Blain’s Morning Porridge – 27 March 2020 – Good or Bad news?

Blain’s Morning Porridge – 27thMarch 2020

“It’s got nothing to do with your Vorsprung Durch technique, you know..”

Apologies for lack of Morning Porridge commentary y’day. I’ve spent most of the last two days in bed; coughing, spluttering, absolutely lethargic and exhausted, with a streaming nose and rhummey eyes – but no temperature. Last night I began to feel better. Cough has largely gone, and I feel less lethargic – although still exhausted. Now She-who-has-Mrs-Blain now has similar symptoms. Young Master Blain – hiding out the virus with us in Happy Hamble – is as yet unaffected. It’s weird. I don’t know if was just a cold, or was it IT? I guess we will never know until testing reveals if I have antibodies or not.. 

What do you want to hear first? The good new or the bad news?

The Good News is it now looks like the economic catastrophe the Virus has triggered could be shorter than we envisaged.

One of things I’ve come to understand though what we laughingly call my financial career is: “Things are never as great as you hope they will be, but they are never as bad as you fear they might be.” That looks likely to prove true with Coronavirus.

It remains vital governments force the R transmission number down through lockdown to drop the peak of infection curve so hospitals aren’t swamped.

But, the policy is working – the epidemiologists from Imperial College, whose report triggered the UK response, now say deaths could be less than 20,000 because the social distancing polices are working.

Sadly, global health services will still be tested to their limits over the next few weeks. There will still be a terrible crisis – and I stood on our balcony and clapped the NHS last night to show solidarity with them.

It now appears the disease may be far more widespread than thought – and that’s a good thing. It means immunity is building up – as a report from Oxford suggested earlier this week. There will still be a large number of people who get a very serious and life-threatening disease, but that’s a fall smaller proportion of the population than originally feared. The maths is not our friend – 1% of 50mm infected people being hospitalised is the same number as 5% of 10mm people.

It’s all down to testing – or the lack of it. Most of the modelling thus far has come up against the same problem: We have absolutely no idea of the number of people around the global actually infected.In the West testing has been pitifully slow and is weighted towards testing only those obviously exposed to, or suffering from the Covid-19 symptoms.

The result has been a bias towards the expectation of a high mortality rates – which although the bias has been factored in, clearly influences policy. The Italy number of around 80,000 cases and 8,000 desks suggests a 10% death rate – which we know is overly high because of the delay factor between infection and outcome, and the high numbers of elderly. In China we see around 3000 deaths against 81,000 cases, suggesting a much lower rate of 3.7%.

This is where it gets interesting. Korea comes in at 139 death against 9,300 cases, a 1.5% mortality rate, while Germany has 228 deaths agains 40,500 cases, a 0.5% mortality rate. Testing in Germany has been more rigorous in the run up than in any other European country – but the German papers are still full of how difficult it is to get tested, suggesting even Germany has also under-tested. (We’re looking to see if we can get numbers for positive versus negative tests – but that will still be biased.)

Once we get more data on just how wide the infection is – then governments will be able to reassess the effectiveness of lockdown as against other policies to ensure against future waves. If we have a high number of infected people, say 30% plus, then it’s possible we could see government allow many workers to return to work, but with many social distancing measures remaining in place. Activity could pick up quickly.

This is all supposition at this point. There are rumours of more cases breaking out in China but being under-reported. We won’t know for sure till we get proper testing in place.

Whats the Bad News? 

If you bought the rally of the last few days, then I think you are in for disappointment. The shortest bear market in history ain’t over yet. There is too much noise and consequences to come. Just watch the jobs queue.

The economic reality – brought into painful context by yesterday’s US Initial Claims report showing US 3.2 million workers losing their jobs – remains dire. Every single country is publishing massive economic activity downgrades. Every finance minister is apologising for not being able to save everyone. The outlook wavers between a deep recession and outright global depression.

Yet the markets have rallied hard on the back of kitchen sink government and central banking support – ignoring the dire reality. You can’t fault markets for arbing the support packages. If the ECB is willing to be unlimited amounts of Italy paper – what’s not to like. If they want to buy copies of The Daily Mail at £1 each, then I am a buyer at 99p. (I don’t know which is fundamentally more worthless…. an Italian bond or the Mail?)

Some analysts say there isn’t much more left in the authorities ammunition cupboard if sentiment drops again. Yes there is. The authorities have gone this far – why not just start buying equities as well?

There are going to be consequences..

As always, I look to the bond market for clues. When it comes to corporate bonds, its really manky. Soaring defaults, downgrade escalation, chronic illiquidity. Excellent. Despite QE Infinity, the corporate bond market is close to breaking – which means massive opportunities!

I was amused by a piece in the FT about the “Doom Loop” in ETF bond funds. I still get “puff advertising” from firms telling me how ETFs are great liquid way to invest in markets. Yet, they are proving chronically illiquid with the ETFs dealers now arguing the definition of liquid actually is “as liquid as the underlying securities” which is as liquid as set concrete in the bond markets. Anyone who bought ETFs without question the dealer blandishments about liquidity should really be considering a different career.

The chap writing the article for the FT – an ETF dealer – suggests the massive discounts to NAV on ETFs should be addressed directly by the ECB. It should – apparently – be buying ETFs to solve illiquidity in bond markets caused by EFT sales.. Doh! “This would improve corporate funding rates and preserve the integrity of ETFs to the end-investor, breaking the doom loop.” Thus speaks a dealer desperate to keep his job. Is there no end to the madness… ?

Right now, I just want to go back to sleep. I will write more next week about just how vulnerable markets remain. Topics might include some of the following danger areas:

1) Headline Coronavirus Shock Threats

2) Cash crisis across Globe

3) What a bond market meltdown means for all financial assets

4) Unintended Consequences of Rescue Policies

5) Policy Deliverables – the risk of failure to deliver economic rescue likely to destabilise sentiment

6) Fundamentals – demand and supply shocks to continue longer rather than abate.

7) Recession vs Depression

8) China vs US

I’d be interested in any thoughts from readers on where this goes.

Five Things To Read This Morning:

FT – Volkswagen calls on ECB to accelerate emergency lending

BBerg – Virus Models Offer No Quick Fix for Panicked Leaders and Traders

BBerg – Technicals the Pros are Watching After this Instant Bull Market

WSJ – Washington’s Trillions Alone Can’t Stop the Jobpocalypse

WSJ – Investors, Fearing Defaults, Rush out of Junk Bonds

Out of time.. and out of energy.. Have a great weekend. We are going to play RISK! What are you planning?

Bill Blain

Shard Capital.