Blain’s Morning Porridge – June 8th 2020 – Plans and Expectations Change
“I Choose Violence.”
When the narrative starts to change, adjust your strategy.
Friday’s US May jobs report caught everyone by surprise. Far from it confirming the economic doom and gloom outlook everyone fears – the addition of 2.5 mm jobs in May suggests an economy far more resilient that we thought. There were wrinkles on the numbers for sure, but they confirm one of my key market mantras: Reality is never as good as you hope, but never as bad as you fear.
Around the developed world Coronavirus lockdowns are ending. Mechanisms to test, treat and cure the virus are being innovated. There will be much pain to come.. but it’s time to move forward.
It’s time to admit – for all the carefully written and closely argued notes commentators (including myself) have been putting out through this “In a Time of Coronavirus”; the lack of clear data, the limited understanding of the virus, and our utter unfamiliarity with the economic consequences of something so completely different to anything in our experience, means we’ve all basically being guessing. Wall Street has no consensus!
To be fair – it’s not just market analysts that have been guessing these last few months. Governments have also been making it up as they went along. Policy mistakes in the handling of the Virus and the Economy were inevitable. The obvious virus failures; like putting recovering patients into care homes, testing and supply issues look more the fault of lazy bureaucracy rather than ministerial direction. But, the speed at which governments acted to support wages and industry was spectacular and pivotal – the remaining uncertainty is: At what cost?
The base predictions for the economic consequences of the virus ranged from the pessimistic deep hit to global GDP causing a long Nike-Tick recovery tail, to a 3 month hiatus followed by a swift V-shaped recover. Neither looks likely – the reality will be somewhere in the middle: an economic shock followed by consequences. Some parts of the global and national economies will swiftly reopen, while others will require much more support and an element of risk. Persuading consumers to get out and consume would seem to be less of a problem than imagined.
The challenge is how quickly the economic consequences of the virus can be mitigated out.
We are seeing it happen. A gang of Conservative politicians, including the chancellor, want to Save the Summer by reopening the pubs within a few weeks. That’s nearly 50000 pubs employing over 1 million people. Cut social distance to 1 meter and its possible. I’d vote for these guys – although to be fair, many of our local pubs are already selling “walking beers”.
Or how about Airbus asking for government support to retire older inefficient aircraft and replacing them with new more efficient planes? That’s a positive – it would preserve Europe’s and the UK’s critical aerospace industry. I would go even further – relaunch Airbus under an Anglo/Franco/German pact (not under the EU) to develop a new series of ultramodern fuel-efficient aircraft to replace the Boeing 737 series and Airbus’s whole range – it’s a massive market there to be grabbed. (I just can’t wait to see how Trump would react to that…)
If airlines experience a big slide today on the back of the ill-considered and unworkable UK quarantine plans, then I’m a buyer… I suspect our appetite for holidays and even business travel means the outlook for air travel isn’t half-as-bad as we thought. (And I’ve got some ideas on how to play that trade – give me a shout for details.)
Yet, for all the signals the Economy might be more resilient than we feared, does that mean markets suddenly make sense?
Probably not. But, ever since QE backed stopped everything, they never really did…
Look at the bear steepening the US yield curve. That’s not just a warning about potential inflation, but also of deep long-term debt uncertainty. If markets are going to focus on debt sustainability, and if its worried about the US (which is effectively the long-term global risk-free rate), then the rest of the global economy could be in a shocker. All the bond desks now loaded up on corporate debt will be praying the Fed is going to address the curve, up QE, and bail them out when losses hit.
Stock markets looked overbought before this crisis – and even more so today. There are umpteen P/E charts available showing how stock market ratios are signalling danger. However, it’s not just QE Infinity and yield tourism (the concept that investors are being forced to by higher risk assets like equity in search of stronger returns), that has driven the stock markets.
Let’s be blunt: QE and ultra low interest rates have pumped an enormous amount of money into financial assets which the stock of equities available to buy has been decreasing. Demand and Supply appears to have created a new higher base level for equity markets – (it’s a theory… I still worry the laws of mean reversion might come back to bite us!)
And then there are the non-market consequences of the Virus to consider in terms of increased Geo-political pressure. Over the past few months the itch that was China’s position in the global economic system has metastasized into a festering gangrenous pustule. It suits certain politicians to have someone to blame…
China’s economic diplomacy is becoming increasingly unsubtle. We’re learning how Beijing’s has successfully captured HSBC – its Chairman Mark Tucker is at risk of becoming Lord Haw-Haw of the modern age as he lobbies Downing Street about the importance of Huawei being given the key role in the UK’s 5G rollout to “de-escalate” tensions between the UK and China. The Chinese have let it be known they intend to abandon their support for UK nuclear power and HS2 – playing to the theme if the UK expects a favoured trade agreement, then we better dance to China’s tune. (HSBC is utterly compromised – it’s at the stage where its larger clients should be walking away.)
Meanwhile.. Former US Chairman of the Joint Chief of Staff, Mike Mullen, put out a cracking piece in The Atlantic over the weekend on Trump and the Military: I Cannot Remain Silent. That follows up another former JCOS Colin Powell, a declared Republican, telling Bloomberg he’s going to vote for Biden! Et tu Jeb Bush? The script and story-line in the US currently reads like something out of Game of Thrones – what will mad Queen Cersei do next?
Five Things Too Read Today
FT – Investors expect credit to outperform despite Covid downturn
BBerg – A Booming Stock Market Could Come Back to Bite the Recovery
BBerg – Italy Might Shake Off Crisis Without Having to Confront Economic Failings
WSJ – Investors Love of Tech Drives Booming Market Rally
Garuniad – £36 bln of government-backed loans will be toxic, taskforce warns
Out of time… but service will be slow today! It’s She-Who-Is-Mrs-Blain’s birthday… and I’m taking her to meet her Birthday present.. a … new set of fenders for the yacht! (And a picnic lunch with bubbles to celebrate!)