Blain’s Morning Porridge – 19th March 2020
“My centre is yielding, my right is retreating. Situation Excellent. I am attacking!”
No matter what the doomsters say… the Coronavirus is not the end of the world. But, it might still have trigged the global economic reset we’ve long feared.
Let’s talk about the virus first:
That the virus will abate is a simple matter of fact. Just as suddenly and quickly as it struck, it will feel like it fizzles out much faster than we expect. Its simple maths.
The modelers I’m working with show the Virus will peak in around 6-8 weeks, and then infections will start to fall. There will be future successive waves – which will be damaging and trigger market reactions before immunity is gradually built up. The virus will have a volatility all of its own. Understanding that will be key to understanding economic and market consequences.
Other models show similar results. Watching the various scenarios play out on cluster charts on the Laptop yesterday was fascinating – rings of infection creating walls of immunity, while the virus seems to sleep before exploding elsewhere. Understanding how the successive waves of the virus will trigger new clusters, how it hides, and especially how it will impact the economy is going to be … educational.
Its complex math – but makes sense. Earlier this week, Rob Hillman, the quant behind the model I’m working with, confidently predicted UK schools would close. It happened. Next up is the rumoured London lockdown – and I hear 40 tube stations are closing this morning. Its not the end of the World – but it feels like it and its unprecedented.
Everything we do to reduce infection rates – social distancing, working from home, self-isolation, and not socialising widely slows the transmission rate – so the overall infection rate goes down. There is a great article on Calcalist which describes similar modelling: Corona is Slowing Down, Humanity will Survive, Says Biophysicist Michael Levitt.
While the Virus may quickly abate, the damage done to global markets and the world economy will not be cured as fast. Despite the UK, USA, and last night, the ECB tweeting its Euro 750 bln PEPPS bond buying bonanza – it feels we’re now heading into the abyss. Today we are blaming it on a global dollar shortage, but the real issue is the damage to sentiment, expectations and the burnt-finger syndrome. We’re hearing lots of funds have been caught wrong, thumped, crippled and are struggling – lesson learnt till next time.
We can all understand why equities are tumbling on the recessionary, depressionary, and demand side shock. I get that safe assets like Gold and Government bonds like Treasuries and Gilts are under selling pressure – because nothing else is liquid and they are the only assets likely to attract a bid. Everyone wants dollars – all around the globe forget anything else.. Gimme dollars! As a result, US banks with access to the Fed are at a competitive advantage. I guess access to global dollars will be the next issue to be addressed?
The dollar shortage partly explains the tumble in Sterling, but I struggle to understand why Sterling has taken such a spanking against the Euro? The UK government’s response and virus fiscal/handout package looks the most joined up, considered and most likely to work in terms of protecting the population from the Economic Consequences of the Virus by promising a decent degree of financial security. (Sure, there have been mistakes in addressing the Virus – but we’re Brits and we know the Heroes in the NHS will save us.)
The US response is more difficult in terms of politics (and the fact proposing free Health immediately makes any politician a de-facto communist!)
The new ECB bond buying orgy looks desperate. How it will protect jobs across the continent doesn’t figure – unless the ECB clearly iterates that Member States can do whatever fiscal money and helicopter drops they decide is necessary – immediately rendering the last 8 years of miserable austerity pointless. (The Bubbles will be very unimpressed.. (Bubbles? Bubble and Squeaks – Greeks.))
All these things and many more – like chronic issues in ETFs, Corporate Bonds, and of course Oil, hint the massive Global Reset Button has been pressed.
Where does that take us?
Its about Bonds. Its always about Bonds.
It would be well to remember its not just Stock Prices that were massively distorted by the unintended consequences of Monetary Experimentation during the last decade. It was artificially low interest rates that pushed yield tourism into higher risk assets – including equity, and allowed corporates to borrow some $14 trillion from bond markets which was largely ploughed into stock buybacks, pushing equity markets higher.
The immutable laws of mean reversion imply that unless interest rates also reset, then artificially low rates will simple restart the same process – again driving money into inflated high risk financial assets. Perhaps the moves towards higher bond yields – which I’ve put down to Government bonds being among the few liquid assets distressed investors can sell to meet margin calls, are going through something more fundamental?
It might be worth remembering my No 1 Market Mantra: “The Market Has But One Objective – To Inflict the Maximum Amount of Pain on the Maximum Amount of Participants”
Now, we all know the market is just the sum of what everyone thinks… but that’s an intelligence of a kind.. And if the Invisible Hand’s intelligence is saying bond yields have to rise to avoid this all repeating… Well that will explain why this Great Global Reset could see Equities continue to tumble and bond yields go higher still – inflicting pain on absolutely everyone..
Thankfully about a 1/3 of the Blain sail-round-the-world-fund is in gold.
Five Things to Read Today
Lets see what happens. Another year …., and deeper in debt, its back to the day job.. Anyone want to buy a Oil mine? Some loverly aircraft going cheap? How about some high-yield loans? Hah!