Blain’s Morning Porridge – Feb 24th 2020 – The Global Draghi Moment
“Prepare for everything and nothing will happen…”
Brace! Brace! Brace! Have we arrived at the moment when the global economy and markets tumble into a proverbial hole?
Relax! Markets always overreact, and things are never as bad as the papers say, but the bad news Virus narrative is gaining momentum with extraordinary speed…. Venice Carnival and sports events cancelled. Italy Lockdown and Korean red alerts. Apparently, its running unchecked in Iran – the ultimate WHO nightmare. Breathe deep.
The reality is the Coronavirus Covid19 remains primarily an economic event. Global authorities are struggling with containment policies in the face of the massive unknowns still surrounding the virus. Its likely mistakes have been made, but they were probably right to err on the side of over-reaction. The effect of underestimating the virus could be even worse. If we are going to be hit with a global Coronavirus pandemic, and mortality rates rise above 2% – similar to 1918/19 – then it’s tragic and has massive implications which we can analyse. Heaven forbid it ever comes to that stage.
But the reality for markets is to answer the question: Which way will the massive economic shock the Covid19 virus has triggered push markets? (Assume the Real and Present Economic damage and a Snap Recession is the direct result of the Authorities policy decisions to contain the virus, and were unavoidable.)
The economic damage in terms of cancelled tourist trips to Asia and vice-versa, empty container ships, global supply chain breakdown shuttering factories across the globe, commodities tumbling, rising fears of mass defaults as just-in-time manufacturers fail to make interest payments is clear. There are any number of articles in the press with the time and space to describe the damage in detail.
Markets feel properly nervous this morning. After another record high last week, the 3% plus subsequent slide in stocks, plus the news, has scared the punters. Treasuries hit a record low yield.
Check out any Chartist, and they will be telling you the runes, pentograms, and discarded chicken livers used to make their market prognostications all scream the same thing: Sell Stocks, Buy Treasuries, Sell Corporate Bonds, Sell Oil and Buy Gold. Generally, they are unconvinced on a positive market outcome.
Could the Covid19 virus crisis have come at a worse time? There is never a convenient time for the end of the world.
This crisis comes at the top of massive bubbles in stocks and bonds, fuelled by 10-years of accommodative monetary experimentation – just at a time when the global monetary authorities are increasingly understanding the urgent need undo the unintended negative consequences, end QE, to normalise interest rates and take the pressure out of asset bubbles. It doesn’t help the dollar is going stratospheric – a natural safe-haven shift, helped by Japan’s massive 6.7% slide in annualised GDP on the back of another VAT hike. That looks increasingly ill-considered as Chinese spenders stay home and fail to sustain Japan’s retail sector. There are a lot of painful wake up and feel the pain moments coming.
Q1 economic and company reporting is going to be brutal.
So……. Buy or sell the market?
Your call boils down to: do you believe central banks can continue to pull it out the hat? Yes/No? Do you keep buying this market on the mounting calls for central banks to ease and provide further accommodative policy support will happen? Will the virus give investors yet another free put on markets?
35 years of markets has taught me a number of lessons – now formalised as Blain’s Market Mantra’s. These include: 1) “The Market has but one objective; to inflict the maximum amount of pain on the maximum amount of participants”, 3) “The Market has no memory”, and, one I borrowed: 26) “The Market can remain irrational longer than you can remain solvent”. I think the one that applies best may be: 8) “Markets are about emotion, never be emotional in the way you play them”.
Think about this market in unemotional terms. What choice do Central Banks have? It strikes me this could become a “Draghi Moment”: that critical singularity when global central banks have no alternative but to do “whatever” it takes to avoid economic meltdown.
The last thing Central Banks can allow is a market collapse alongside the snap Virus recession – the long term damage to economic activity would be brutal, and unnecessary. Could we even see Occidental Central Banks step into buy equities “to support market confidence through the economic consequences of the virus”?
What else could they do? Massive and unlimited lending/giveaways to banks to support and maintain struggling corporates? State support for populations to stay home? The news out of China is the banks have been told to lend and support firms getting perilously close to default as industry and towns remain shuttered. Companies have been banned from laying off workers. I suspect where China goes, other economies may follow.
Or maybe time to get even more imaginative. How about a real fiscal kick? The crisis facing the planet is about distribution – broken global supply chains on the back of the policy response to the Virus. At some stage, and I suspect fairly soon, these will be restored (although I doubt the Chinese swift V shaped recovery). The issue might be a broken global economy by the time it happens…
What about driving demand through variations on Helicopter money? What about massive tax cuts for consumers, VAT holidays, debt forgiveness for students etc. The idea would be to drive the economy into recovery through a demand side boost – which would be inflationary if its enacted too early, but massively pro-cyclical if it was to drive a massive demand led boost to supply chains as the story behind the virus becomes clearer?
While markets start to worry that a couple of days of lower markets means the imminent end of everything, and wonder what lower bond yields means – the reality is global supply chains from just-in-time tech, autos, tourism and commodities have all been hit for 6. There will be a massive Q1 shock. Some sales will simply be delayed – like an iPhone not purchased in Feb will probably be bought in May, but a holiday next week cancelled is gone for ever. Choosing stocks is a tactical call for investors – which firms take real damage, and which might just slow.
The strategic call is one for Central banks. Just how much will they have to juice the COVID Recession?
5 things to read today…
FT – Wanted: new chief executive for Norway’s $1.2 trillion oil fund
BBerg – Coronavirus May Be “Disease X” Health Experts Warned About
BBerg – China Pushes Factories to Reopen, Risking Renewed Virus Spread
WSJ – Swiss Franc Climbs Against Euro, Leaving Central Bank in Bind
Torygraph – IMF warns Covid19 threatens global economic recovery as markets brace for turbulent trading.
A No-Sh*t Sherlock Award goes to the Daily Torygraph – “The Stock Market May Catch a Cold from Coronavirus.” Worth a read tho!
Final Thots..
I can’t help but feel sorry for poor unloved HSBC Temp-CEO Noel Quinn. Now that Jean Pierre Mustier has pulled out the 2 horse race for the top job, Quinn will always be seen as a second choice. Should he stay or should he go? It was a massive insult to him he wasn’t confirmed in place earlier, and who would want to work for a chairman like Mark Tucker – who has crashed through the whole CEO thang with the subtlety of a T-Rex in a crystal shop. 3 years utterly wasted on senior management, while the bank struggles with relevance, staffing, future direction and its failure to really exploit its Asia niche. Who pays? Miserable customer service, and 15% of the staff facing the axe – no wonder they are so demoralised and demotivated. Quinn should walk as a matter of principal – after all, what potential upside is there for him, and the board should bin Tucker tomorrow…
Out of time, and off to do the day job..
Bill Blain
Shard Capital