Blain’s Morning Porridge – April 16 2020: The “Judder” moment

Blain’s Morning Porridge – April 16th 2020

“It was a closest run thing you ever saw in your life…”

Markets stumbled y’day – caught between hopes the global economy will shortly reopen versus the increasingly dire economic outlook and the complexities of reopening. Yesterday’s record 8.7% decline in US retail sales triggered a “wake and smell the coffee moment”. In a hope vs reality fight – guess who usually wins…

The good news is New York, the UK and much of Europe seem to be at the top of the C-19 curve. The bad news is it feels like a market “Judder”is underway – that moment when reality bites, market sentiment turns and reassessment occurs. I sense it’s happening. It doesn’t mean a renewed market collapse is nailed on, but certainly the mood is turning sanguine and ugly. The focus will shift from FOMO over the rally to digesting the dire economic news as it deepens in coming weeks.

The Judder will have profound implications for the longevity of the current rally.

I’m remaining selective: I’m still flat/short all but a few names. My portfolio includes Netflix which hit a record – although I still think it’s a long-term competitive loser. What happens in 6-months when I’m bored watching Narcos for the 10th time, and they’ve delayed series 3 for a year? Switch to Disney? (Guilty secret: my son and I watched Moana y’day.. and its rather good.) My six Tesla shares are apparently worth more than the rest of the global car sector – and that really doesn’t make any sense.. I want an E-Tron!

The only thing worse than a battle gained? 

Mistakes were made, but UK hospitals are coping splendidly. The battle isn’t over, but none of them were overwhelmed by cases. There has been tragedy, but there is pride – and a certain amount of guilt that the people of Britain who’ve saved us; the supermarket workers, the delivery drivers, the nurses, the care assistants and the rest are on close to minimum wages.  The story of the young pregnant nurse puts a tear in my eye – but her daughter lives. The massive new Nightingale Hospital out in Docklands has only seen a trickle of cases – and that is fantastic. It tells us the curve was flattened.

Time to get back to work?

Let’s listen to the scientists. If the Americans want a willie-waggling contest between governors and the president; their call.

There is a lack of data – we simply don’t know enough about infections, rates and numbers. It’s a clear lesson to learn about testing. It’s now about a trade-off between opening earl or delaying opening. In the absence of real data, it’s probably better we wait a little longer. The big risk is opening too early could result in a second spike in C-19 cases in around 2-3 months. That’s a repeat crisis worth avoiding.

I’m increasingly confident the economy will be reopening by Mid May, and we will avoid the worst of the economic predictions. There will still be pain, and the cascade effects of increased debt, missed payments, and SME failures will reverb round the economy for years.

Yesterday I was trying to help a chum who expected to sell his middle-sized business and retire comfortably this year – now he’s struggling to keep it open, and he’s finding applying for the much-vaunted Government loans a nightmare. The multiplier effects of SME slowdown will be enormous as that happens across the nation. Areas like prime residential property – much of which is fuelled by retirees selling their businesses – are going to struggle.

My chums at Economic Modelers Neuron Capital are doing the work on when to reopen. They’re not quite done yet, but their initial thinking is it looks like if we relax the lockdown 2 weeks after the peak, we’d need to maintain social distancing measures around 80% of today’s levels to avoid a second peak. If we wait for 4 weeks, we can allow that to drop to 60%. Exactly what that means in terms of distancing is one issue – but economic activity will resume! (If you want to sign up with Neuron – let me know.)

Why Government debt is a bad thing…. It encourages Bureaucracy

I got involved in an argument yesterday about why Government’s raising lots more debt when interest rates are so low is such a bad thing.

We talked through the usual stuff about public debt crowding out private investment, the inefficiency of spendthrift government spending creating private sector bottlenecks, the massive pension burden government places on productive workers, (like UK government pensions being about 110% of total tax receipts in a few years time), and issues such as the hidden hand, the public goods governments should pay for, against the likely failures of governments trying to set market levels.

The real issue is bureaucracy – and how it stifles any economy.

Come the summer I had intended to write The Book about how bureaucracy is the most dangerous force acting upon Global Economies. They are pernicious, but predictable. They economic goal of any entity is maximisation. Traders’ economic goal is to maximise profits. Managerial accountants’ economic goal is the maximise margins. Mine is to maximise time on my sailboat.

The economic goal of bureaucracies is to maximise how deeply they can entrench themselves and exert control over the area of responsibility. Providing services becomes secondary to ensuring their own criticality to that service. Read this story on Zerohedge to understand how policy deliverables just get in the way of bureaucratic objectives: “Somethings Gone Wrong”: UK Government, Banks Screw Up COVID-Loans, SMEs Near Collapse.

If you want examples of how, let me introduce Janice Hewitt, who was chief officer for health and social care integration (whatever that means) at North Lanarkshire council. She received a pay package of over £615k last year. It included a massive pension contribution and compensation for loss of office after she left with a “golden parachute for poor performance”, according to trade union Unison.

Knowing what care assistants are paid in Scotland – and how long pensioners and the long-term sick have to wait for the scarce resource to be allocated to them, that pay-package would have funded over 30 care workers.

Ms Hewitt is not even a national civil servant – she’s a local authority employee – of a local authority in a deprived area that cut $16 mm in services last year, and hiked council tax by 3%. She isn’t the only Local Authority employee living it big – around the UK over 660 earn more than Boris Johnson’s prime ministerial salary.

While we are all out supporting the NHS and the bravery of our Nurses and Doctors, last year 15 NHS Trust Chiefs – the bureaucrats earned over £250k. Maybe that is a fair rate for these jobs – but ten times what a front-line Nurse earns seems high. Take a glance at the website of NHS England, the body that leads the health service in England. Its big. It’s got lots of senior managers – I did a quick search to see what they are paid. Its obscure, but looks likely to be quite a surprisingly large number.

You may say these managers are a bargain compared to private sector CEOs. Good argument – but the private sector is accountable. For civil servants, the buck and responsibility always stops with government.

These health service managers are paid to ensure the NHS delivers and are responsible for long-term planning. You would have thought that after an in-depth wargaming exercise of a Virus Pandemic in 2016 they would have paid attention to the need for PPE and Ventilators – the main conclusion of the exercise. Nope. They apparently missed that particular lesson. They are happy to take the cash, but they don’t take the flack.

Instead, every night, at 6 o’clock we get politicians thrown into political bearpit so some BBC harridan can scream at them for their bureaucrats’ mistakes. After this is done, it’s time for the unthinkable. A root-and-branch examination, refocus and relaunch of the NHS and other bureaucracies. Root out entrenchment and run them like business.. AND PAY THE FRONT LINE STAFF!

Five Things to Read This Morning

FT – Cash Rich Gulf funds hunt for bargains as asset prices plunge

FT – Coronavirus will awaken inflationary fears before year is out

BBerg – The Fog Surrounding The Coronavirus Economy

WSJ – Business Leaders Urge Trump to Dramatically Increase Coronavirus Testing

Torygraph – Business plans for socially distanced reopening

Out of time, and back to the day job…

Bill Blain

Shard Capital