Blain’s Morning Porridge – October 29 2020: Greater minds?

“Slain, after all man’s devices had failed, by the humblest things that God, in his wisdom, has put upon the Earth… “

If you were choosing a week for the culmination of the most critical election in global history (ahem… confabulated exaggeration time), you would not have chosen this one. Even as Americans hurl spite and vitriol at each other over electoral choices, the Real World and Markets are increasingly dominated by The Coronavirus.

Looking at charts of the Dow, FTSE, and Europe, you can’t but help think it’s deja-vu all over again…

Winter Lockdowns, fears about second and now third waves of infections, and tumbling stocks on the back of prospects for a crumbling economic recovery across Europe have put markets into full tumble mode. It might be the last couple of days of the month, but this feels like it could develop into a classic October crash – which are historically characterised by the sound of popping bubbles and euphoric giddiness being swept away on a tide of brutal, bleak reality.

This time it’s different.

It’s even worse.

The financial history of this young century will show how badly our reliance on bailing out markets with free money, bank-rescues and “stimulus packages” worked out. For every action there are consequences… the long-term negatives of overly low interest rates, the dark and sordid truths that underlay QE Infinity, the unheeded warnings of burgeoning corporate and sovereign debt, and the reality that bailing out banks had simply allowed them shift their risks to pension savers.. But in the early days of the 21stCentury we believed these were all short-term accommodations and ultimately fixable.

But them someone changed the rules. You can fool the markets with massive bailouts to step a catastrophic crash, but no amount of QE can stop a tiny virus a billion times smaller than a computer screen pixel doing its stuff.

It’s not just confidence in markets that’s gone awry. This time it’s more fundamental – we face a long cold miserable winter and an implacable microscopic enemy we struggle to fight. Of course.. we shall win… the question is when?

Yesterday I was writing about the opportunities a pandemic driven correction may present. I stick with that analysis: we will overcome this pandemic and that means fundamental stocks are on!

But, the deepening lockdown and the Economic Fabianism required to fight the virus means there may be more market pain to come. The outlook for economic resurgence is looking worse as the threats of longer lockdowns and collapsing consumer confidence in the wake of job losses and the ending of generous support regimes hits sentiment.

Let’s not waste time debating whether the Pandemic is real or not. The simple reality of the Coronavirus is nothing to do with the low death rates, or the probabilities anyone under 65 will suffer little more than a bad flu. It’s all about the hospitals and health services – although we can now treat and cure patients that won’t happen if hospitals are overwhelmed. Politically it would be unacceptable. Hence lockdowns, distancing and the rest will continue and even deepen as the winter deepens.

That means picking your moment to re-enter markets… carefully.

Meanwhile, I’m in the process of working out my post US election strategy – and I’m frankly wondering if it’s worth the time and energy.

Are we going to get a Blue Wave (Biden Win and Blue Senate), a Blue Tide (Biden Win and Red Senate), a Red Line (Trump wins except house) or even a Trump Steal (Trump wins everthing)? The Polls are fascinating and all over the place – yesterday’s crop of polls ranged from +1 for Trump to +12 for Biden. Who knows. Everyone and no-one.

What is the right investment strategy to follow?

Should I focus my energies on trying to work out the likely election result scenarios and which stocks will benefit from an Infrastructure Splurge or suffer from a Tech Clampdown? Should I worry much about the future slope of the yield curve on high, very high or outrageously high spending plans? Should I buy or sell oil on the basis Biden says go green and Trump is trying to persuade voters that’ll be the of America? (Should I buy oil on the basis that US politicians usually get it wrong?)

Should I wonder too much about how rising social and equality issues are likely to continue impacting consumer and business confidence across the States, and therefore the whole Western economy? Or should I figure out just how broken the broken political systems of the West have become, and how much more fraxious they will become?

If Biden wins the right will spend the next four years in furious denial, wasting yet more legislative time and focusing on all the wrong stuff – just like the Democrats have being doing since Trump took office. If Trump wins the left will be equally implacable in their response. None of it looks a recipe for success. Democracy is not perfect. Don’t forget how the original Athenian democracy resolved conflict – banishment and worse. (And please America…if Trump does lose, please don’t send him to Scotland. We don’t deserve that.. we already been punished enough! (look who our neighbours are…))

Or should I ponder what will happen to the US if divides between Democrat cities and a Trump Washington widen, further alienating entreprenuers from creating city-based jobs? America could become a land of a thousand Detroits as a comfortable middle class of home-workers shrinks as AI takes over. That’s got serious implications for consumption.

Or maybe I should focus on the economy: which is likely to remain low growth, beholden to continued stimulus and bailout from Washington, where the key rule of capitalism – the importance of failing companies being allowed to fail and be replaced – is undone by artificially low rates? Zombie companies are not going to drive US growth – that requires CapEx investment… but most US companies blew their profits and leveraged up in the bond markets to spend money on stock buybacks.

Or should I just admit the attractions of further investment directed at the US now look…. Questionable?

Maybe I should be investing elsewhere?

Europe and the UK are cheap, but for very good reasons. Europe is hamstrung by EU Bruxeaucracy, multiple untrusting tribes, and imperfect monetary union without fiscal union. The UK’s political system is suffering whatever the political equivalent of vascular dementia is – and is run by bureaucrats. Whatever the history books say about our inventiveness and ability to innovate, there isn’t a single UK company you can point to an say… “World Leading.”

The reality, of course, that no matter how bleak the news and outlook.. there are always alternatives. And even in the detritus of ruined Washington and London there will be diamonds in the dirt. But this morning I shall be filling in the self-dealing compliance forms to shunt a part of my PA investment portfolio into Asia.

Compare and contrast. The occidental part of the global economy has been floored by the pandemic, while Asia is back up and running…

Five Things To Read This Morning

Master Investor – Maybe it’s time to put some of the gains from Tech Stocks in the bank?

Torygraph – Double-dip lockdowns threaten to overwhelm Europe’s economic defences

FT – China races ahead in Electric Vehicles

WSJ – Many on Wall Street Who Predicted A Trump Win in 2016 Aren’t So Sure Now

BBerg – Boris Pressured on Fresh Lockdown as Virus at “Critical Stage”

No Porridge tomorrow – but back on Monday to guess what might happen on Tuesday. Out of time and back to the day job!

Bill Blain

Shard Capital