Blain’s Morning Porridge – March 25 2020 – Reasons to be hopeful?

Blain’s Morning Porridge – March 25th 2020

“Hammersmith Palais, the Bolshoi Ballet, being rather silly and Porridge Oats..”

This morning I have sniffles, a runny nose, I’m sneezing, and I’ve got a stonking headache. I’m certain it’s not the Wuhan flu – the symptoms started soon after I got back from a really fun cycle through the local woods. Its more likely the start of my annual bout with Spring Hay Fever. I am now overdosed on anti-histamines and feel like going back to bed… 

Instead I shall preserve with this morning’s comment!  My sniffles this morning are not a harbinger of doom, but a reminder of normality…..

Things might be better than we think!

It’s difficult to argue with the biggest (10% plus) meltup in stock prices since 1933. It only cost $2 trillion in Government support measures (finally agreed late last night) and the Fed’s QE Infinity on Monday, to put some $3 trillion back onto the value of US stocks y’day. A bargain…! No doubt the market will soar again today as it digests the US plan in detail. No one wants to be late to a rally!

Is it the moment to buy? There are definitely opportunities out there, but don’t get carried away… Yet!

There will still be real damage to factor into prices. We have still to feel the pain of Q1 and Q2 earnings and national economic numbers – which will be frightful. And we have not seen health services in the US and UK exposed to the full trauma of the Coronavirus – which is going to shock us all. We reckon in about 17 days time…

And then there will be longer term damage to the economy. Even UK wunderkid Chancellor Rishi Sunak admitted the UK can’t save every business. Global supply chains are still pressured and could take months to restore. There will be defaults and we expect to see a significant rise in downgrades, plunging more uncertainty into corporate bonds as first firesales sales of Fallen Angels occur. The knock-on effects of low oil prices on US shale producers will be rock the US system.

Even a best-case guess suggests the consequences of the Coronavirus will be devastating. You can’t get away from it.


Its increasingly clear there is light at the end of the Covid-19 tunnel. Strick lockdown, a focus on hygiene and disinfection, aggressive testing and a massive contact tracing effort seems to have kept transmissions low, and kept new clusters from breaking out in China. The shops are reopening – even in Wuhan itself. In Korea the rise of the virus looks to have been similarly controlled. Other countries in Asia probably benefited from climate and weather – but the rules seem simple:

· When the virus strikes, put strict social distancing in place as quickly as possible to get R down to zero. R is the critical number – the transmission rate, the number of people an infected person infects. We’ve assumed that is between 2 and 3 is a normal economy. The Chinese imposed draconian controls right at the start of the virus, and made a massive effort on hygiene – hand washing and masks (ineffective though they be). They got the R number down to 0.32. That is very strict indeed – and it effectively slowed the infection curve.

It worked – look at the new cases infection line – it was flattening at a far earlier stage than we now see in the curves in the West. Italy is still aggressively rising at a stage where China was beginning to flatten.

As China reopens they have relaxed the “R number” containment rules, allowing people back to work where necessary if they can’t work from home, maintaining bans on social gathering, and generally trying to keep R below 1. At this stage, the economy starts working again. Eventually, everyone will get to that point.

However, there may be even more positive news.

The critical problem has been knowledge of how many people have the disease – lack of testing means we just don’t really know.

The authorities have been using the limited number of testing kits to test those showing symptoms of the disease, and then those who had contact with carriers – which skews the models. The results of these tests gave us estimates on mortality rates, those likely to be lightly affected, seriously affected and hospitalised.

But, there was no general testing of the whole population. It would have been impossible with the testing facilities available.

The anecdotal evidence, including Cabinet Ministers returning to post, and the fact there has been no widespread testing, supports the notion the observed number of people currently in hospitals is way below what we’d expect if we’ve been getting successive infections from China since early January. It doesn’t mean the hospitals won’t still be swamped, but there are fewer people in the ICU wards than we might have expected based on what we suspect the real infection rate is.

It’s very probable there are far more people infected than the limited testing suggests, which means the disease has a lower mortality rate than we thought. It means more people have probably had it and shrugged it off.

Yesterday, a large number of readers sent me the “Coronavirus may have infected half of UK population – Oxford study” from the FT.  If it’s right, it could be a real game changer, and mean lockdown can be ended sooner, and the economy kickstarted, perhaps within weeks rather than months. (However, it is based on a very basic and simple epidemic model.)

Rather than only 1/1000 people being hit by Coronavirus so far – the rough number from Italy cases/population, if the virus has spread far more widely, with most people showing no symptoms and those who do suffer having something akin to a light cold, then the reason we aren’t seeing new clusters constantly igniting is because its already so prevalent in the population – who have considerable immunity!

My chums at modelling experts Neuron Capital suggest the key to buying into the Oxford results is that the virus is much less dangerous than assumed by the Imperial team’s study released last week – which triggered Boris Johnson to step up the cumulative lockdown of the UK.

If the Oxford Study is correct – and it has not yet been tested – and 50% of the population are already immune, then it would validate the assumption in their model that only 0.1% of the population are at risk. By contrast, if we think that the virus is more dangerous, for example with a mortality rate of 3.4%, then it would suggest less than 2% of the UK population has so far contracted the virus.

Neuron’s modelling suggests that if the world looks more like the assumptions underpinning the Imperial model then we might expect there are currently about around 5% of the population currently infected.

The bottom line is that if the infection rate is much higher, then we will still need lockdown now to protect the health service from crashing due to a wave of very ill patients. But subsequently, we can worry less about subsequent Fat Tail waves of infection. The sensitivity of the assumptions are very important, but will become apparent in coming days as the infection peaks and testing becomes more prevalent.

It’s a good reason to have multiple different models analysing the crisis. But… somehow the Oxford study makes me feel a little more confident this morning…

Five Things to Read This Morning

FT – Oil Industry faces biggest crisis in 100 years

FT – Nationalisation of bond markets helps calm markets

WSJ – Loss Rate on Bank’s Real-Estate Loans Expected to Soar

BBerg – Formula 1 Helps Boris Edge Close to 30,000 Ventilator Target

BBerg – Sweden May Be Headed Into Worst Recession in Recorded History

Out of time, and on to the day job!

Bill Blain

Shard Capital