Blain’s Morning Porridge – June 11th 2020 – The illusion wears thin
“It is the system that deserves to be blamed. What those who wish to perpetuate the system deserve is another question.”
The Fed did exactly what was expected – nay, demanded! Asset purchase volumes will be maintained while rates will remain near zero for the next 2 years. Hallelujah! The market shrugged aside indications a second virus wave is hitting across parts of the US and Europe…
If Fed-Head Jay Powell has said anything else, there would have been a hissy-fit mini-taper-tantrum. The dominant force on markets will remain central banks juicing markets – and all the entails in terms of distortion. The immediate lesson for investors is – keep buying! The Fed and the other CBs have got your back. They can’t afford for markets to stumble.
Problem is… little the Fed said is likely to change the reality of the coming recession. The downturn might not be as deep or as bad as we originally feared, but whatever nonsense some analysts are spouting in terms of hopes for a V-Shape recovery… recession is coming. It might be less damaging, and less long-lived than we fear… But..
There is a new and growing dimension to this crisis…
The Black Lives Matter demonstrations around the globe highlight the threat of social unrest, and political dislocation. When the virus kicked in, I commented a few times how lockdown frustrations and hot summer nights could be a recipe for riots. But, what’s happened is much more fundamental – and should be a critical concern for investors in terms of how it changes the political narrative.
Unrest is a political issue – and politics have a seriously underestimated ability to roil markets.
The shocking judicial murder of George Floyd and the resurgent Black Lives Matter campaign have launched something very significant in terms of political dislocation. I don’t for a microsecond buy into any of the nonsense “antifa” conspiracy fake-news, but from the massive global reaction its clear something has been stirred – and markets should be factoring in rising political risks as a result.
Forget all the news-noise in recent days about thuggery, police brutality, frankly ridiculous white middle-class virtue signalling, and chucking statues in harbours. While the violence and looting was probably driven by opportunism and boredom, the underlying grievances are about fundamental human emotions. The real issues are much bigger. Perceptions of rising inequality are rising – in terms of opportunities, rights and of income. Inequality has been magnified over the last 12 years – as a consequence of the last market crash – and societies are likely to become even more unequal as this recession plays out.
This growing sense of injustice and unfairness will hit across economies. As the virus bites harder in less developed economies, the pressure and unrest is likely to escalate. As the global economy deteriorates, unemployment rises and inequalities widen, the pressure on governments will mount. Economies in crisis and rising unrest are going to prove a fertile ground for political agitation and populism.
The authorities should be increasingly nervous. Persuading electorates that stable markets are indicative of stable economies won’t hold up for long if the picture becomes bleaker. I suspect the veil is falling – the increasingly obvious inconsistencies that underly markets and the economy could break down.. deepening the swiftly developing sense of injustice and inequality we’ve seen in the recent demonstrations.
The unrest is rising at a very vulnerable time in the virus cycle, and will further deepen political dislocation. The narrative has changed from unity and “governments know best”, to a new blame game phase. It doesn’t help build confidence when a discredited epidemiologist is given face time by the government-hating BBC to declare 20,000 UK deaths could have been avoided if we’d locked down a week earlier.
Around the globe, governments are struggling to address the critical fiscal challenges thrown up by the virus. As the coming recession mounts, the pressure will increase. Here’s how its likely to play out:
o We know global supply chains are stretched and difficult to repair. Every shuttered factory and furloughed job has potential downstream consequences – much like the proverbial butterfly’s wing flap in Surrey causes a typhoon in Hong Kong. It’s a very connected global economy – and will take time to adapt and settle.
o Corporates are planning defensively, cutting costs and jobs. If 5% of jobs are cut, that’s a massive global economic demand shock. Factories are being shut because of slumping demand – not the virus.
o For all the government largesse, state bailouts and furlough schemes – they can’t last forever. I understand there was a massive rush y’day to get UK workers registered on the furlough scheme before the 1st phase of the scheme closed yesterday.
o The virus remains a threat – while there has not been a second Tsunami of cases, waves are occurring in places like Texas, Arizona, Florida and across Europe. Lest we forget – if you catch the virus and get it bad, you could be looking at long-term recovery after weeks of hospital.
o Meanwhile, we have stock markets at or close to record levels, and record PE ratios ahead of massive drops that will be released through the Q2 earning seasons. We are seeing a massive debt binge by sovereigns, corporates and individuals who seem to think ultra-low rates means debt doesn’t matter – it still has to be repaid.. (Unless… where is that teach-yourself MMT Book of Magic…?)
Its already happening. We’re seeing recently reopened factories being closed again – sometimes due to a lack of parts from broken supply chains, but in the case of Caterpillar yesterday on a lack of demand for its products. Around the world, companies are looking to shed costs and surplus employees as they scale back businesses to weather the recession.
All the above point to an increasing number of fracture lines and points of tension emerging in the global economy. But it’s not money or markets that actually matter. Economies comprise individuals interreacting between themselves. As the economy cracks – unskilled workers suffer most, and unrest will rise.
Job cuts are hitting hardest across the least skilled classes. Its shop, factory-floor and serving staff that are joining the job lines. Knowledge based workers are having a much easier – even satisfying – crisis in lockdown.
Through the last 10-years of debt-fuelled corporate stock buybacks we’ve seen massive income shifts towards the rich. Shocking corporate bonuses, and the failure of trickle-down, offends many – not just on the left. Unskilled workers are priced out of good neighbourhoods. Social deprivation, drugs, crime – all hit hardest on the less privileged parts of society. Educational opportunities are limited.
And how do politicians react? Badly. Our current leadership crop are dominated by dither and bluster. Stories are allowed to take root and spread like pernicious weeds.
For instance, when a prominent politician claims BAME health-workers have been sacrificed to Coronavirus, and were bullied into treating patients with insufficient PPE, she is playing to an audience where the story has resonance.
It’s true – nearly every single doctor in the UK who has died from coronavirus has been of Black or Asian ancestry. But have you ever tried to bully a doctor? You won’t get far. Its also true BAME staff are massively overrepresented on the NHS, and they will have run a greater risk of exposure. They’ve clearly suffered more – but I’m pretty damn sure no one ever planned for it to be that way. (I am frankly furious a politician would demean the NHS BAME doctors, nurses, cleaners and other staff who’ve died as result of the coronavirus by calling their deaths racism – they were skilled and highly regarded heroes doing jobs they chose to do. Government will find out why the virus has hit BAME citizens so hard – and will address it.)
The riots demonstrate that tensions are high and rising. As the recession bites, there is a risk of further division and populism creating political instability and populism. While the riots are largely a US issue thus far, I’m actually even more worried about the political risks elsewhere; in South America, North Africa, Asia and even Europe.
Five Stories to Read This Morning:
Grauniad – UK Firms say they have dramatically scaled back investment plans
Spectator – Macron is facing economic disaster
WSJ – The Fed’s Work is Far From Done
Torygraph – Tesla becomes the most valuable car company in the world at $190 bn
Bloomberg – Centrica to cut 5000 jobs in move to stem losses
Out of time, and back to the day job…