Blain’s Morning Porridge – March 11th 2020
“In terms of unconvincing rallies, yesterday takes the Tunnock’s Caramel Wafer – Scotland’s National Biscuit.”
During the last crisis we reassured ourselves there was a firm hand on the tiller, that the great ship of the global economy was being steered away from the rocks and the lee shore on which it so nearly beached itself. Experts from the central banks, governments, finance and regulators pulled together with common purpose and steered us through – not without significant consequences, which we still suffer from today in terms of market distortions.
So…. does an emergency 50 bp rate cut by the Bank of England to “support business and consumer confidence” fill you with confidence all is well with the World and we are going to miss the sharp pointy rocks? Are you going to put your buying boots on because the BoE has made stocks look relatively better return value than Gilts… or are you going to critically consider the risks, shake your head and sell?
I shall watch today’s UK budget with interest…..
Surprisingly, I’m still getting emails and being sent “news” articles explaining why the Coronavirus is not a threat, how it’s been hyped and vastly over-exaggerated, and is only mildly dangerous to a very few elderly patients with pre-existing conditions. Its, apparently, Fake News.
You’d have to be completely blind to the very real economic effects now making themselves increasingly apparent across the global economy. The Italians are not only struggling with a massive medical crisis, but are juggling their options on how to put their economy on hold for however long the crisis lasts by declaring some kind of moratorium on all domestic mortgage and debt repayments.
That’s pretty fundamental in terms of how money works, circulates and flows within an economy. But what else can they do to avoid a massive escalating financial implosion cascading through the economy except pull out the control rods to stop circulation?
Problem is Italy is not a sovereign borrower and can’t just print money to pay for it. It uses someone else’s currency – and even worse, the Euro is a committee currency. Anyone buying Italian bonds is taking a big gamble on the ECB and Europe agreeing to step up with an essentially unlimited ticket for an Italy bailout. Based on our previous experience why would you think that’s going to happen?
There might not be any choice but to bail them out – that’s the bet!
And its not just Italy in trouble. This is where globalisation and the complexity of modern financial markets comes back to bite us with a vengeance…
Suddenly, the virus has coalesced into crisis. Now we find ourselves at the epicentre of a massive and expanding economic conflaguration. Any firm or individual relying on income to service debt is unquestionably going to face crisis as cashflow dries up. We are likely to see cascading consequences as one missed payment becomes many, and one defaults sets the dominos tumbling.
As cash deteriorates on the balance sheet, you are nailed-on to see dozens if not hundreds of firms downgraded to junk triggering a massive enforced corporate sell-off. If you are still long corporate debt.. good luck with that one. I was emailing with an ETF dealer y’day on Fixed Income EFTs and he neatly turned round the liquidity promise.. “It’s unfair to say its Junk and Crossover ETF’s that are illiquid.. their liquidity is simply a function of underlying liquidity”.. which is why you can’t get a meaningful bid on any position. Try explaining that one to your investment committee.
If that’s not a problem.. then go buy the market.
And, that would be a mistake – because I’m pretty sure the market is not as cheap as its going to get…
Even as money stops, we’re going to see sentiment and hope driven lower as economic expectations on future earnings, default rates, and particularly the efficacy of support mechanisms come under increasing downwards pressure. Yesterday’s rally – such as it was – will stumble even more as it becomes clear… THERE JUST ISN’T A PLAN.
We all know that cutting interest rates is unlikely to persuade anyone to get on a plane, or help a corporate struggling to make this month’s payroll and rent. Yet the market buys the expectation central banks and the authorities are going to sort this, and will do whatever it takes.
What if there isn’t much that can be done?
At some point in the future, someone is going to pull all the data together. They will closely examine the hospital logs, analyse the transmission number and the infection rate, and do a cost-benefit analysis of the efforts to contain the virus. They may well conclude Governments over-reacted and the damage to the global economy exceeded the economic costs in terms of the virus mortality. That’s a nasty, inhumane calculation to make – but it’s one that is repeatedly made in emergency triage and wartime.
It’s not a calculation any politician in a democracy is going to admit making. The virus controls the headlines and the political options. Politicians have to be seen to be reacting.
There are lots of articles out there comparing this crash to previous crashes. The general perception – nicely encapsulated by Mo-the-Tash in How this market crash is different from 2008, and the same – is its different but similar. Yep.. we’ve been here before.
But this time it is different.
We naturally assume our Governments know what they are doing, and our financial leadership is fully informed. They are advised by the brightest, smartest and most informed scientists, technocrats, economists and industrial leaders. They will have analysed the way in which the virus is spreading, understood the transmission rate, the likelihood of mass infection, plotted where health resources are likely to be most efficiently targeted, figured out the areas of likely economic weakness, examined the policy options and concluded the right way to address crisis with well-timed fiscal policies, supported by accommodation across the market.
It’s as clear as a bell that Trump had no plan to address the Coronavirus before he was finally forced to say something Monday. Until then it was a “fake-news” distraction. He made a political gamble: that the virus would recede before it became a crisis, making him look smart and a market genius for calling it.
As the market went into freefall he was forced to play to it off-the-cuff. He spouted out what he thought the market wanted to hear in terms of measures, not because of concern about the virus, infection and mortality, but because a tumbling stock market will crucify him at the polls.
He promised us a full package – which he singularly failed to expand upon at his no-show press conference last night. On Monday he was flolloping around, throwing out crazy ideas like a payroll tax cut (effectively helicopter money) to trigger a demand side economic boost, talked about direct support for shale oil producers and airlines, and further threats about the Fed playing its part. He caught the market and his staff – such as they are, his trusted family members and carefully chosen anodyne yes-men unlikely to trigger a twitter storm – by surprise.
The market took it at face value. It heard what it wanted to hear. The most powerful man on the planet has a plan. Yippee! Marvellous! It’s bound to be a good one, because he is the US president. Yep, but he is also Donald Trump. There isn’t a plan. There are tweets.
In the past Donald has proved lucky. Napoleon said he didn’t care about how good a general was, only that he was lucky. Donald was lucky in his roll of the dice against Iran, and despite the dangers, his ham-fisted approach to trade, tax and the economy, his gambles haven’t resulted in complete disaster. I suppose that’s his “art of the deal”: gamble big and bluff it out.
But now it’s increasingly clear there is no real plan for the consequences of the virus on America. He’s barely speaking to the Fed and the other economic and financial advisors. Still he’s got economic geniuses like Mike Pence, Larry Kudlow, Steve Mnunchin and Jared Kushner telling him how brilliant his “not-a-plan” is.
We are so Rubber Ducked.
Without a deliverable plan, without clear and deliverable policies to support America through the crisis, the market is going to fade. Fact.
When the US economy weakens, then this crisis becomes full blown Global Depression and a Global Market Reset. At that point we’ll know who to blame…
Five things to read this Morning..
WSJ – Trump Struggles to Balance Mitigating Epidemic, Protecting Economy
WSJ – Ailing Chinese Bank Secures $1.7 bln of New Capital
FT – Bank of England cuts interest rates to 0.25% – stocks higher
Bloomberg – Britain Reaches for the Coronavirus Bazooka
Torygraph – Fears mount Italy will require a jumbo global bail-out to stem broader financial contagion
Its going to be an interesting day… Out of time and back to the day job..