Blain’s Morning Porridge – May 18 2020 – Life begins again!

Blain’s Morning Porridge – May 18th 2020 – Life begins again! 

“There is nothing, absolutely nothing, half so much worth doing as simply messing about in boats.”

That has to be one of the best weekends on record. Life resumed!

After 2 months of lockdown I was out racing my Foxer dinghy on Friday, sailing with my Wife and Son in the yacht on Saturday, while Sunday saw more dinghy racing and canoeing on the river. A bunch of us grabbed “walking beers” and snacks from our local (which has turned itself into a takeaway shop) to go sit on the deck of our “shuttered” yacht club and argue about the racing. It was so the same, but different. We had asked permission from the harbourmaster to race. We might just have taken part in the first competitive sporting event in the country! Lots of people were watching and doing so safely.

We had to tweak the Racing Rules of Sailing just a little bit to ensure we kept well clear of each other. On one race I nailed the perfect start, garnering “starboard” rights over ever other boat, but I had to duck them all to avoid the possibility some might have collided if I’d forced them all to tack – annoying, and it wouldn’t happen in the real world.

Except this is the new real world. 

I realised we were subconsciously arbitraging our new rules of sailing; working out how our measures to maintain distance on the water, and minimise risks of contact, meant we were positioning our boats on the start-line and at the turning marks in ways that would make less sense in the old world, betting that boats in the “right” would bear away or turn to avoid contact. Interesting…. We learn and adapt quickly.

It’s much like business and markets – which are similarly arbitraging government support packages and central bank QE Infinity to stay “insanely high” despite the massive economic hit of the virus. If the proverbial Martian visited the stock market today, he’d struggle to understand just why markets are so high when prospects look so low.

At which point we come back to earth with a bump. The papers this morning are full of doom and gloom – particularly re the UK. My email is full of analyst gibberish about why I should be buying Bitcoin, Tesla and other crap. I shall ignore them all, and focus on the real picture

Even if the global economy was to magically reopen tomorrow, we’d still see earnings for 2020 massively impacted, reduced credit worthiness as companies leveraged themselves with more debt to see them through the crisis, and an increasingly protectionist trade uncurrent. That’s not a favourable market for anyone. And we all get it – the world has changed.

Understanding the nuances of this new markets is going to be critical.

It’s not just about listening to what Fed Head Jay Powell was saying when he warned about how assets prices could be impacted by the pandemic, and how it might take 18 months for the US economy to recover. It’s not just understanding the consequences of how UK long-term unemployment might rise to 9%. It’s not even all about the 11.2% decline in US industrial production through April, or the 70% crash in car production – and the knock on effects these have across the economy.

It’s also about understanding behavioural economics – how will people and politicians (note the distinction) respond in this changed environment. What impacts will politically driven decisions and consequences have on markets going forward.

Much has been said about the welfare and mental health crisis the virus lockdown has unleashed. Anxiety and fears for the future are impacting just about everyone – which I why I recommend sailing to everyone. Getting back on the water this weekend has given my feel-good an enormous boost. People are going to cut spending plans if they fear their jobs and livelihoods are under threat because of the virus and the virus recession.

How much damage can Coronaphobics and Coronanazis do to recovery? In the first bracket are the genuinely scared – frightened by the excitable news flow, and what the virus will do to them and their families. How to reassure them?

The CoronaNazi camp is more dangerous. There seem to be an increasing number of players willing to play politics to delay reopening to prize concessions and control. Corbynistas (yes, there is still a nest of them at the extreme end of the UK political spectrum) are demanding the unions are given control of workplaces to ensure worker safety is a complete red herring – but try to criticise it, and you will be trolled! (Some of the tweets are hilarious.) All political actions have consequences – and when the government has to play to the fears of Corona-phonics and respond to the Virus-Nazis, we are going to get sub optimal outcomes.

Much of the growing China vs US trade war rhetoric is politically inspired. You can’t threaten trade sanctions again a microscopic bug, but you win voters by blaming Beijing!

It’s clear much of government response has been about anticipating the coming blame-game. Just how did the staggeringly well-paid public health managers across the UK so conclusively fail the logistics and preparation tests for the virus? Because the buck doesn’t stop with them – it will be the health minister that takes the can. Bureaucracies have a tendency to become even more entrenched during times of crisis. Although the NHS desperately needs root and branch fundamental reform, and being dragged into the modern age though AI and apps, its unlikely to happen any time soon… Cost constraints etc will ensure the bureaucracy will probably grow.

What businesses and sectors stand to win or lose short, medium and long-term? Clearly some stocks are going to do very well – companies that crack the vaccine and new treatments. But just how secure is the rest of the health sector? We’re hearing talk of being prepared for a second wave of the virus in the autumn/winter, but are governments going to keep the spending spigots open? Or do they start slash and burn cuts on health care to pay the costs of the virus? How vulnerable are any sectors that rely on government spending? Defence? Policing? Health? Education?

There is a well-circulated post doing the internet rounds how the UK’s furlough scheme is costing over £14 bln a month – £168 bln over a year. Put that in context of replacing our nuclear Trident deterrent at £205 bln, the money already spent on the HS2 railway to no-where (£100bln) or how much it’s cost to bail the banks out in 2008 – £500 bln!

The debate about how much governments can afford to leverage up before crisis is going to be an ugly one between the traditionalists who will demand a sharp scale back, and the NMT factions arguing for even greater spending. Somewhere in that argument between spending our way of out recession, and calls for financial orthodoxy, some important lessons are going to be lost. And markets will arb these events.

That’s what they do…

Five Things to Read Today 

Thunderer – Council tax to rise as coronavirus hits town hall investments

Garuniad – Britain is at risk of “returning to 80s levels of unemployment”

FT – More than a fifth for UK employers plan redundancies, says survey

Bberg – UK gets warning of Deep Economic Scars Before Sunak Speaks

WSJ – What I’ve Learned About Investing in the Time of Coronavirus

Out of time, and on with the day job!

Bill Blain

Shard Capital