Blain’s Morning Porridge – May 5th2020
“He’s so fluffy I’m going to die…”
A BBC producer once told me about the risk assessment she was required to complete before filming at a market in Wales. She quietly added “superglue to repair broken unicorn horns” to the first aid content list. She was never caught. No one ever checked. Full in-depth risk assessments by companies with 5 or more employees will be required for post lockdown business re-openings. I won’t be getting the train to London anytime soon – the rail unions are insisting on full PPE, and arguing it I would be safer if trains were passenger-free to protect their members.
Nothing ever really changes… I am going to instigate a prize for the most ridiculous threat identified or mitigated by a Risk Assessment. How many lives have risk assessments saved?
What is the future going to look like?
What if I suggest the Coronavirus, and the consequences of the response, will spell the effective end for Financial Asset Markets – bonds and equity? What if I think that’s probably a good thing?
The argument is simple.
The repression of interest rates to zero and negative real yields has become an absolute disincentive to invest in them. The search for yield has pushed investors to take more risk – buying increasingly high-risk corporate debt at lower and lower yields. The effect has been to make businesses less and less efficient as they gorge and grow flabby on cheap debt, while pushing up their stock prices through buy-backs. As dividends collapse because of the crisis, and because any cash is required to service burgeoning debt.. its time to ask an important question:
SERIOUSLY – WHAT IS THE POINT IN BUYING FINANCIAL ASSETS?
At this point, my fund management readers will choking into their coffees, spluttering with rage. They buy financial assets because they are liquid. (No – they are not. They are liquid because QE Infinity makes them liquid by supplying a buyer of last resort.) Or they might bemoan the fact UCITS rules mean they have to hold them. A few will be laughing.. “That idiot Blain, doesn’t he understand that we don’t care.? As long as governments and central banks keep buying, we’ll earn returns.”
You don’t need distorted financial assets.
It’s time to by-pass them. Invest direct into the real economy. The returns will be better, and its honest.
Wake up to the Alternatives Markets – investing directly into the real economy! It’s much less distorted and offers real returns versus risk. I expect to see direct investment grow exponentially in coming years – especially as the investment community wakes up to the fact they already have all the required skills to invest in it. Whether its debt and equity private placements, direct lending, secured loans or venture capitalism – the trick is to understand the business, its risks and returns. Simples…
Arbitraging government bailouts or Central bank QEI is something any second-rate trader can manage.
Let me present you with a choice. Would you rather just follow the Fed, BoE and ECB and buy whatever they buy, or would you rather invest in the Coronavirus recovery?
Anticipating what the Virus Recovery is going to look like is a great place to start. The decimation of humanity by (this) virus came no-where close. We’ve been lucky. It could have been much much worse. The reality is the virus will start to play a smaller part in economic decision making. Be warned: it’s still going to dominate the news and media – Journalists need something to be sensational about.
Expect to see the experts, advisors and politicians become increasingly confident as effective treatments, and long-term mitigation through a vaccine, push back the threat. Last night I was impressed by the confidence of one of the Oxford Team who thinks we could have a functional virus ready in a few months. (The BBC had to balance that with a doomster warning of how much longer it could take…)
Without the fear of the Virus – how quickly can we get the economy up and running?
This where financial asset markets and reality have utterly diverged. President Trump has long made the error of mistaking gains in stock indices as a proxy for economic strength. It’s never been more apparent how detached the two are.
There are many investible scenarios arising from the crisis recovery:
1) Investments that will do well out the crisis long-term because of the new business environment/ecosystem it creates – the dramatic growth of Microsoft’s cloud business is a great example.
2) Firms that got short-term lifts from the crisis, receiving a boost from filling a lock-down need – game makers and companies like Netflix seeing subscriptions surge, while the numbers for supermarket chains may not hold up as a new reality bites.
3) Some companies will see order books hit by supply chains and lockdown – causing massive Q2 earnings hits. But many discretionary purchases will simply be delayed – we will still buy new i-Phones and even a Tesla when the economy reopens.
4) There are whole sectors that have oversold on fear. Property is a good example. There is a blithe assumption Working-from-Home means no-one will ever live in cities again. Wrong. If London-resi blips or slows, it’s a buy! The long-term shows it swiftly recovers.
5) There are businesses that see short-term revenue permanently lost during lockdown, but will see recovery as the economy reopens – local hospitality and restaurants. Despite the panic, I suspect these service sector businesses are best placed to benefit from medium-term low/zero cost govt support, job preservation, and swiftly reopen.
6) Companies that have seen permanently lost revenues and face long-term struggle to reopen as fears persist – airlines, cruising, aerospace. These are today’s equivalent of the 1970s/80 obsolete industries.
7) And of course, there are firms exposed as corporate failures – I would put Boeing in this bracket as it could take years for order books to recover, and despite the bond market arbing the Fed put, they don’t have the cash to develop aircraft airlines can afford to or want to buy! (Personally, I think it’s an opportunity for someone to break the airtravel duopoly and build something new and better. I have Embraer’s phone number…)
How long is recovery going to take? Longer than we hope, but prove less damaging than we fear.
The idea of a sharp V-Shaped recovery has been knocked on the head. The reality is global supply chains – especially for just-in-time manufacturing – are reliant on multiple producers to come back together. Volkswagen are on the front pages this morning warning their suppliers are being forced to hike parts prices. The supply side of the economy is going to take time to reopen and adjust. (And to complete risk assessments..)
The demand side will be even more tortuous with upwards of 100 million workers constructively unemployed around the developed world. The experience in China seems to show workers slow and reluctant to return to work. We’re hearing similar in the UK and Europe.
Meanwhile, the consequences of bailout and QEI distortions mean Financial Assets are effectively doomed – except as arbitrage games. Direct investment to get away from the distortions that have killed markets is going to boom.
And if you are looking for advice on the subject … my day job is running Shard’s Alternative Asset business… If you want a great play on a vital commodity, a chance to get in at the bottom of the Resi recovery, or even exploit the end of lockdown by investing in outdoor pursuits… then give me a shout.
Five Things to Read Today
LATimes – China’s Wolf Warriors Attack!
Out of time.. back to the day job!