Blain’s Morning Porridge – March 20th 2020
“How beauteous mankind is! O brave new world that has such people in it..”
This is a very strange world we find ourselves in.
There is literally too much to write about in terms of how the Global Financial System is being roiled by the Coronavirus. It feels like everything I’ve ranted about over the last 12 years in the Morning Porridge is coming to roost. Another emergency rate cut. QE infinity plus 1. Oil prices everywhere. Massive corporate failure – Boeing is a great example: begging a bailout after years of greed and mismanagement, stock buybacks and failing to innovate better product – to the counter-intuitive assets moves we’ve seen in Gold and Government bonds. The credit markets are in lockdown and the bubble is blown on stocks.
I’m convinced we are at the beginning of a chaotic reconstruction of markets rather than passing through a simple predictable correction to the current order. If you don’t think so, can I interest you in this basket of junk bonds going chirpy chirpy cheep cheep? (Corporate Bonds are going to really, really hurt. Lots.)
The big shifts in safe haven assets like government bonds and gold getting cheaper illustrate how we’re still in the first phase – when investors cover losses selling liquid assets. We’d don’t need to overly worry about government bonds: they will revert higher, fuelled by renewed flight to quality, and by the massive new QE programmes. Gilts and Bonds will trend through zero yields. But, what if the evil uncle, Inflation, turns up unexpectedly at the new world party? He may well do…
Sterling is interesting. Why has it been spanked? My guess is as good as yours, but London is the centre of global finance. It is also, unfortunately, where a lot of less than pristine money ends up. In recent days we’ve seen the worlds nerdowells; the kleptocrats, the dodgy rulers and bankers, the arms dealers and drugs lords, panic and pull out money from London. They look to repatriate it as dollars. Short-term painful. Long-term? Cleaning up London is not a bad thing.
WFH! Buy Lawyers!
This working from Home malarkey is proving far more productive that expected… If I had a portfolio of City office space I’d be worried…
And thanks for the birthday wishes y’day… She-Who-is-Mrs-Blain bought me new Gravel Bike (a hybrid of mountain and road cycle) and book of local routes – which tells me something about couples sharing a workspace. (If I could buy stock in Divorce Solicitors I would – they are going to get seriously rich when this is over.)
Why Info and Data on the Coronavirus matters
Ray Dalio, CIO of Bridgewater shared the rather sobering investor letter he sent to his investors earlier this week. Across the range of Bridgewater funds, they have been thumped, and lost lots of money – between 7-18% depending on the strategy (and that was earlier this week – it might be more now!) He’s been on the wires at lot in recent days warning about how this will cost US corporates trillions, and how firms relying on algos and historical trends are going to hurt more.
In his letter Dailo said the Bridgewater losses were in line with what he would expect every 10-15 years, and the firms risk control processes worked as expected to mitigate the losses. It could have been worse. They won’t be the only firm to lose lots this quarter – but they are open and transparent about it.
What is extraordinary is Dalio’s explanation of the losses. The “Coronavirus pandemic came on fast and hit us because we had a long tilt in our positions.” And.. “there were no immediate signs of economic decline”. The firm has been tracking the Coronavirus since January. They decided not to deviate from Bridgewater’s tried and tested systems because they’d didn’t have any “edge trading view” on the virus or other outcomes.
Fair enough, but I don’t think you need an expert edge to listen to the experts and use a bit of common sense.
To blow my own trumpet: check out the Coronavirus Timeline pages on the Morning Porridge Website and you will see I’ve been tracking it’s rise since Jan 21st. I’ve consistently warned the market was underestimating the effects, it was likely to create economic and market mayhem, and potentially overwhelm health systems. And that was Blain’s seat of the pants approach; look at the story and work it out! Simples!
Bridgewater concluded the Coronavirus was just another unknown risk. The performance letter says “the risk control process worked as designed.” That’s like the official communique after the Somme disaster concluding.. “All arms combined magnificantly” and ignoring the 200,000 dead Tommies.
The fund says it is learning from the experience, and will “delve” deeply into companies and sectors to create a coronavirus edge. This is not over yet – there will be successive waves of virus volatility that will roil markets.
Dalio says they are questioning if they could have done things differently: “We are exploring this, and will systemise whatever we come up with into our decision making systems.”
With better information and an understanding of the virus and its likely effect on markets – Bridgewater might have been able to foresee the burgeoning damage COVID19 is doing.
The market is only now catching up with what a study by Imperial College revealed on Monday – it was the shocker that triggered Boris and Trump into action: The Shocking Coronavirus study that rocked the world. (I sent it round some clients on Tuesday.)
The study demonstrates the value of modelling in being able to predict how the virus transmits, spreads, infects, builds up immunity, reignities, and comes back in successive waves. The Maths is predictable. Its complex. We can see exactly how it has hit the markets.
Predicting the virus – trends and numbers of new cases, new clusters, mortality rates, etc, is going to “fast become the “new payrolls”,according to Rob Hillman, who is running the modelling team I’m collaborating with. Its going to be as powerful a pricing tool as Monte Carlo Sims became in derivatives!
The team is exploring the impact of different testing regimes and the impact that increasing test coverage will have on changing the impact on reported statistics. For example, early indications suggest that lower levels of testing (i.e. knowing how many people have the virus) serves to dampen the profile of new cases, making acceleration or deceleration harder to detect. Another issue the team is exploring is the impact of lags between policy intervention (ratcheting up suppression policies) and the published numbers.
In simulations they have found there may be well over a week for any impacts to change the underlying spread of the virus, and even longer to detect depending on the strength of the testing regime.
Getting a grip on how to interpret the amount of news in the daily published data will be critical for both investors and policy-makers.
Get in touch if you wish to know more – I’m afraid institutions only.
Five Things to Read this Morning
BBerg – The Ethical Way to Ration Coronavirus Hospital Care
BBerg – Death Toll Tops 10,000, says John Hopkins. 12 days for 100,000 new cases to emerge.
FT – Downgrades to junk are just one sign of an “ugly” credit market
WSJ – The Next Coronavirus Financial Crisis: Record Piles of Risky Corporate Debt
CNBC – BoA says the recession is already here: “Jobs will be lost, wealth will be destroyed.”
Have a safe weekend, stay away from crowds, and find a nice quiet hobby. I’m off cycling round the New Forest!
Out of Time and Back to the Day Job!