Blain’s Morning Porridge – 18th March 2020
“Orthodoxy means not thinking – not needing to think. It is unconsciousness.”
Governments around the globe have pledged trillions to address the Virus Pandemic. It doesn’t matter if markets aren’t convinced – as I write, it looks like we are heading for another down day in stocks. Yesterday’s bout of coordinated Global Spending promises are about keeping populations safe and secure by protecting the global economy from the Virus uncertainty.
The Pandemic is being addressed! This is the big test of our epoch. Break out the optimism!
UK – WOW: Hats Off to Boris and Sunak
Despite my earlier misgivings about Rishi Sunak as Chancellor, he and Boris delivered a BLINDER yesterday – a package likely to get the UK through the Virus Crisis with far less collateral damage than we ever expected. Sunak comes across very well. He sounds competent, balanced and focused… When you’ve got Boris as premier.. that’s a very good thing.
Is it enough to stop the market panic and signal it’s time to start buying UK Inc? Maybe.. It certainly feels like the end of the beginning with real support thrown under the UK. Something firm now underlies the market. There will still be shocks to come.. but hey-ho… let’s go!
There will still be problems. I notice another UK real money account gating property fund exits, the continued collapse in corporate bond spreads, and lingering doubts about growth. And I’m told the new Pireaus Bank Tier 1 CoCo bond is trading in the low 40s a month after it was launched.. Ouch.. The big danger for the UK is not about what we do internally, but how well the rest of the global economy adapts and responds to the virus. If the world crashes into depression as a result of the Virus, the UK will not be immune.
Yesterday morning I was negative and extremely bearish on the long-term consequences on economies of the virus – how massive job losses, consumer stress, mortgage defaults, SME collapse, corporate defaults, and lost orders would create long-term depression. I saw zero chance of a V-Shaped recovery in the wake of the virus.
Now, I’m feeling positive for Britain. The lads addressed my fears. The package won’t be perfect, but it’s a massive step towards stability. This morning I’m smiling, and whistling the theme tune to Dad’s Army as the UK’s wartime economy rolls into gear. (It was Fed 26th when I wrote the UK would need to take a wartime approach to the economic consequences of the virus!)
The “Do-What-Ever-It-Takes” Sunak package might not have been fully thought through, or completely watertight. The devil will be in the detail and they will patching over holes like exactly how it will work, including protection for renters in next days. But.. it should do pretty much exactly what is needed: Providing Protection for the ECONOMY and the POPULATION from financial uncertainty through the crisis. It’s a wartime economy solution that is going to substantially mitigate the negative effects of the virus. Its great to hear a Tory government talking to the unions.
You can tell it’s good because opposition leaders are struggling to say anything substantial to knock it down.
The rise in government bond yields over the week in the US (10-year T-Bond from 0.6 to 1%) and UK (10-year gilts from 0.10 to 0.5%) highlights some concern about the amount of money being pledged.. but.. relax.. We are not headed towards a bond cliff – for sovereign bonds. (QE can ensure that..) The real issue for government bonds and gold is they are the only assets funds that have been thumped with margin calls can sell to raise cash!
Sunak and Boris threw away the rules and economic orthodoxy. They have promised £350 bln immediately and as much more as it takes. How can the UK afford it is not important, and probably irrelevant. We spent much more on bailing out useless banks in 2008. The Hardest Working Civil Servants; the UK’s Debt Management Office, will spirit up the money from somewhere, or working with The Bank will conjure it up by some slight of the fiscal hand, imaginative accounting and a bit of (as yet undiscovered) Haldane magic. Don’t worry.. the money will just appear..
That’s the great thing about being a country that owns the keys to own printing presses and can make as much money as it needs. Functional Money Trees are a credibility game; If the UK retains credibility then we don’t need to worry about devaluation and importing inflation. Let’s move on with recovery.
