Blain’s Morning Porridge – March 16th 2020
“What d’ya mean you can’t swim? The fall will probably kill ya!”
Before getting into the gory detail of what’s likely to happen in markets this week, let me assure readers that life goes on as before: South Western Rail is a bravely keeping up the illusion of normality by conscientiously screwing up commuters’ day. This morning it was a tree on the line somewhere West of Southampton stopping 99% of trains to London from Wessex. The only way up was to catch the stops-everywhere cattle-truck local service and change at Basingrad, meaning I’m massively late, and had to write the Porridge with a lap top poised on my knees.
Although London feels busy this morning, there are hints of permanent change – there was barely anyone travelling up to London from the Deep South this morning. I’ve never seen the station car-park so empty, and so few people waiting. That says a lot about just how badly Coronavirus is impacting the economy.
In answer to the question – how gory is this going to get? Like a Kurosawa film. Messy. Very Messy.
The nature of the Virus Shock is becoming clear, and it’s much more scary than most analysts expected. This is no longer about dimly perceived threats about how some new exotic Chinese flu might briefly impact global supply chains. It’s now about imminent health and social crisis in Europe and the US, combined with the most massive sharp economic and business shock.
It’s not about markets – it’s about holding countries together through massive and unexpected shock! This is a No-See-Um like has never been experienced before..
The Fed stepping in with a second emergency round of support over Sunday dinner is unprecedented. A 1% Sunday rate cut is extraordinary, and a promise of effectively unlimited QE and free lending to banks to juice liquidity is unparalleled.
Will it work?
Whatever Donald Trump hoped for from the Fed, the emergency measures are not about supporting markets. They are squarely aimed at ensuring the economy doesn’t implode due to a cash squeeze, and that banks can continue to oil the transaction-based economy as it comes under likely tremendous cash flow pressures. Thousands of companies aren’t getting paid, can’t pay suppliers, rent, leases and wages – creating a potential cascade of cashflow blockages through the whole economy. That required immediate action.The same thing is happening globally – which is why global coordination is critical.
But will averting a cash collapse restore confidence in markets?
The game has changed. Slashing interest rates, and buying bonds isn’t going to put a single traveller back in the skies or stop panic hoarding. So why did the market rally Friday? Because it desperately still wanted to believe there is some kind of magic government and central bank support going to sort everything out. Think again.
Wake up and smell reality. It ain’t going to happen.
Markets are about predicting returns. At the moment, the market is unconsciously weighing the likelihood and speed at which the global economy may recover and get back on track. Analysts – like Goldman saying another 15% lower – do their scenario analysis and prognosticate.
Calling a positive scenario requires far more than just ensuring a liquid financial system. It’s about ensuring the underlying damage to corporations from lost orders, cashflow delays and confidence doesn’t become permanent. That requires far more than QE. It will require massive and carefully targeted fiscal stimulus, tax breaks, grants and incentives in detail to sectors and companies across Occidental economies.
I am seeing precious few signs that is yet happening in the detail that will be required in order to avoid massive corporate dislocation.
At the moment corporate bonds are in trouble because investors perceive a massively enhanced risk of cashflow crisis, refinancing troubles, and lost order books which will tumble loads of companies into bankruptcy, downgrading many to junk and long-term underperformance – a direct payback for the last 12 years of easy money and squandered stock-buy-back programmes.
Gold has massively underperformed – apparently because it’s no longer perceived as easy cash. That must be a good thing – investors are more confident in government fiat money than they are in gold? Such confidence might be a good thing… explaining why dollar remains strong, and the Euro wobbles. But, the global markets need a safety valve – and as the crash in crypto demonstrates, its not in invented get-rich-schemes.
Even more critical is the human element at the individual level – the effects of a likely Demand Side shock from a sudden spike in unemployment, and collapsing spending caused by the crisis and what that does to future consumer spending – the key driver of economic activity. Maybe it’s time for targeted helicopter money to anyone losing a job, increased benefits and new rules on job security through the crisis to directly address the fear.
Why are people panicking? Because they fear the future, losing their jobs and zero support in economies fighting the virus. Last week I explained how the fashion company my daughter works for was busted because it couldn’t deliver its summer collection because the fabrics were stuck in China and their Italian manufacturers were in lockdown. On Sunday she also lost her weekend job in a high-end furniture showroom which closed because of virus fears. Fortunately for her, the Bank of Dad was able to provide immediate liquidity – but as the Bank of England won’t taking her marker as collateral for an unlimited Blain repo, I am – yet again – stuffed. Magnify the same story across the whole population…
What’s the outlook for markets?
More pain. The authorities are barely scraping the surface in terms of the economy and markets – therefore I remain bearish and see no reasons to buy the dip until I see clear upside. Last night’s Fed Action looked a bit desperate, dollar late and short. It looked as bit Donald.
What chance the newsflow might improve?
Unlikely… The media are having a field day – competing to outdo themselves with horror stories about elderly patients being triaged and left to die, how shortages of basic necessities will collapse delivery companies, understaffed medical services, and local services at the brink. Stories about how the UK government is scrabbling around to find more ventilators, the Italians getting 1000 from the Chinese – yet still being fined by the EU for “illegally” subsidising its ailing hotel industry, stand beside the unbelievable queues of passengers trying to get back into the US – standing in close proximity for 3 or 4 hours to ensure they get infected!
It’s difficult to not get caught up in the panic. Step back, balance the news and figure out the reality and consider potential opportunities:
1) Markets continue to react to very real economic damage. Next few months will see massively lower domestic numbers, and lower corporate earnings – all “look back” data. What investments are likely to suffer least from look back, lost orders and benefit from a re-opened global market?
2) The Massive Supply Shock to global economy was swift and unexpected.Where does it get sorted quickest? China is already reopening… but where else stands to benefit?
3) Likely Demand Shock from consumer fear, rising unemployment, and shuttered flows is going to be massively significant. What opportunities are least susceptible to long-term demand shocks?
4) Reassessment is possible as economies pass the infection peak. What stocks will bounce? Which are one-trick ponies that will lose their lustre as this passes?
5) Rebuild phase likely to be slower as effects of crisis on corporates and employment becomes apparent. Which opportunities will take off quickest?
The bottom line is that are looking at something more L-shaped than V-shaped in terms of likely market outcomes.
Six Things to Read This Morning
StoryStorks – Can I take The Kids Out?
Out of time, and back to the day job..