The Great Autumn Financing Season – and why we should be nervous!
Blain’s Morning Porridge 27 August 2024: The Great Autumn Financing Season – and why we should be nervous!
“He rubbed the pot-roast all over his chest, Excitable Boy they all said..”
September is the start of the final 3-month rush to complete deals this year – it’s the busiest, most frenetic period of the financial year, and often the most dangerous for markets. What potential shockers lie around the corner?
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Bill’s Pub to Club Swim:
Let me remind readers about Bill Blain’s Pub to Club Swim on September 14th. Its a Charity Event in support of Wessex Heartbeat, the cardiac care charity.. I will be swimming 2.5 miles down the River Hamble as a thank you to the Medical Staff who care for cardiac patients and their families. You don’t have to anything except click the link – here – and make a donation.
Without Heartbeat, well, you would not be reading the Morning Porridge.
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We are approaching the opening of the Autumn Funding Season. Back when I was a young banker, (the Glory Days of The Global Capital Markets 1985-2008), the return from the English August Bank Holiday was akin to the Glorious 12th, the opening day of Grouse season. But now the nexus and centre of financial global market gravity has shifted from London, and next week’s Labour Day Holiday in the US marks the real end of summer.
Back in the day, every investment bank would be in a race to get deals done before the markets closed for the Christmas/New Year Break. In the 1980s I remember publishing “Tombstones” in the FT and WSJ with literally hundreds of banks listed on each deal – one of my first jobs in banking was checking the names were all spelt right! Even in the 90’s and Noughties there were still dozens of leading investment banks fighting to win business.. Today – you can count the number of real global players running markets without equity salesmen having to take their socks off.
The Autumn surge in deal making was driven by two factors:
First were the all-important league tables where every deal counted towards market bragging rights. Banks at the top of the table were more likely to win future mandates. The more deals an investment firm led, the more investors were likely to listen and work with them. Many prestige mandates were only awarded to top five firms – therefore league table prowess was a thing many firms were prepared to buy in terms of cheap or even loss-leading deals.
Second, every origination banker aimed to have deals ready to go – knowing their renumeration and careers largely depended on deals executed in the three months from September to November. These were the ones their bosses would remember at bonus time. Deals that clinched a high league table position were more important than profitable ones.
It was in “everyones” interest to get deals done.
Banks and their capital markets teams were incentivised to talk up the market to suck in issuers – in my case persuading financial institutions that fixed income markets had never looked better or more receptive towards now senior, subordinated, preferred Tier 1 or equity capital deals. (I invented mantras, like; the time to raise new equity is when you don’t need it – because when you do, markets will be locked.) Salesmen were carefully scripted on the bullet points as to why conditions were so perfect for buyers. September Markets were puffed.
That’s maybe why October was such a dangerous month for markets as the bight rosy promises salesmen were making post summer failed to materialise.
What it will be like this year?
Markets are different. They are less exciting and less adrenaline fuelled. Investors are in control – and they recognise hype and BS when they hear it. Or do they…?
There are fewer big personalities driving the investment banking teams – most bankers I meet today are smart, clever, intelligent, thoughtful, very dull and very boring. They are acutely aware of rules, regulations and other such mumbo-jumbo that never once troubled us decades ago. I doubt they would never have survived the bear pit that was 1980s investment banking – and the guys that ran the show back them would probably now be in open prisons if today’s financial Stasi were then in place.
However, markets are still ruled by the same animal spirits that have always driven the hunt for returns – they remain, at heart, excitable boys. Thus markets are terribly, terribly excited at Jay Powell’s promise last week that interest rate cuts are coming.
But, but and but again….
One swallow a summer does not make. There is a major risk markets are getting way ahead of themselves. We know interest rate cuts are likely to limited – maybe a point or so before Central Banks consider the inflation risks too high and “wait” to observe the results. The coming months will be very cautious – because there is so much to be cautious about. The reality, of course, is that Central Banks don’t want to risk easy interest rates – they want to establish “normalised” interest rates to normalise the functioning of the economy – which effectively flatlined from 2008-2022 while financial assets, aka the markets, were incredibly bullish. The monetary authorities want to normalise not just rates, but also financial and investment market behaviours. The first step in that Pavlovian process is re-establishing “Real” interest rates.
The good news is while higher real interest rates have created substantial economic pain – especially for highly leveraged borrowers (corporates and individuals) – the economy has not stalled or collapsed. Earnings remain high. Consumers may be broke, but generally they are still buying. Any ease in rates will ease the pressures on consumption and production – but will not correct the significant long-term issues effecting Western Economies in terms of infrastructure inefficiencies holding back growth.
The second stage will be on-going vigilance.
The dollar will bear careful watching in coming months – if US rates are set to fall then that has implications for further declines in the dollar (the $-Index is down 6% since June) and for global trade. While a weaker dollar is great for nations and companies paying oil, energy and interest costs in dollars – it creates a push towards higher prices (inflation) or alternative markets (geopolitics).
Then there is worrying about all the other stuff – like the US national debt increasing roughly $1 trillion every five months, while the deficit looks out of control as both sides in the coming election make all kinds of promises.
Maybe the US treasury market is too big, too powerful and too important to wobble… but.. Bloomberg is warning this morning of the risk China selling over $1 trillion of dollar assets which would trash the dollar, treasuries and revalue the Yuan. Let that sink in – what happens if non-aligned central banks around the globe continue to buy gold and decide the outlook for the US economy, US politics and the US treasury market are just too uncertain…. Ouch.
Meanwhile, there is still a degree of fooling ourselves in stock markets as rampant speculation still over-rides common sense. For instance, its increasingly clear there has been a major paradigm-shift in the Electric Vehicle market from pure EVs towards Hybrids – but look at Tesla’s stock price (only down some 20% y-o-y) and you would not see it. (Tesla only makes EVs and maybe, someday in a galaxy far, far away, Robotaxis..)
There is definitely a degree of “manufactured” over-optimism. Over the past 14 years private-equity, venture-capital firms have thrived, attracting in major investments by persuading mainstream investors the low returns due to ultralow interest rates could be bettered in the “alternative” early-stage investment markets, while the best way to capture the stock-price gains of the next Tesla, Nvidia, Theranos or WeWork would come from early stage private investments. There are now two massive problems with that model – a) lots of early stage tech companies (over 60%) are failing well before they reach close to unicorn status, and b) the lack of industry takeouts or firms progressing through IPOs, means the VC/PE investment firms books are blocked with unsold inventory – a problem they are trying to solve by selling down positions via financialization and deal structuring.
In short – still much to worry about!
Out of time, and back to the day job..
Bill Blain
CEO and Founder,
Wind Shift Capital