Blain’s Morning Porridge – June 22nd 2020 – The Mars Bar Conundrum
“If you’ve never seen an Elephant ski, then you’ve never tried acid..”
People are getting very optimistic. I’m reading predictions the massive retail splurge of the last few weeks means the crisis will result in much less severe slowdown – the US economy will only contract 4% rather than the earlier 6% decline. Brilliant..! We’re all going to be saved then? Perhaps not. Europe, and especially the UK, are still going to tumble 9%-ish. And that’s the good news – the downside is new outbreaks in Iran, slaughterhouses becoming infection hotspots, R numbers doubling, record infections in US sunshine-retirement states.
A 4% decline is still a 4% decline. 9% is a much bigger number. Will someone please explain these to global markets?
What is really happening across the global economy? The analysts and economists are still arguing about sharp V-shapes, W-Ws or Nike ticks. We really don’t know – it’s a very complex call. The outlook is a delicate balance between companies that have simply seen sales delayed vs those that have lost income permanently, firms planning for growth vs those looking to stay solvent by slashing costs and jobs, rising debt levels, unemployment surges, coronavirus threat indicators and the likelihood of a successful vaccine or therapies.
When investment banks say look at the fundamentals and understand the effects on individual discrete investments – I could not agree more. This is a time to delve into the detail. The trend is distorted, and very much not your friend.
Last week I mentioned how the data driving the market is changing – it’s no longer the monthly jobs, GDP, production or factory orders that matter, but the immediate information highlighting how consumers and business are responding to the Coronavirus/economy axis as it happens. But, in our effort to understand the chaotic market volatility, are we now trying to find significance in the number of times a butterfly’s wing beats…?
Sure enough, “investors and analysts are tracking a number of unconventional metrics to predict the stock market’s trajectory” said the Wall Street journal over the weekend. Everything from car crashes and breakdowns giving information on travel, rising flight numbers, restaurant bookings (not here in the UK to be fair), clicks on Google Maps, shop footfall and food spending.
All these metrics give immediate indications of consumer and producer behaviours.
The problem is human behaviour is not always particular rational. RATEX (rational expectations) theory has been debunked many times.
UK Comedian Eddie Izzard once observed “Mars Bars seldom rot in the fridge, but there is never a right time to eat a pear.” Spending on UK food shopping has risen between 7-10% over the lockdown – much of it on confectionary and alcohol. Here in Blain Manor, we’ve tried very hard to be good. We’ve been getting a weekly “organic veg box” – and our larder is now full of unused shallots. I’m not entirely sure what one does with a shallot. (Its a slightly elongated and squishier onion..) They will probably go the way of most Pears – beautiful, nutritious, delicious but thrown out uneaten. I have never thrown out a Mars Bar.
My point is: careful of what you assume from the data. There is clearly a massive desire by individuals to get out there and spend after 3 months of repression. Companies are desperate to sell. There has been a sharp bounce in activity in recent weeks – but activity today is nowhere near where it would normally be at mid-year. Yet, the Virus will remain a massive break on economic activity. Many of these people may not be spending when they lose their furlough cheque.
I’m wondering if behavioural responses to the crisis are the way to best predict its path? It’s thrown up some really mad stuff, like the retail “robin-hood” marks and the David Portnoy nonsense that markets can only go up. Their action resonate with the ongoing historical “peculiar madness of crowds” narrative from the Children’s Crusade and Tulip Mania.
Maybe the Virus response is akin to the five-stages of grief?
We’ve had the initial Denial of the virus by geniuses like Donald Trump and Brazil’s Bolsonaro. We’ve seen the shock and surprise of lockdown. We’ve seen the Anger over the botched handling of the crisis. And we’re seeing bargaining as people decide its ok to now take some risk by going out, by shopping or joining in a demo.
There is no doubt the virus has created extreme reactions. Its spawned a large number of Coronanazis who now genuinely believe its death to pass within 2 meters of another human being, and can’t resist warning of the dangers of not wearing a mask. It’s an unmissable opportunity some unions have seized to garner greater power representing their members and demanding concessions from government. And, lets face it… we are all getting very comfortable working from home..
Markets are behaving like we’re in a new stage of virus reaction – a relief stage as people think the virus has passed them by. They can’t wait to go back and resume their former lives. I’m sorry, but it’s still the Bargaining stage – people want to believe it’s over and is no longer a threat. But the virus remains very real: if you get it bad, you get it very bad, and even the best case says a tiny fraction of the population has antibodies.
The next stage in the up/down mood swings will likely be Depression. As infections flare up, lockdowns are re-imposed, promised re-openings are delayed because R numbers have risen, then the urge to go out and spend might diminish. That could coincide with the miserable Q2 earnings season (that starts in 14 days) and rising unemployment as companies realise what a long-term challenge to solvency the virus presents. Governments can’t pay furlough schemes indefinitely – or can they?
The same reassessment is likely to happen in financial assets. I have not spoken to a single client in recent months who thinks the markets are not massively distorted and inflated. Some of my very largest accounts are telling me how concerned they are on UK and European economic metrics and outlook. They are smarter and weeks ahead of where the dumb stock market now is.
At some point, for all that governments and central banks chuck at the markets, there is going to be Acceptance and Resignation to what’s happening – which is bad. Very bad.. That’s when stock markets stop fooling themselves..
The consequences are going to be immense.
Another area of pain will be markets themselves. If you have time, please click on this article I wrote for CAPX: QE-addicted markets will not get us out of this crisis.
So much more to think about this morning. Germany looks a bit embarrassed after Wirecard loses billions and Lufthansa looks set to lose its Government bailout because shareholders can’t be bothered to vote. Trumps debacle in Tulsa points to an interesting US election season – Biden would win outright tomorrow, and things may get much worse by November.
And finally I have given up on Bloomberg TV – despite being a subscriber, it seems to play in a permanent loop of meaningless adverts. Its the square root of useless.
Five Things To Read Today
NYT How Humanity Unleashed a Flood of New Diseases
BBerg – Niall Ferguson: America is on the road to relapse not recovery
CapX – QE-Addicted Markets will not get us out of this crisis
FT – Small US companies squeezed hardest by Covid-19 effects
WSJ – Thank Stimulus For the Market’s Whiplash
Out of time… and taking a half day to spend with my Daughter…