Bill Blain: “I’ve Got October 12th As The Day The Big Equity Crash Occurs”

Thursday, August 31, 2017
By Paul Martin

by Bill Blain of Mint Partners
Aug 31, 2017

The big risk? The ECB taper… what follows?

“It will not always be summer; build barns.”

Today’s sermon is about complacency.

Yesterday, I read in a Fixed Income analyst comment something about the: “robust macro backdrop ahead of the ECB meeting on Sept 7th creating a solid base for risk assets and prompting a steady flow of borrowers to get funding programmes underway..” Sure enough, there is a feeding frenzy developing in the new issue bond market…

Meanwhile, my stock picking chartist Steve Previs warns the gauges he follows, like put/call ratios and VIX, reflect an “overly confident” market. He thinks a top is coming.

Personally, I’ve still got October 12th at 10.30 in the morning tagged as the moment the big equity crash occurs and I get out my buying boots ready for the opportunities that will follow. (Why Oct 12th? Why not..? The date has a nice ring about it as day of manic market mayhem – and the following day is a Friday the 13th… meaning it will panic folk even more!” Mwwwhahahaha..! )

In the fixed income markets I think we’re glossing over the likely pain to come courtesy of the ECB.

What happens post the next ECB meeting, (or more likely the ECB meeting after that, or the one after that, based on the ECB’s predilection for kicking the can down the road)? Forget inflation and growth nonsense.. at some stage the ECB has no choice but to ‘fess up how it’s actually been mutualising European debt, and cut its buying programme. We’re all talking about European normalisation, wondering when, but when it actually happens, please explain exactly how that “solid base for risk assets” works.

If I was wearing a corporate treasurer hat, then I can understand exactly why I would want to fund today – rates are still cheap. If I have to wait until the ECB announces its scaling back its buy programmes then I’m potentially in trouble. At that point, which confirms the ECB is no longer the buyer of unlimited recourse, debt levels have got to rise. It will be “interesting” is the way a slo-mo misted-red battle scene from GoT is “interesting”.

Why so gory?

Scaling back (tapering) QE in the US didn’t cause the bond market to crumble and collapse.

That’s because the US market is very different to Europe. It’s a single political polity under the dollar god and functions as such. It has functional financial markets and banks. (Compare and contrast European banks…) US QE functioned pretty much as stated on the box – it pumped money into the economy to be recycled into credit lending via a banking system that had gone through a crash-course recovery programme. (The fact much of that lending was then arbitraged by smart CFOs into share-buy-back programmes is a mere detail and a bedtime story for another day…)

Europe is very different.

The ECB is herding a menagerie of European nations with different goals, ambitions, (and most importantly) varied attitudes to debt. They are all using the wrong and very unsuitable currency – the compromise that fits none known as the Euro. None of the sovereign issuers retains access to the printing presses. The banking system is “mixed” – still very much broken in the South.

It’s been the illusion the ECB will keep buying that has kept folk buying in its wake, thus keeping rates artificially low– solely on the basis buyers couldn’t lose money if the ECB was there. (The fact the current European treaties didn’t perceive the ECB ever having to be there is just one aspect of the monumental cluster***k of compromises at the core of the Euro. Harsh… I know I shouldn’t be swearing this early in the morning… but.. sometimes it just makes you feel good.)

The Rest…HERE

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