Blain’s Morning Porridge – May 4th 2020
“Why that’s absurd, the wing is on the bird”
Economies are poised to crawl out from underneath the COVID rock. Across Europe and the States it’s not quite an economic spring, but there is a sense something more positive is underway. The UK gets a big announcement next Sunday detailing re-opening rules, new social distancing recommendations, and return-to-work advice. It won’t be business as usual – but it will be businesses.
There have been mistakes around the globe in how the coronavirus was handled. It has not been The End of The World the models predicted. Harry Hindsight is the best trader I ever knew… we didn’t know then what we know now.
C-19 has been a massive test of political leadership. Scared electorates have accepted the lockdown choices that were made. Bad calls were made – but the critical thing is they were made. Generally, any leadership is better than none. (There are exceptions… I shall wash my mouth out with a bleach and chloroquine cocktail before naming any..) Resources proved scarce, and much to joy of journalists who can’t find anything better to do, the buck for that stops at the top – for the time being.
We still don’t know what the Virus plans next.. what insidious grand plan to kill us all is coursing through its.. STOP. It’s an unthinking strand of RNA in a fatty protein shell that got lucky.
The more we understand about how it functions and what it does, the better we can predict – we’re learning more every day. The experience of countries that didn’t lockdown, particularly Sweden, countries with better contact tracing, plus new drugs and therapies means we’re better prepared and more ready for round two. It’s a war we’re winning. We can prepare for the peace to follow… and face just how ruined the economic landscape is – its a quick clean up or a total rebuild?
I’m interested in how the real economic outlook unfolds. What will that mean for markets?
It will be kind of ironic if the current rally proves a bear bounce and stocks now tumble just as we see the exit signs.
The outlook for markets remains massively challenging. There is a very delicate balance underway: the market’s confidence in QE Infinity and Government fiscal support vs the real economic damage in terms of failing companies, dividend stops, rising unemployment and permanently broken supply chains. If that confidence breaks… then it’s a massive sell signal.
The risks are compounded because of how distorted and overvalued markets were before this crisis even began. The ultimate mistake of the 2008 Global Financial Crisis may yet prove to be the market price distortions caused by QE were never unwound. These have keep bond prices high, interest rates artificially how, and though cheap debt and yield tourism, kept stock prices well above where they should be. We’ve been waiting for the invisible hand of markets to correct the imbalances for years – but they never did. The invisible hand of markets is handcuffed to QE Infinity!
Confidence all depends on how the news plays out in coming days – much of it is already nailed on as bad. There will be a record tumble in US Employment – from 3% to around 16% on Friday 7th May. Markets will depend on whether the “illusion” of “Whatever it takes” Government and Central Bank action can be maintained.
US earnings show around 14% y-o-y declines in earnings through Q1 – that figure will be magnified in Q2. New earnings this week will include GE – another top contender for the fall into Junk – which could weaken sentiment. Another Oil Shock or rising tensions with China won’t help. Across the globe companies are trying to fathom how quickly they can adjust “just-in-time-supply-chains” and prepare for the massive demand shock that’s underway as consumer confidence collapses in face of salary cuts, furloughs, redundancy and firms failing – there is an avalanche of bad news made up from millions of individual financial tragedies underway.
There is also the issue of how much can Nations do? The Bank of England will likely announce or hint at enlarging QE – its already blasted through an unprecedented 1/3rd of the £200 bln emergency package that’s kept Gilts stable through the government’s spending promise splurge.
Would it matter if markets did break? The billions and trillions of QE Infinity and government support, plus the and associated Moral Hazard, is not an attractive look. How do you explain to electorates why their jobs are collapsing, yet the financial markets are having the ultimate party? A collapse in markets would have enormous knock-on effects into the banking sector, and especially asset management (where most risk resides). It would destroy savings and confidence.
I suspect governments will react – much as they did following the last crisis – with new hastily conceived and ill-considered rules and regulations that will further damage functional markets.
There will be consequences…
Yoorp… a game to play…
In order to play the markets – the right call is to play the volatility of confidence.
I was struck by this line in a bank’s global equity outlook: “We are structurally overweight countries with monetary and fiscal autonomy.” They could equally have written: “We are selling the **** out of Europe.”
Europe and the Euro are goods example of great idea badly executed at the wrong time.. We know its decision-making processes are hamstrung by the EU constructs, the ECB’s political oversight, and national self-interest . It’s structures make strategic leadership slow and nebulous. Every major policy shift requires a crisis to precipitate it. There is no consensus on what the future should be: Unification vs Federal? Repeated crisis means prices collapse and spreads widen, before they snap back in on something like the Draghi “Do-Whatever-It-Takes” moment.
The next few weeks are critical for Europe. The tensions between the struggling south desperate to spend their way out for crisis and the thrifty German-Dutch axis is being hampered by a lack of political direction (ahead of elections and the Merkel succession issue), and credibility. Southern Europe needs cash to bail them though a 15-20% collapse from zero tourism income. As economic pain spreads around the globe, expect a renewed immigrant crisis across the Med this year – requiring further cash for the poor south.
In the absence of real decisions, and “kicking-the-can-down-the-road” non-decisions, European spreads will remain volatile, and commerce will continue to underperform. These are likely screaming buys at the lows on the basis a good crisis in Europe will eventually trigger a “hold-the-thing-together” response with some kind of Southern Europe bailout. But – it will be just enough to solve the immediate crisis, and leave full resolution of Euro imbalance effects to yet another day.
The bottom line is Europe is a market game to play – buy low and wait for the “whatever-it-takes” bailout in whatever form it takes.
Five Things to Read This Morning
Troygraph – Corporate Confidence slumps to all-time low
Out of time, and back to the day job!