Blain’s Morning Porridge – 31st March 2020
“But what a fool believes he sees, no wise man has the power to reason away”
My prediction it’s going to be a terrible week for markets took a drubbing y’day. Stocks and corporate bonds had a great day. But if you want a headline for the last day of Quarter 1 2020: Global Stocks on Track for Worst Quarter Since 2008 – Despite Daily Gains.
Far from stocks retreating on the fundamental economic doom and gloom, the rally continues. We even saw a blast of high-grade corporate debt issuance – snapped up by equity investors (according to BBerg), who reckon higher yielding new bonds eligible for the Fed’s QE programmes will tighten as they have a buyer of last resort. They are probably right – doesn’t help crossover and junk tho!
And, there is apparently good news on the Coronavirus front. Headlines in the papers are yelling about falling infection rates, peaks being reached, curves being turned, the success of social distancing polices, and how warmer weather will ease the danger. Sadly, there is a terrible paradox at the core of this good news. Its counter-intuitive and could mean lockdown for longer – which I will explain in detail below.
Markets rally – but I stick to me comment that April is going to be a very bad month as the data and business news shocks and roils expectations.
The news is about to get much much worse… This morning I nearly choked as I read in the Torygraph small shops have been told: “selling Easter Eggs and Hot Cross Bunds goes against new guidance because they do not qualify as essential items”.
This really is the end.
Delicious toasted hot-cross buns from our local Co-op have been the rock and anchor of our sanity these past 2 weeks of lockdown. Without the sugar-rush of hot-cross buns – what chance our morale can be maintained?
Hot-cross-buns are much like the sugar-rush of market distorting stimulus. Fiscal Stimulus and Monetary Giveaways have proved absolutely vital to stop civilisation tumbling into the abyss. You only need one good reason to buy financial assets at present – and that’s the stimulus packages (and rumours of more to follow), interest rate cuts, and QE infinity packages. Central Banks and Governments have promised to go all-in to support economies, so markets have coat-tailed them – why would you not?
The economic reality? Well, let’s not go there. Its Grim. Let’s wait and see what this week’s US unemployment claims look like, how many more downgrades hit the screens – and that’s just the US. Let’s see how many more UK citizens run out of cash before the government schemes help them.
Europe faces even bigger problems dealing with this. There really isn’t enough carpet in Europe to sweep the problem of Italy under. The virus has crystallised the impending debt mutualisation crisis. As Italian debt marches towards 150% of GDP – in a currency that is not their own, and for which they have no printing presses – the Government is getting fraxious with Europe about the lack of support. Rumours of food riots in the poor South and Sicily add to the pressure. The investment banks are predicting a GDP contraction of between 19-30% in Q2! (Clue: Argentina is the most Italian Latam nation – go check out its experience borrowing dollars, someone else’s currency.)
European “Coronabonds” and the PEPP (Pandemic Emergency Purchase Programme) are seen as first step to defacto debt mutualisation, potentially allowing the ECB to simply fund Italian reconstruction. (And while they are at it – should they not also do the same for every other European country that’s been economically poisoned by ECB imposed austerity over the last decade?)
I am sure German and Dutch workers will leap at the opportunity the Virus has created to pay higher taxes so their southern European brothers and French hairdressers can retire early.
Ok – that’s a bit extreme…. But essentially the nature of the problem the ECB faces..
And what about the Virus?
There is good news – the numbers seem to be turning. Unfortunately, as I said good news for patients is also potentially bad news for the economy.
A new report from Imperial College shows the virus may be far less established than we thought. Europe, the UK and US might be nowhere near establishing any kind of herd immunity. Because so few people have actually been infected, it raises prospects of devasting second waves of the virus as it breaks out again… The sad maths of the infection means the lower the infection rates today; the greater the chance it breaks out again, meaning the longer devasting social distancing has to be maintained.
The Imperial College report suggests the accrual infection rate in the UK is still only 3%. The have stuck with their assumption of a 1% IFR (infection fatality rate). The lower that IFR rate, then the higher the numbers infected, and the greater chance of ending lockdown early. Last week we hoped a higher infection across the population might mean an early return to normality – aking to what we are apparently seeing in China.
Robert Hillman, my chum who runs the economic quant and modelling firm Neuron Capital, said: “If Imperial are right – and they are the guys advising government – then if there ever had been a strategy of achieving herd immunity, then that is completely out of the window. The paradox the public and markets will need to grapple with, is that the sooner the infections drop, other things being equal, the longer we might expect to be in lockdown.”
Longer lockdown infers rising negative economic consequences. Until we get widespread testing, then it’s all a bit academic..
There is genuine good news out there. The UK is close to opening the largest hospital in the World in London docklands which will rise to 4000 beds to combat the Coronavirus. We are also seeing medical innovation in terms of less invasive and simple methods of getting oxygen into patients – something that would have taken years of testing before, but McLaren Formula 1 team produced in days!
Five things to read this morning:
BBerg – Italy Weights Extending Lockdown
BBerg – Hedge Demand Shows “No Faith in this Rally,” Credit Suisse Says
FT – South Africa’s rand hits record low after debt downgrade
WSJ – NYU Langone Tells ER Doctors to “Think Critically” About Who Gets Ventilators
WSJ – Hidden Chinese Lending Puts Emerging Market Economies at Risk
Tomorrow, I’m being interviewed by Aviation Specialists on a Webinar: The Markets and Aviation: Today and The New World. A “work-from-home” chat with Bill Blain. Please feel free to use the link to sign up. We will be covering all kinds of aspects of the crisis relating to aviation and aviation investments. I won’t hold any punches…
Out of time and back to the day job!