk said “We do not have an affordable car. That’s something we will have in the future. We’ve got to get the costs of batteries down.”

Tesla is a serial underdeliverer. Three years might be thirty in Musk-speak. The stock crashed 6% following battery day. Wake me up when it is down 80%. At that point I’m a buyer.

Five Things too Read Today:

FT – How close is a coronavirus vaccine?

WSJ – China’s Attack on “Unreliable Entities” Is a Double-Edged Sword for Beijing

WSJ – Tesla Battery Day Spotlights Elon Musk Plan for $25,000 Electric Car

BBerg – ECB Must Limit Emergency Powers to Temporary Crises, Mersch Says

Thunderer – New Covid curbs “fatal” for business

Out of time and back to the day job…

Bill Blain

Shard Capital