Blain’s Morning Porridge – April 14th 2020
“If you try to take a cat apart to see how it works, the first thing you will have is a non-working cat.”
On Thursday I posted a note on the Fed doing exactly what I predicted – a programme to buy high-yield junk. A sniffy Wall Street trader called me an imbecile – which is quite a big word for a Wall St trader. He told me the Fed is not buying junk bonds, just ETFs related to junk and levered finance. He yelled at me to get it right. Really..? Go figure. Same difference. Its detail. I confidently predict the Central Banks will be buying equity ETFs soon enough – which is buying equity. End of.
After a glorious 4 days Easter staycation over the best April weekend in history, do I feel refreshed enough to face another week in markets? As analysts simultaneously forecast global depression and record stock markets by year end, are we are into the realms of financial insanity? I have some seriously dark dystopian forebodings about where this could go….
Get over it… Smile.
But before we talk ourselves into giving up.. REMEMBER – things are never as bad as you fear they might be. (It doesn’t mean they are looking particularly good either.) If you are prepared for the worst, then you are less likely to be disappointed if it happens…
If you can’t make your mind up about markets, you are in good company. I have to admit I am beginning to wonder what some commentators are smoking – there is lot of hallucinogenic nonsense out there. But, the bottom line is the global economy is not dead. It is adapting. That means massive change. It means dropping current orthodoxy, and working out what is real today may well be dead and buried tomorrow, and front-running the completely new opportunities that are going to arise. It’s dangerous, but kind of exciting.
To face the future… get pragmatic.
Work out why the market is fooling itself. Markets are scared of change, with a default position things will revert to “as-they-were.” This time they will not. There are a number of dangerous narratives playing out in markets at present – all of which expect things to revert to “same-as”.
1) C-19 is going to go away because of “curve flattening”, and we will have a vaccine in a few months time. No. We mighthave a vaccine in a year or so, and Might is not a winning market strategy. C-19 might not go away any time soon.
2) This is not a real war. No means of production like factories, ships, infrastructure have been destroyed. Everyone can start working again when the all clear sounds. No. As the old adage goes – 40% of American’s are one pay-check away from bankruptcy. A recent survey says nearly 40% have seen family members lose jobs, and 30% of Americans think their jobs are at risk.
3) Global trade will swiftly fill any supply gaps. No. Protectionism is going to play front and centre as countries seek to ensure they are not caught again.
The World had changed. Adapt to it.
Let’s remind ourselves of the disturbing reality.. A few examples to think about:
Stocks have just staged their best turnaround performance in over 80 years. The Global economy is heading for a 10-15% single quarter contraction.
Investment banks are calling the bottom on stock markets, to buy credit bonds, and predicting a V-Shaped recovery. Landlords, Lenders, Companies and Individuals are being sucked into a cascading landslide of defaults, missed payments, increasing debt, fear and panic.
Central banks are pumping cash into economies through QE infinity, governments are doing everything to get cash to companies to keep them going. Some support programmes are swift and are working. Others are delayed, with failed delivery exacerbating the sense of crisis. Markets are arbing the supports.
Asset managers say strict investment ESG guidelines have never been so critical. Moral Hazard has gone out the window when it comes to bailing out protectionism, payrolls and sectors.
The Financial sectors thinks it’s fantastic – witness the Goldman Sachs syndicate head bragging of his record first quarter new issue revenues in bonds, despite lockdown. People don’t have enough cash to put food on the table for their kids.
Investment banks are telling their staff to get back into their offices. C-19 is running rife around bankers who have gone back in.
Politics is creating new heroes. Everyone loves Boris. Trump gets testy when his C-19 record is questioned. Not a problem – the Democrats look determined to lose in November.
My job is to try and make sense of it. Let’s lay all the pieces of the jigsaw on the table, and try to put them together.
· Massive monetary stimulus through QE Infinity, and unlimited fiscal support via the promise of sector and company bailouts and nationalising payrolls, have fuelled the market’s expectations rally. NOT BECAUSE OF A STRONGER ECONOMIC OUTLOOK OR RISING COMPANY RESULTS. Distortion and disconnect is not sustainable long-term (although its pretty much fuelled markets since 2009).
· The expectation is Central Banks can’t allow a market meltdown. Follow the Fed.. you won’t lose. Financial assets – bonds and stocks are rising. If you fear inflation, stocks and bonds are where to look for it.
