Blain: “All That Matters Now Is How Trump Will React”

Blain’s Morning Porridge, submitted by Bill Blain

“Quit behaving like a family and become more like a team. If you don’t perform, you don’t stay on the team…”*

In the wake of missiles and plane crashes, it’s likely to be the kind of day market analysts refer to as: “fast evolving”. 

The big news is about Iran shooting off a bunch of dumb missiles at well prepared US bases in Iraq.  But we’re not asking questions about how an ant of a country like Iran hopes to hurt the American Elephant… The uncertainty is all about how the American President will react.  And if Trump does decide to go full Travis Bickle and retaliates – what signal might it send? Small terrorist-harbouring nations assuming asymmetric warfare means they are protected by the basic decency and the established law and order of the West… will have to think again. 

It’s going to be interesting… 

After yesterday’s histrionics and crowd stampede at the funeral, the Iranians had no choice but to respond to the Soleimani execution.. Firing fairly inaccurate ballistic missiles off into the desert at well dispersed airbases makes lots of noise and looks spectacular – but are unlikely to have caused much damage or casualties (unless both sides got unlucky.)  

Trump can shrug it off, look statesman-like, and get on with the main business of the November election. Or maybe something dramatic – say the USAF carpet bombing Tehran with leaflets just saying… “Next Time..”  That’s probably over-subtle for Donnie. 

My bet is that whatever happens next, markets will quickly shrug it off…. The chances for de-escalation look high, but…. 

Gold

It’s not often I write about Gold.  However, so many articles are talking about why we might be in a Gold Bull Market, it’s probably worth thinking about.  Yesterday I was chatting to my commodities colleague, Ashley Booell.  Last year, he predicted Gold would enter a bull phase, calling for$1580 in mid 2019 – which it hit.  Now his target is $1630, and if it builds a “proper foundation” there, then a $2000 scenario is possible. 

Ashely says: “A lot of people describe gold as a hedge against inflation and a store of value. I’d go further by saying that gold is insurance against market and geopolitical insanity. And right now, things are bloody insane.” He predicted gold could rally on the trifecta of market risk, geopolitical risk and recession risk. “Have these gone away? Hell no!” he told me. 

“They’re like the three parts of a trident wielded by a very angry titan that can’t wait to shatter the financial system. But jokes aside, it is rare for these three risks to be so strong at the same time. Each of them can easily add $ 100 to gold’s price if things get bad.” 

Sure enough, Gold hit $1620 last night before sliding back a tad.  

Aside from reacting to market events, what is the point of Gold? Its only inherent values are its scarcity and an indicator of inflationary threats.  It yields diddley-squat – just like a bund! It massively over-performs in time of panic and meltdown, and massively corrects as calm is restored.  Its primary investment purpose is as an inflationary hedge, but that vanished following the death of inflation after central bank monetary experimentation – leading to a price collapse in 2013 when it became clear financial asset inflation was de-linked from real world deflationary threats as a result of QE and other policy mistakes. 

Why is Gold now rising? All risk assets rose through 2019 on the back of easy monetary policy, and Gold got dragged higher in the slipstream, and because it might prove a hedge if the Central Bank confidence rally broke. The move this year is largely ascribed to unpredictable US policy and potential instability in the wake of the assassination of General Soleimani. 

But… there is also an element of the rise that is due to increasing signals that rising inflation expectations are returning. There are similar signals in rising market activity in inflation linked bonds and hedges. Is Gold telling us something about inflation we don’t understand or haven’t spotted? 

Boeing

The other big news overnight has been the story about a B-737 800 crash outside Tehran. It was a relatively new plane – but a precursor model to the cursed 737 Max. It was operated by Ukraine International Airways which has a modern properly maintained fleet, and a decent track record. The fact the aircraft suddenly vanished as it climbed after take-off around 9000 feet with no emergency called is worrying.  The shout it was an accident looks suspiciously swift to me. It could be weeks/months before we know what happened. 

Boeing itself remains in the news. There are rumours Warren Buffet has been building a stake in the troubled planemaker. That’s intriguing. With nearly 400 finished B-737 Max aircraft sitting useless on the tarmac unpaid for, sacking the CEO over Christmas, rumours the company will need to raise money from the bond market, serious questions about its management structure, it looks like a company in serious trouble. This great article in the WSJ – Botched Predictions, Strife with Regulators Cost Boeing CEO His Job – is well worth a read. 

What makes Boeing so interesting? Is this the right time to buy? The stock seems incapable of going much lower. Its not just that its core to the US military industrial complex, a massive multiplier across the US economy and the biggest stock on the Dow. It’s attractiveness is all down to its “Moat”. 

I suspect Moat will become the most overused word of 2020 – it basically means how entrenched and resilient to competition a company is. Boeing has a very deep and wide Moat around itself – it will take years for any competitor to build up the logistical scale, product range and knowledge, and relationship strengths to compete head to head with the Boeing/Airbus monopoly. 

On the other hand, Boeing’s decision to not build a 737 successor years ago, and the fact it cash strapped today opens the chance for someone to think about trying to bridge that Moat. Boeing will need 7 years and $30 bln dollars to introduce a new plane. Anyone fancy a go? 

· Anyone intrigued by this morning’s quote – it’s taken from a comment by former McDonnell Douglas CEO Harry Stonecipher. It’s an old story, but important to understand in terms of where Boeing went wrong. Famously when Boeing acquired rival airplane maker Mcdonnell Douglas it became referred to as “Harry buying Boeing with Boeing’s money”. The engineering centric ethos of Boeing was lost as McD costcutters took over. 

Carlos Ghosn

The other other big event today will likely be the Carlos Ghosn press conference. It’s well worth reading the story of his escape, but I can’t wait to hear him stick it to the Japanese and Nissan.  But, really, what will it tell us? That Japan is different and does things differently?  That is hardly enlightening.