Blain’s Morning Porridge – July 27 2020: Rocking the Boat
“It is no coincidence that no language has ever produced the expression: “As pretty as an airport.””
My spidey senses are tingling. I have a feeling this is going to be an “interesting” week for markets. The virus, and the government responses toward it, look likely to remind us just how destabilised economic growth has become. We’ll be getting the Fed response on how US growth may be stalling on Wednesday versus expected better European numbers on Thursday. Q2 numbers may yet disappoint. I suspect the current cosy global recovery expectations consensus will be shaken by rising hotspot outbreaks across the US, India and even Asia. Add in likely earning shocks from global plane makers reporting this week, (Boeing accounts for around 1% of US GDP on its own), plus increasing political uncertainty over the US election.. and then ponder what this morning’s record Gold price in Asia means… It could get pretty rough out there.
But let’s start with Europe and the Virus:
First up is the myth Europe has had a good virus. Has Europe’s “competent” handling of the virus positioned it to benefit from a stronger recovery? Is that why Italy needs the lion’s share of the €750 bln EU Recovery Fund to get back on its feet? The reality is Europe was heading into economic slumber long before we’d even heard of Wuhan. What we are more likely seeing is European bounce back from what was an already much lower base – there is nothing particularly magic about how European numbers seem to be ticking up faster than the UK or US. It’s all about how there was already so much more slack in Europe before this crisis began. Be cautious on numbers and relative performance.
A second issue for Europe is the power of human behaviour. The virus effect on the economy is a macro event – but it comprises the sum of every single human’s behaviour.
Let me digress a moment: I’m sure you all have virus stories to share – but let me illustrate behaviour with two different pub lunches over the weekend.
· Saturday’s pub had clearly posted how it would operate by social media and website, and they’d really thought it through: there was an uploadable app to order drinks and food, and it arrived swiftly from a masked but very friendly waitress. It worked well.
· In Sunday’s pub, there was fear and panic.. despite the incident tape and 2 metre markers, and plastic screens at the bar, an anxious landlady was screaming at customers to keep their distance. A single barman was dispatched to stand outside slowing taking orders on a tablet. Customers then had to stand and wait for a girl to spray down the table with bleach before sitting down. A lady was barked at to stay outside because someone was already in the loo. It was like something out of Fawlty Towers…
Which pub do you think will do better this summer?
It’s the way people react and learn from the crisis that will determine future growth prospects. The FT touches on it: Swedish Companies reap benefits of COVID-19 approach. By keeping the economy and particularly the schools open, the Swedes maintained normality and although the economy will take a hit in line with the globe, the Swedish behaviour have not been permanently damaged by the virus. (Keeping schools normal seems the critical ingredient.)
Here in the UK its very different. The daily litany of virus news, the constant sniping at government and the oppressive fixation on issues like schools, PPE, and deaths means individuals are increasingly anguished, stressed and fearful. There is no Blitz Spirit – just rising fear and depression. Lockdown is morphing into a permanent mental-heath crisis. It’s unlikely to get better. “Significant normality”, as Boris puts it… could remain out of reach for longer – especially if governments continue to over-react, dither, backtrack and push danger signals which up the individual fear levels.
I can’t help but wonder at the news UK tourists returning from Spain will be expected to quarantine for 14 days. Really? New cases in Catalonia are rising as fast as during for first Virus Wave – yet no one thinks this is yet the second wave the medical experts fear will hit in the autumn. Elsewhere in Spain, the numbers remain low – but by pressing the quarantine button on the whole country, all kinds of signals have been sent, and these are picked up by nervous populations!
Spain’s economy was hoping to recover something of the season, but this could put it back years – and tourism is 11% of Spain’s GDP. Tui has cancelled flights to the Costas. If Spain is hurting, how much will the rest of Club Med suffer, if Brits (25% of European tourism) staycation?
We now know the economic damage of even limited lockdowns could be even worse than first time round – it’s the “nuclear option” no one wants to repeat. Bloomberg quotes new French prime minister, Jean Castex on resumed lockdown: “we won’t survive, economically or socially.” Not just for our mental health, we have to get economies open!
The third area of concern is the very real damage the virus has done to the base of the economy. Although gyms, hairdressers and others are now back in business – they have lost 1/3rd of their yearly income, but still face 12/12s fixed costs. And if customers are scared, and businesses can only operate at 30% capacity… then it’s clear just how much more damage is still to come – and why the entrepreneurs running their own businesses are set to give up in droves.
We’re now seeing small business redundancies start to ratchet higher as business owners understand the brutal reality their businesses won’t survive on the basis above, and once furloughs end, they can’t afford to carry their staff any longer. It’s going to be bleak out there.
And the final thing about Europe – this is happening in an economic area where the virus is now largely confined to hotspot outbreaks.
Elsewhere, around the globe, the virus is still burning. The pace of increase in the US remains frightening – but looks like the first wave is only now finding its way into the southern “secondary” states. Even Donald is acknowledging it matters. The scale of the rising crisis in India is putting pressure on Modi. The fact Hong Hong is experiencing a rise could be indicative of something scary, or is it the Chinese trying to gag the former colony?
I mentioned the aircraft industry in the opening paragraph. Clearly global travel is among the most compromised sectors – this week we’ll see airlines announce frightening figures. Boeing and Airbus will post their worst delivery numbers in 60 years! I’m planning to do a special on aviation later this week, but this a great article in WSJ on just how bad things are: At Boeing and Airbus Finished Aircraft Pile Up.
Meanwhile, Gold hit new records this morning, breaking $1922 – but my colleague and commodities expert at Shard, Ashley Boolell, warns me to be “conservative” – worried there may be an element of market hype building into the price.
Gold has risen on the back of virus fears and the escalating tension between the US and China, but also on the increasing understanding that Zero Interest Rate Polices and QE Infinity have grossly distorted the prices of financial assets – enhancing the yellow metal’s appeal as a tangible thing of value. However, could the rise in gold be over-anticipating crisis? It’s a very easy market to get sucked into.
Five Things Too Read This Morning
Out of time, and back to the day job..