USA – Less Convincing
Effectively the USA is doing the same thing but with slightly less conviction. Trump talked big, but delivered less – it was clear he is not a believer. The deal was further pumped, and the market looks unconvinced. There is still much to be addressed, but I suspect the Americans are waking up to a new reality about their society: There is a superb article everyone should read on Bloomberg this morning: Americans Forgot the Economy’s Purpose – Until Coronavirus. Let me quote from it: “Since the 1980s the US has equated economic health with a rising market and ever-increasing corporate profits. They are necessary to a healthy economy, but are ultimately just a means to an end. The end is the welfare of citizens.”
I think Boris gets it – my vote was not wasted after all. But Trump does not get it all.
In particular Hats Off to Katie Porter, a California Democrat. She grilled Trump’s Department of Health and Human services Yes-Man about the cost of a coronavirus test in the US. It will surprise European readers to know that’s the cost a patient has to pay for the test. Americans seem to think all Europeans are “goddam commies” because we have free health provision.
The guy refused to answer – she knew: $1331 with additional insurance costs on top is what a US patient will pay for a Virus test. (The government chap reluctantly said tests will be made free.) You can understand why the bulk of low paid, barely solvent US workers will baulk at paying for a test, or skipping work through sickness.
To quote again from the Bberg article: “The great failing of the government’s response to the financial crisis is that it puts the needs of companies over the needs of the people. The tragedy of this economic crisis that while companies seem to have learned their lesson, the Trump administration has not.”
The consensus I heard from the US y’day was lacklustre on the Trump package – too small, not focused, and will need to be much better.. Relax – we all know it will be all right: Americans always do the right thing – after exhausting every other possibility first..
Yoorp – Big worries
France, Germany, Spain and Italy are going large in terms of the money they are pledging to support business and consumers. (First word on the French spending list was Nationalisation.. it always is..)
However, there is a problem. Unlike the UK and the USA, Europe does not have access to a healthy money tree fruiting unlimited amounts of Euros. ECB President Christine Lagarde has already let loose the crisis after her screwed up comment about not being there to keep spreads tight. Italy bonds have suffered – ballooning wider.
But what can Legarde realistically do? She is a politician with a smattering of banker-speak. She was put in place by Macron to solve a political problem – which boils down to getting Germany to agree to German workers funding French pensions and busted Italian banks… It might have been achievable in good times in the name of a closer, more unified Europe..
But no one in the Rich North is likely to listen or prioritise closer economic union now. They are focused on the domestic politics of immigration, replacing Merkel or jobs, and, of course, the virus.. They might only start to pay attention as the Euro unwinds again.. and may be not even then in the wake of Brexit and 10-years of economic underperformance in Southern Europe’s periphery. It’s likely the Euro will wibble on, and we’ll get a succession of long-passes down that long and winding road.
The problem for Europe is this needs a coordinated Euro-Wide response now. It needs desperately to dispense with all the Euro’s deficit rules and come up with a coherent wartime economic rescue plan – a Marshal Plan Mark 2 – to get Europe through the crisis. But how could that happen with the ECB being a monetary central bank with no political power? Does anyone believe Lagarde is the right person to deliver it?
The key issue is even more insidious. Without clear direction, countries will continue to diverge from the Euro rules, making it less and less sustainable. Meanwhile, Europe is going to fall further and further behind in terms of growth and struggle to avoid deeper recession escalating job losses. It looks mired in an inescapable negative feedback loop.
Sell BTPS.. and sell some more… and add Bonos to the list.
I reckon the Anglo Saxons may get an unexpected economic boom similar to what happened in 1940s and beyond from an easy money “wartime virus” economy.. As the UK and USA free themselves from the shackles of monetary orthodoxy by announcing Draghi-esque “do whatever it takes spending binges” – because they can, Yoorp struggles on trying to use someone else’s currency… which is never going to be a good thing when the crying need is for fiscal spending, helicopter money, massive tax and lending programmes, while the deficit rules demand austerity!
What we will see next is the US and UK spend their way out of trouble… a massive demand side boost as confidence returns, a wave of SME investment as they sup at the trough of government benevolence, and hopefully a gesture towards paying for it by taxing the bejesus out the rich…
Five Things to Read This Morning
Out of time, and back to the day job…