Blain’s Morning Porridge – June 24th 2020 – Not a silk purse..

Blain’s Morning Porridge – June 24th 2020 – Not a silk purse…

“We need to ensure financial support is available to companies so they can afford to remain shut.”

Stock markets are determined to surge. The World Bank’s Carmen Reinhart is warning about the dangers of confusing rebound with recovery. European PMIs rose spectacularly, but remain far below normal. JP Morgan is talking about the sharpest, deepest and shortest recession on record. The US Treasury head is pontificating about further fiscal stimulus. There is a massive bubble around Tech stocks – a bubble within a bubble within a bubble as some describe it. Every single senior market talking-head is warning of dangers ahead. The new-minted day-trading hot-shots scream buy, buy, buy! (Which will likely morph into: “bye, bye!” fairly soon.)

These are just some of the many factors markets are trying to weigh – although the dominant one is just how much more QE Infinity and further support packages governments and central banks are set to throw at the problem.

I did listen to a very good interview with Pimco’s Emmanuel Roman. Some excellent points about how the deluge of Credit issuance in recent weeks has bridged the liquidity gap, but now corporates face a potential solvency crisis. A short-term crisis has morphed into a longer one. It will take potentially years to repair business balance sheets, which will require massive restructuring. For smart investors, it’s a massive opportunity to purchase distressed companies and make outsize returns – said Roman.

I would agree. But let’s not forget – the underlying force behind market moves remains The Pandemic. As the respected Dr Fauci warns; the next two weeks will be critical as new infection hot spots bloom in the US (and also Germany), what I definitely do know is: THE VIRUS DOESN’T CARE ABOUT ELECTORATES, RULES, ECONOMIES, GROWTH OR JOBS. 

It is what it is. And the western democracies are making a right pig’s ear addressing it.

Although its increasingly clear much of the “science” behind estimating the pandemic dangers was absurdly pessimistic – its proving difficult for politicians to change course. They are hamstrung by their declared reliance on the data and scientists. Fear is still the dominant emotion. If you get Covid bad, it can be very bad indeed – here in the UK doctors are warning of multitudes of patients with irreversible long-term lung damage. We still don’t know enough about how the virus works – but it’s clear its less dangerous to the bulk of people than we thought. Were the policies wrong? Probably.

Should we have changed path as a new information came to light? Yes. But information paralysis, inertia, and fear of explaining a reversal to voters meant they didn’t.

It was always going to be a zero-sum game for Politicians. Standing up and admitting… “Gosh, we got this wrong. We should have done this, not that,” is unlikely to pass any politician’s lips. It’s no wonder confidence in them, and the political process is waning. I read the UK’s Labour party – which has done little except ineffectively grandstand the crisis – is closing on the Tories.

Things might get worse. Even as an enthusiastic Boris announced the reopening of the UK economy next weekend, Bank America was telling clients sterling is now an EM currency, and dropped out the big league. They say Brexit has confirmed the UK is a small and shrinking economy. (In response, I say: the dollar is next as the US loses its “exceptionalism” and the cost of Trump peeving just about everyone has to be paid.)

Brexit negotiations are just one of the many issues sidelined by the pandemic response. As in all things, the fear of a Brexit disaster is exaggerated. Solutions, half-baked and last minute perhaps, will be found.

I suspect a bigger problem is going to be more political distrust and dither. (Ask yourself – who would replace Boris?) A snap back is possible. Trying to do the right thing, but badly advised, Governments have got it wrong.

The sheer pointlessness of it all was demonstrated on TV last night:

A political spokesman was allowed to witter on for minutes about nothing much at all. She was followed by a very earnest person telling us how the government’s failure to provide a trace and contact app meant it is far too dangerous and far too early to cut social distancing to 1 meter from 2m. After she presented some “data” about it being 19 times more likely to catch Covid in a pub, we eventually got on to the proper economic data-scientist.

He had some really interesting stuff to say about lockdown probably being the right thing to have done in March, but using the NHS’s own protocols and models for costing the value of lives when approving therapies, his team examined the excess death numbers, the numbers of direct deaths and infections, and presented the conclusion the UK should probably have ended the lockdown and got the country back to work weeks ago. His point was simple – the virus is now costing the UK far more than Lockdown its saving.

At least I think that’s what he was going to say…

He didn’t get the chance as the femsplaining presenter decided about a minute into his spiel that both the women on the panel should be given a right of reply to this man. Which meant we never heard anything more from him. We heard the politician burble on about how she wasn’t here to talk about whatever she wasn’t there to not to talk about, while the earnest woman muttered darkly about ascribing values to human life – which is basically what the NHS has been doing since its inception.

In short – the programme did not push the debate on. It did not inform us. It left us nowhere and will have convinced many people government has failed again. We can all continue to believe what we want to believe about the virus. 29% of the UK population apparently don’t care about the economic damage. They are going to keep isolating – and government (ie us) to pay for it.

Meanwhile.. continuing the theme of political incompetency…

If you want to know what markets really think, consider the reaction to Monday’s Peter Navarro market destabilising comment: “it’s over. Yes.” What a scoop. Navarro went on to say China had not revealed enough about the virus. The Trump administration went into full damage mitigation mode, and backtracked the mistake. Markets wobbled and then regained their upside.

The subsequent narrative illustrated a whole series of truths:

1) The sell-off highlights how little faith markets have in the Trump administration’s ability or ever desire to work with China. Participants sold off so quickly because they believe there is a high probability trade negotiations between the two largest economies on the planet, that drive so much global economic activity, are fated to unravel.  They will sell on confirmation.

2) Markets may even think a botched trade deal is good – it would generate further government stimulus.

3) The swiftness of the Trump admin’s denial demonstrates how desperate the Man is to sustain the trade deal – knowing how important it will be in key swing agribusiness states.

4) Do we know what China thinks? We can guess..

Five Things to Read This Morning

BBerg – How to Appease Germany’s Constitutional Court

Bberg – Four Years After the Referendum, Brexit Still Haunts UK Stocks 

FT – Record number of US companies seek relief on loan terms

WSJ – The Big US Stock Indexes Are Telling Different Stories

Torygraph – Boots withholds rent as landlords brace for dismal collection day

Exciting day in prospect down here in Hamble. One of my clients will be dropping in for a socially distanced pot of tea and a chat about markets. How exciting! O brave new world that has such people in it…”

Out of time, and time to do the day job…

Bill Blain

Shard Capital