Blain's Morning Porridge, submitted by Bill Blain

“Boring, boring… but 4:1?”

There is a pall hanging over North London this morning we shall not dwell upon.

Instead, let’s be gloomy about markets and prospects instead. With much of Europe out on holiday – which means the weekend has effectively started - stocks continue to wobble to the China trade war beat. We have the added spice of Europe being unable to coordinate any particular response to renewed US trade threats. US numbers look likely to be weaker – which will no doubt please stock markets on the basis lower for longer rates mean buy more stocks.. Oh dear – I suspect they are fooling themselves.

Listening between the lines, Special Counsel Robert Mueller pretty much as said Trump should go to jail when his presidency is over, but the Democrats will now be utterly sidelined trying to impeach him instead of coordinating proper policies on care, education, health and planning how to unseat him. Nothing is likely to change. 4 more years…. Here it comes.

Back here in Blighty, I’m getting more and more depressed about the prospects for the UK. Boris being sued for lying while in public office? Heaven forbid! The courts will be jammed with politicians for eternity. Please put me on the jury!!!

Up in the Northlands, Wee Nicola Krankie has confidently laid out her plans for Neferendum No 2 (or is it 3?) on Scottish Independence. She is a gallus, naughty wee minx; stirring up the pot just as we looked for it to settle. She is not daft. Her plan plays straight into a UK general election – we can guess what she is willing to promise Corbyn in return for his support for a second Scottish Vote. Labour could well lose a general election, but with the Calendonian hordes/MPs on his side, he could still end up in No 10! Wouldn’t that be worthy of a film – blue-arsed Scots descend on Westminster en-masse to demand they can leave.

As I’ve said many times, you really cant make this up..

Of course, all the daily stuff is just noise. More nonsense for us to cut through and wonder what it actually means. The bottom line – and sorry if it sound like I’ve said this before – is that only 3 things actually matter Long Term.

1. Trade War is becoming a Cold War.

The escalating China/US conflict has enormous implications for global trade and is likely to scale back global growth significantly. It could change utterly the current Tech supply chains, concentrate demand on compliant products and lead to a massive realignment of trade flows.

Some say the world will coalesce around 3 groups: the US and Allies, China and its Asia Co-prosperity sphere, and non-aligned including Europe. I suspect it's more likely to be a US Pacific Rim anchored on Japan and Korea, with an aligned Europe. The economic efforts will be to undo Chinese debt diplomacy in Africa and Middle East, and determined efforts by both sides to woo India and SE Asia. Its going to be fascinating. Tough for economies like Australia that need China to maintain their current growth, but it’s the opportunity for pivot. That’s what happens to supply chains.

There have been a number of articles quoting “Thucydides Trap” – but I have to credit a risk manager at L&G for pointing it out to me 2 years ago. The trap it refers to the Spartans deciding the only way to constrain Athens growing power was to take them out – leading to years of Greek unpleasantness. A Harvard professor dug back into the histories and came out with 16 other classic situations where a long established incumbent power faces an emerging power. He concluded there is a 75% likelihood of war (hot or cold). It looks like the US vs China will be example 17.

2. Monetary Distortion

The key issue since the post Global Financial Crisis has been monetary distortion – the effects of QE, artificially low interest rates, and subsequent impact on prices and price inflation across all financial assets. The unintended consequences of QE have still not been addressed, and Central Banks look trapped in low inflation/low rate impotence. They are struggling to put any momentum into economies like Japan and Europe. Where do we go from here? Modern Monetary Theory looks to be a convenient log to cling to, but I reckon we ought to check it isn’t just a resting crocodile!

3. Climate Change and the Environment

I was having an “argument” with an old chum about climate warming yesterday. I came up with the easy simile we are like the Frogs in the Pan of Water. The smarter frogs, the scientists, are warning the water is getting warming because their instruments show it to be so. But the Big Orange Frog says he can’t feel any change, so there is nothing to worry about and don’t change anything.

But climate change, and its effects on markets are real. We know fuel prices will be impacted by new rules governing carbon scrubbers and clean fuels at sea. We are seeing the price of Carbon offset go through the roof in economies with governments are enacting carbon taxes to clean the environment. We are going to see the costs of waste treatment to clean the oceans escalate dramatically.

There was a great line in an article I was reading in Forbes on Climate Change Investments- “Carbon will be treated as a costly waste product that needs to be captured and stored.” Its just one of may opportunities..

The challenge for the whole investment community is to strip out the current political noise, and focus on how the world changes and what investment opportunities it throws up as a result of a 1) Global Trade Cold War, 2) Ongoing Financial Asset Distortion and the 3) Long Term Implications of Climate Change and protecting the Environment. Easy, eh?

Out of time.. and time to save the world.