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Blain: “The Question Is Who Replaces China As New Supply Chains Emerge”

Courtesy of ZeroHedge. View original post here.

Blain’s Morning Porridge submitted by Bill Blain

“Hang on, I’ve got an idea…”

June is bursting out all over, but we’ve still got 5 more days of May.

An exciting week in prospect – Trump in the UK, Xi in Russia, the US Employment Report on Friday. The ECB on Thursday. I would advise avoiding central London for the next few days – its likely to be full of demonstrators. I will publish the best original photos from Readers of the Trump Baby balloon… not because I think it’s particularly smart to be insulting our greatest trade partner, (perhaps our only trade partner if Brexit pans out as badly as it might), but because it’s kinda funny, and we need something to cheer us up.

I was going to scribble something about how Trump’s latest twitterstorm targeting Mexico highlights the risks to any and all emerging market economies, but he’s also taken India off the developing nations list, hinting they are also in his book of names to be “sorted”. Is it just random? Or is it part of some grand plan?

I met with a very senior UK/Australian strategist/economist on Friday, and over a very pleasant bottle of Lady Petrol we got talking about EM. While we both agree smart EM is good way to achieve non-correlated returns, we concluded the last 30 years of thematic EM investment based in BRICS was probably a nonsense – full credit to Jim O’Neill for coming up with the moniker, but they are such different and challenging economies it never made much sense to treat them as a unit. Each EM nation faces its own set of challenges – which often boil down to governance and law.

There is a massive opportunity out there. Which nations benefit from the New Cold War? Which countries replace China as new global supply chains develop and form? That’s a fascinating EM theme.

Mexico would have been one of my picks – but Trump is now going for the jugular. India? Not a chance – too much inequality, bureaucracy and too difficult to try to find partners. Brazil? Forget it. South-East Asia? I suspect Vietnam has higher ambitions. North Korea is tipped, but when ESG is now an investment requirement, who is going to buy goods built in Slave Labour conditions? Mention Africa and there is much shaking of heads and sharp dismissal – I suspect it’s too easy an option to simply write off Africa; we might be missing a great opportunity for affirmative capitalism to improve lives if we can see past the endemic corruption.

While it’s easy to talk about China being replaced – the who-by is a more difficult and nuanced call. Maybe, as more than one wag as suggested, China replaces China?

Or what about a new industrial revolution? Maybe the right investment theme is to identify opportunities in developed nations with the ambition to replace China directly through the innovation of new tech such as 3D printing, automation and robotics? Who has these abilities – which boil down to which economies have the engineering supply chains to provide the graduates to staff and run new manufacturing plant? Robotics is not going to replace us, but we do have to upskill. Sadly education in the Anglo-Saxon Occident is failing to produce the skills in the quantities required – time for a rethink on education I think.

Back in Yoorp, the ECB meet on Thursday, and although there is talk about revision to higher European growth, it won’t change the lower into infinity choices facing the bank. Speculation about who succeeds Draghi remains rife, but it feels there is a concerted spin effort underway to recast arch-sceptic and Bundesbank chief Jens Weidmann as a born again Europhile.. which further hints at backroom deals being done in Brussels on the other European top jobs. I suspect this leads to a very unhappy parliament if a cabal of leaders have already carved up the top jobs… but hey-ho!

In Markets, Bond yields are still falling and stocks are looking well wobbly.

Is the inverse yielding treasury curve really predicting a recession? Or is it dollar strength, a flight to quality, and the expectation the US is the most likely winner of the New Cold War that’s fuelled the rally in Bonds? Lots of analysis says a recession is on the way – fuelled by the current noise on trade war. That doesn’t seem to be a major issue for lots of investors who remain wedded to the belief low interest rates = strong stock prices… which is a curious notion.. Low interest rates suggest an economy in trouble, requiring support and nurture… not one that supports optimistic stock valuations..

The bottom line is who is going to pay my pension if bond yields are the square root of nothing? How I am going to live off dividends if I’m invested in a stack of tech stocks that will never ever make a profit, or across an economy when 10-years of zero interest rates means corporates are overleveraged, having converted their equity into debt to fuel buybacks?

Time to go back to basics and figure out what is wrong with this programme. Financial assets (listed stocks and bonds) remain profoundly distorted – which isn’t a reason not to trade them in the short-term, but long term you have to be asking some pretty serious questions.

I’m going to stick with non-correlated alternatives for the time being. There are certainly risks – not least in terms of liquidity, but if you can buy US$ bonds liked to performing assets that give an 8% return plus additional upside at maturity, then what’s not to like? Happy to explain!  

Meanwhile…

Later this week we have the 75th anniversary of D-Day. I was hoping to attend some of the events in my home village of Hamble. It was the setting off point for part of the invasion fleet, but we have a pretty packed schedule of business.

There is no shortage of D-Day heros, but three personal stories are worth sharing:

The legendary D-Day piper, Bill Millan, set off from Hamble quay. A few years ago She-Who-Is-Now-Mrs-Blain and I were delighted to sponsor a March of 100 Pipers in his honour through the village and met his son – who is a pretty mean piper himself. (I am a very bad piper.) Millan was apparently the only man to wear his kilt during the invasion, and the vision of him charging up the beach playing Highland Laddie with the Commandos must have been a stand out moment. There is a story the Germans didn’t shoot at him because they simply assumed he was mad! There is now a statue of Piper Bill on Sword Beach.

Or there is my sailing chum Elis, who as an ensign in the merchant marine wasn’t bound by the same age restrictions as the military forces – he may have been the youngest man in the invasion force. Or our neighbour Ted – as a young lad growing up in the village during the war, he told me how he spent the months before the invasion skipping school to deliver water to the invasion craft moored on our river. Every day he piloted his water barge up and down the river, until one morning they’d all gone.

On that note, back to the day job! 


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