Blain’s Morning Porridge – Feb 11th 2020 – V or L Shaped Recovery

Morning Porridge – February 11th 2020

“For want of a nail the kingdom was lost…”

Wow.. I can hardly believe it! There was actually a train (a mere 10 mins late) this morning, and I’ve made it into the office… People are asking who I am.. Am I a new joiner..?  Lol…

New record highs mean only one thing. Complacency rules. Why bother about over-reliance on central banks, insane P/E ratios, crashing oil and commodity prices, bubbles across all Assets Classes..? Relax.. forget the old adage “all bubbles end with a pop”, (the only question is when). There is nothing to worry about. Yield curve inversions? Why worry? Be happy. Central banks will kiss it all better. The Coronavirus? C’mon.. it’s not important.. its already receding. It’s time to buy, buy, and buy some more.. Have another shot and a hit of something stronger, and pull out your wallet.

Wake up and smell the coffee – which you can’t through a face-mask.. The expression of the week, (or is it prayer of the week?), is “V-Shaped recovery”. It’s the hope the Chinese economy will simply shrug off the consequences of Coronavirus and policy responses, and everything will get straight back to normal. As I’ve written so many times: Hope Is Never A Strategy!

A V-Shape recovery looks a big ask – which means the whole global economy will literally catch the flu!  In the medium term, perhaps a L-shaped economic growth event is more likely?

The picture within China is muddy – we’re hearing all kind of specifics and generalities: some factories are reopening, others remain shuttered, including Apple’s manufacturing partner Foxconn in Kunshan.  The government is standing by to provide unlimited financial support and legislate for stability, but is also aggressively acting to address the virus through strict application of rules. The two may be mutually exclusive. There are still cities that are, to all intents, still quarantined, and many Chinese municipalities have put themselves into lockdown, refusing to admit outsiders.

China supply chains are well and truly disrupted. All it takes to stop production is one “just in time” delivery to be missed and the whole edifice shudders. There are profound implications internally, and externally – take a look at sliding oil and commodity prices.

(Of course, I have heard the new Tesla Gigafactory in Shanghai has reopened without any problem. According to one Tesla Cult site: a gang of Chinese cobbler-elfs magically constructed 500,000 Model 3s during the 2 week holiday shutdown. If that’s true, it might justify a stock price a mere $700 short of Tesla’s current level. Only joking about the elves, but only if Elon Mush says its happened will we know its bollchocks.)

You can’t magically undo the instability the virus has triggered in terms of China GDP. The government has mandated all workers must wear masks. If Chinese workers are about to return to work, then the nation is going to be massively short facemasks (which I’m told are pretty much a placebo against infection anyway). I read China can produce a mere 22 mm facemasks daily – enough for a couple of average sized cities.

The government has pledged to address any economic crisis effects, including large scale lay-offs. Working from home isn’t an option for China’s legions of migrant assembly workers. Rather than lay-offs – because even if Chinese Apple factories are closed, western consumers still want their bright-shiny things, there are fears many workers will simply not return to work but stay at home, thus triggering a potential secondary labour crisis for many Chinese manufacturers.

It’s worth remembering the lesson the Black Death in Europe in the 15th century – it triggered a massive labour shortage, wage inflation, ending the age of feudal servitude and sparking a social revolution that led to the renaissance and reformation. Even with limited mortality, the effect of an economic stumble on the Party and Xi’s position could be significant. The unexpected consequences of the Wuhan plague are not yet fully understood. Things change.

And, I suspect it might be far too early to talk about economic recovery – V-shape or L-shaped. Such talk is driven by an early end to the crisis.

Some reports talk of the Coronavirus incident as already drawing to a close. That may be premature.  I’m distrustful of the apparent slowdown in Coronavirus infections.  The number of fatalities is now over 1000 with nearly 43,000 cases in China. However, the authorities say the mortality rate is 1% – which would mean over 100,000 cases. The numbers say last week’s daily increases in infections of between 7-10% are now less than 0.1% – a staggering success for the Chinese efforts to contain the disease, or just bogus information.

I’m not convinced – what’s changed to slow infections? I’m also surprised at the lack of growth from foreign infections. Is it delay in new cases being reported or confirmed? Something doesn’t stack up. See the Zerohedge comment in 5 stories below…

Stepping back for a moment – what’s the right investment call when faced with the uncertainty and rising likelihood of a global recession in the wake of the Wuhan Flu? This is when unintended consequences bite: Normal strategy would be safehaven assets – Treasuries, gold and defensive stocks.Gold is already rolling, Treasuries yield SFA, and what’s the point in stocks when they could get massively cheaper.


I was told I was spectacularly wrong in thinking Sinn Fein as winner of the Irish Election isn’t a major crisis moment. I’ve apparently made a schoolboy error assuming they’ve succeeded by recognising and seizing an electoral niche representing left-wing,  working class concerns. I’ve been told “don’t be fooled”, they remain essentially a revolutionary cadre, with party governance outside acceptable norms, and determined to bring down the state.

Yesterday’s advice, and yes, it came from a disgruntled chum of mine from Belfast, told me to dump Irish bonds and get ready for another crisis on political gridlock. Add it to my European threat list, I was told. Ok.. That’s me put right then.

Good luck to all three parties sorting out the next Irish government.

Five Things To Read Today

BBerg – Cruise Ship Rejected by Four Nations Runs Out Of Options

Zerohedge – This is how China is Rigging The Number of Coronavirus Infections

FT – Safe Haven dollar is headwind for US economy

FT – Xi Jinping faces China’s Chernobyl moment

WSJ – How a Reality-TV Producer Became Rainmaker to $300 Billion Saudi Fund

Out of time, and back to the day job from the comfort of my London office..

Bill Blain

Shard Capital