Blain’s Morning Porridge – 23 March 2020: New World – what to do?

Blain’s Morning Porridge – March 23rd 2020

“Stands the clock at ten to three, and is there honey still for tea?”

A week ago on Monday morning I was furiously trying to get up to London, delayed yet again – because of a tree on the line. It was worth it as we went out for a proper lunch to celebrate a colleague’s birthday. Shades of August 1914?

Since then the world has changed, and changed utterly. I’m unlikely to see the office again for a long while. The Wuhan Flu has come out of nowhere as the ultimate No-See-Um.  It’s closed commerce, overturned markets, destabilised expectations and effectively stopped society in its tracks. Its scale is unprecedented. Yet, it’s something we always knew likely, even inevitable. The experts warned it was just a matter of time, but we pretty much ignored them. Apparently, the numbers the WHO use show: “a severe pandemic is expected to occur ever 63 years.”

The immediate prospects for markets look bleak. As politicians bicker, we’re still waiting for clarity from governments on rescue packages, for further central bank liquidity programmes and more rescues – all actions designed to stem the overwhelming sense of imminent disaster. Some pundits think another raft of government bailouts and supports, plus more rate cuts, QE infinity and even direct buying of the underlying stock markets could still create a rally and take markets back up.

Wake up. Not going to happen.

In the wake of increasing estimates on the scale of the damage, it’s difficult to see how markets will rally from here. Estimates of the economic damage vary, but we can conclude Q1 and Q2 are going to see the global economy contract 6-8%. No one is now talking about V-Shaped recovery. The developed nations of the west will see much higher falls – there are warnings of a 25% downspike in the US and a 30% joblessness rate!

We’re hearing of massive stampedes out of fixed income funds, and its pretty difficult to sell anything in the ETF market. The news Saba Capitaldoubled investor money by shorting bonds is not a surprise. This is about finding a new bottom – not returning to where markets were a billion years ago in February 2020. 

I also think we’ve about to get a few company specific shocks that will further destabilise markets. Regular readers will know my doubts on Softbank valuations – check this out: Softbank to sell $41 billion in Assets.. Good luck to them in this market. Remember – the defining moment of the 2008 crisis was Lehman exposing bank weakness. What would Softbank mean for Tech?

And all this is before we see the inevitable rise this week in infections and the death rate across the Western Economies.  It’s going to be difficult to be positive on a market bounce when every cough or sniffle reminds you why you are sitting behind a computer in the spare bedroom trying to follow markets.

We know hospitals in the UK and US will do their absolute best, but also that they are massively unprepared in terms of equipment and space. We know there has been national failure across the West to prepare in terms of testing and containment. Doesn’t matter now. The Storm is coming.

As the disease goes stratospheric across the Occident, we look for saviours. Our eyes are opening as we realise the heroes will be the workers who hold society together. While the rest of us hide, the bins will be emptied, deliveries will be made, the services will watch over us, and the hospitals will prepare. It puts the world of finance and the Porridge in context.

This crisis isn’t just about the Wuhan Flu. Its much more.

We have the unravel/reset of the last 8 years of monetary experimentation on markets. We have a complete unravel of global supply chains on the back of the last two years of trade tensions. We now have a de-facto oil-crisis occurring. We have rising threats of geo-political tension as China perceives opportunity in the wake of a distracted and badly-led USA. The prospects for destabilisation in Europe from another refugee crisis as the polity is distracted by the flu is immense. The authorities must be praying for dismal weather as a few weeks of enforced social distancing could well trigger dissent and riots.

The next few months and years are going to see a massive change in society and the economy. It will get sorted and fixed, and maybe this time we will focus on getting the priorities right?

Unlikely.. but here’s hoping..

The next few months are going to be full of noise. The market, production and political implications of the Wuhan Flu are going to be enormous. They will colour the opportunities we’re likely to see emerge as this develops, and how the global economy recovers.

Far from just closing The Morning Porridge while this flu works through the system – I reckon I’m going to be phenomenally busy trying to discern what it all means. I’ll try to stay focused primarily on the markets and finance.

I’m particularly interested in areas such as

· The economic effects of flu damage – it looks like Europe and the US will be hardest hit, while Asia and China could bounce back fairly quickly. How will that change investment decisions..

· Sector opportunities in terms of good, bad, ugly and fugly places to put finance to work..

· Relative returns and illiquidity in terms of alternative assets.

· Where the market is failing in terms of liquidity, prices and interventions – and what these throw up in terms of opportunities..

· How does the European Union react and adapt to avoid another sovereign debt crisis and unravelling of the Euro project..

· How economies cope, protect society and ringfence economic infrastructure and adapt.

· What does it mean for politics – the one to watch will be the US election in November, but the shift in UK with the Tories now instigating socialism on a scale Jeremy Corbyn never envisaged is fascinating.. ( “The Labour leadership battle has taken so long that global capitalism collapsed while they bickered.”)

I will try not to write about the flu itself.. but we need to know when it peaks, the likelihood of successive peaks – which could prove even more devasting – and how the virus develops and mutates and what that does to “herd immunity” if it ever was a valid concept.

Understanding how the virus “acts” in terms of data is going to be critical in terms of calling market moves. I’m working with chums at Neuron Capital who are modelling it on detail via an Agent Based Model. If you want to see more – then please let me know (institutional investors only).

Let’s try to put some numbers on the flu in context. Italy has a high death rate from common flu; according to a study it looks like around 3000 Italians per month typically die of flu during the winter months. Some of the coronavirus victims would have been in that number, but it’s clear the overall number of deaths is now massively higher. Italy’s elderly population and dense urban living contributes to the high number.

in 2017 56k Americans died of the “Influenza and Pneumonia”, 2% of total deaths, and the 8th leading cause of death, according to the US Department of Health. It compares to nearly 650k who die of heart disease. The latest estimates suggest between 200-700k Americans could die from Wuhan Flu. Most of them will be elderly, but it’s going to be an enormous strain on hospitals.

The disease is now going exponential. We’re expecting it to follow what’s happened in Italy – but Italy and the US are not similar. To generalise; Italy is urban, densely populated, and tight family groups with multiple generations live together, while America is younger and more spread out. They will be very different. But they both illustrate the danger.

There is still so much we don’t know – what the real rate of infection has been, (because testing, especially in the US has been minimal), just how much immunity it confers (it now seems there are already multiple different strains of the virus circulating, meaning multiple reinfection is a distinct possibility). We don’t know how seasonal it is – it could come back. Flu’s have a pattern of coming back. The Spanish flu over 100 years ago is the most famous. It’s second wave was the real killer – 20 times more deadly than the first wave, and over a year later.

Still so much to learn and think about..

Five things to read today

FT – Coronavirus: Can the ECB’s ‘bazooka” avert a eurozone crisis?

FT – We’re about to find out how smart the big banks have been

WSJ – The Worst of the Global Selloff Isn’t Here Yet, Banks and Investors Warn

BBerg – Europe is About to Get First Glimpse at Virus Economic Damage

ZH – BofA Call for “War-time Measures”, urges Near-Total Fed takeover of Capital Markets

Out of time, back to day job, and stay safe..

Bill Blain

Shard Capital