Blain’s Morning Porridge – Feb 25th 2020 – V or L Shape?
“We fear what we don’t know, and kill what we fear..…”
That was apparently an interesting day. 3.5% declines in stocks and gains for safe-haven bonds. US Treasuries touched record low-yields, (despite being 11 years into “recovery” from the deepest market crash of all time? No-one else seems to think that record low rates are spookyly bad, while I think its symptomatic not all is well with the world…) In fact, y’day played out pretty much as predicted after markets did the shock/horror reaction to the spreading virus thing… Everyone in Iran is not dead. Most of Italy is still open. Korea has a problem its addressing. (But, I should probably add a questionitive “Yet” to these observations…)
Hah! When I were a lad, 3.5% up, down or sideways in stocks was a normal day.. a Market move was 5% plus, while an event, Crash or Boom was 10% plus. 3.5% is nothing to panic on. It’s a watch Kittens on Instagram (whatever that is) moment…
I’d hazard a guess/hope its 99% likely the Coronavirus fizzles out in next few months, becomes a repeat issue again next winter, by which time its more treatable. But, even if the virus ends today, there will still be massive economic damage to recover.
The question for markets is: Where do we go from here? Down to the lake? Or is it going to bounce back as the wall of money looking to play the markets decides equity yields look too attractive relative to negative bonds, and decides we’re panicking too much about virus sniffles… It still feels too risk-off to be any kind of buying opportunity. If anything, time to sell into any market strength.
To be blunt, this market is a blundering herd without any real knowledge. Until we know more, I’m tempted to double up on gold on the basis the herd is going to panic, stampede in one direction or another, figure out bonds and stocks are dangerous, (NSS!) and veer another direction – hence Gold. Some market guru will say buy gold, and the herd will pick it up! Why not… by gold on the basis it’s the ultimate safe haven because its utterly useless, you can’t eat it, it doesn’t pay dividends, but there isn’t much of it, so, hey, it must be worth something…. Darn… if the market believes in Tesla, what’s so difficult about Gold?
Markets are full of extraordinary imagined experiences. Yesterday one market sage got himself quoted on a news wire: “Usually these things blow over in two to three months, and that’s my base case. This virus is highly contagious, therefore the risk goes on longer than normal.”
“Usually”? So how many times has a killer flu threatened to wipe out mankind on that guy’s watch? Where was I when we last faced a market threat heading towards Globally disruptive Pandemic? I must have missed it. Through the 35 years in markets – and there are some parts I just can’t remember (like Munich any Oktober, the lost weekend/month in Vancouver, or Barcelona ABS conferences) – I don’t recall ever being faced with such potential disruption and clear and present damage:
· Global Supply Chains ruptured
· Companies across globe shuttering plant and announcing downward sales revisions
· Nations closing transport links and borders
· Workers locked out of factories by local and regional lockdowns
These are only the first order immediate effects. And remember, we still don’t know that much about the virus.
We’ve had minor scares like SARS and Birdflu before. They had clear market consequences ranging from travel bans to Asia, and cancelled deals, but they never tripped over into full market dislocation – like now. This crisis is different because of the swift action the authorities have taken to contain it, and because, as others have said, it’s the first Pandemic playing out on social media. Try and forget all the rumours, the strung und drang, the stories you’ve read about how infectious it is, how its spreading, how the numbers are being manipulated, and focus purely on the economics.
If you think this blows over in just a few months, and we are going to get a nice V-Shaped recovery – one where everything returns to normal when the all-clear sirens sound… then good luck. And this is not about the virus, or how contagious it is – that’s a job for the authorities to sort.
Again, it’s about the economics. There are second order effects still to come: If the negative newsflow continues to deepen, and markets perceive further economic effects from wider lockdowns, increasing default risk as companies fail to pay rents, salaries and taxes, rising threats to banks and permanent supply chain breakage, and social unrest, then the prospects for anything approximating a V-Shaped recovery diminish.
At this point we could be facing third-level market consequences from the virus – threats to the present economic set up, raising doubts about the sustainability of businesses in the new economy, maybe trigger a unicorn meltdown, a complete reassessment of trade and travel. Or it might be blaming central banks for the economic consequences of the flu, and Governments/Authorities for over-reacting/under-reacting.
(As I’ve written recently – the Black Death of the 15th Century had enormous political and market consequences in terms of changing labour supply, wages, consumption, breaking down feudalism, and trigger the renaissance… but its way way to earlier to start drawing parallels…. Or is it? Mwhah, ha ha… (Vincent Price voice..))
If this deepens, then we’re far more likely to get a L-Shape recovery. (By which I mean, a slower more jerky recovery – think of an L tilted a couple of degrees to the left with a kinky base leg.) The virus, however serious it proves to be, will have created economic permanent scars.
Five Things to Read Today
If anyone is interested, here is a Shard Capital Lite-Bite Video from yesterday morning with me blathering on about the virus…
Out of time and back to the day job…
Strategist – Shard Capital