· There is no escape for Central Banks and Governments from the consequences of their actions – they can’t pull fiscal spending without crushing the economy, and they can’t pull back monetary market support for fear of crushing confidence. They have “crossed the diamond with the pearl” to create the ultimate market drug high, and markets can’t face cold-turkey. The merest hint of a taper tantrum today – and we’re talking massive market reset. Negative rates look inevitable.
· A massive deflationary demand shock is under way as incomes crash, insecurity and uncertainty wipes out whole sectors, and governments predict massive GDP damage.
· This week we will get a barrage of new doom-laden forecasts from the virtual Washington IMF/World Bank meetings. Plus, it’s the start of the US earnings season – so we get first look at Q1 business damage. They may shock markets, but we really need to know how companies plan to cope.
· Investment firms are in serious trouble as dividends plummet. Asset managers need returns to pay investors. There are zero returns across financial assets. The only way to generate returns is to go yield hunting – meaning investors will take increased risk, piling into riskier assets like Emerging Markets. It’s another accident-waiting-to-happen the authorities can’t let happen. Expect further financial asset bailouts.
· Where will all the cash go? Companies borrowing unlimited amounts of rescue money through governments are unlikely to rationalise making any serious investments into deflationary economies with 20% plus unemployment. Their response is more likely to be defensive, retrenchment via cost and job-cutting while determining what the future looks like. Depression will fuel depression.
· Demand for get rich quick speculative fantastical stories – like Bitcoin, We Work and other implausibles – will push prices higher. Note how Tesla has bounced 40% plus off its recent lows despite the fact no one is buying cars. I’m pretty sure I’ll be writing about Softbank’s collapse in coming days/weeks/months.
· Helicopter money support direct to consumers may alleviate immediate poverty by giving the masses a couple of day’s fish, but for those still with income and the knowledge to fish, it will magnify income inequality.
I’ve seen some investment banks predicting a 35% Q2 global GDP crash. Other analysts are looking at 2022 before we see global production recover. Sage old hedge fund managers are telling us it’s the “worst I’ve ever seen..”
What does the jigsaw show us? Ongoing uncertainty and insecurity, meaningless financial asset markets reflecting monetary and fiscal distortion rather than economic reality, low growth (if any), declining investment, soaring unemployment, rising social discontent.
What are the opportunities?
I suspect…. A massive refocus on what is real in the real economy. Make the assumption the global economy is going to recover and change to reflect the impact of C-19 Event. Working patterns will change. Microsoft is a good example – its cloud business is going through the roof. Office property? Not so hot. Global travel will return, but could take years. Go figure out what the future looks like. Fundamentals…
Who wants to own high risk financial assets in search of a few basis points in yield? Better returns will be made from owning real assets in the real economy. That is what Warren Buffet and others are waiting for – the opportunity to buy real companies and assets.. not overpriced stocks. Until the distortion of financial assets is undone – which looks pretty much impossible… I’d rather own real things…
Recovery is going to follow – Commodities could be a starting point. At the moment everyone is looking at depressed Oil prices, saying global demand has plummeted, despite China’s stronger than expected production numbers. At some point, sooner than expected, we will see commodity demand rise sharply.
I cycled round Southampton Docks on Saturday. There were five massive cruise liners laid up, empty. They cost about $750mm, and guzzle around $10mm a month to run in terms of debt service, crews, fuel, and the rest. How long can cruise companies haemorrhage money? Well… I read that cruise bookings for 2021 are actually up. Yep.. people still want to go to see the world from a luxury hotel room.
Or… we could figure out how to reset the global economy. More than a few folk are proposing a debt jubilee – but that would have enormous consequences.
Let’s finish on a fairy-tale…….
The publican was worried – the bar was empty. No one was making any money and could afford to drink. Next day a German tourist walks into the bar. He says he needs a room for the night. The publican shows him both available rooms. The German says he will need to ask his wife. He gives the publican 100 Euros to hold the rooms. The publican immediately runs across to the grocers and pays off his 100 Euro tab. The grocer nips across to the butchers to pay the 100 Euros he owes for last week’s meat order. The butcher runs across to the undertaker to pay off the Euro 100 cost of his father’s recent funeral. The undertaker rushes off to the village Madam to pay for services rendered. She runs across to the pub, and pays the publican 100 Euros for the rooms she’d rented. The German returns with his wife, who doesn’t like either room, and the publican gives the German his 100 Euros back. The bar is full that evening…
If only life was so simple…
Five Things to Read This Morning
Torygraph. – Rift fears as eurozone bailout fund is sunk
(Apologies for posting this piece of blatant Torygraph Europhobia… but make your own mind up..)
Out of time and back to the day job