Blain’s Morning Porridge – April 8th 2020
“The greatest idiot is a man who thinks strong stock markets are an indication of economic health.“
That was a curious day in markets… The good news ran out of steam and the rally faded… Reality rears its head again? Was it just a bull phase in a bear market, or something more significant? Does the market realise just how deep the crisis has bit into the real economy?
I’ve been trying to think through what the increasing dis-connect between the financial reality of the looming deep and dark global recession – which is upon us – versus Euphoric Markets, means in terms of opportunities and likely outcomes. The perception gap is wide enough to drive a container ship thru.
Personally, I remain massively uncomfortable with current stock and bond prices, but can I afford to remain flat/short as Central Bank monetary policy will underpin and support prices? Some analysts are predicting record stock levels later this year. Banks are all saying buy corporate credit. It’s all on the back of market distortions created by policy.
After 35 years working in finance – when it comes to the real world, it sometimes feels like: FINANCIAL MARKETS HAVE BECOME TOTALLY IRRELEVENT.
Yet that would be a mistake. Financial assets – listed bonds and stocks – are cocooned in a bubble, but global commerce desperately requires liquidity and cash to survive. It’s happening – behind the illusion created by public markets.
What is actually happening out there in the real world?
According to a note I read this morning 80% of the global workforce has seen their workplaces closed or partly closed as a result of the crisis. A tiny portion of workers will be covered by government payroll schemes or other insurance, and they face long delays in receiving money. Over a billion workers have been affected. Many will be forced to take on crippling debt to get through the crisis. This will prove the biggest, most devasting, demand shock in history.
That is reality.
There is not a single corporate on the planet preparing itself for a global boom. All around the globe corporates are engaged in a mad-cash scramble. Smart Chief Financial Officers know long cash is going to be critical as the globe slides into depression in Q2 and a recession that will last far longer than Wall Street and the City perceive.
There are some fascinating trades being done – and they tell us lot about real condition, business, commerce and the developing crisis. I am working on secured asset deals with decent spreads, and full capital equity/debt financings in decent double digits. Email for details. Carnival’s secured 11.5% Senior bond last week was just one example of what is bubbling under in transport, consumer debt, property and receivables.
This morning we’ve seen details of AirBNB raising $1 bln from Silver Lake and Sixth Street in a debt/equity deal that slashes their last valuation of $31 bln to $18 bln. The two hedge funds will be getting a 11-12% Coupon. The company will raise further debt to cover the obvious short-falls in income the Virus lockdown has triggered. I’m told it’s looking to raise more debt.
After cutting 95% of its routes, Lufthansa is ditching 40 aircraft (including its’ A-380 superjumbos which I doubt will ever fly again), axing its low-cost carrier and warning about years of disruption. It’s talking to brokers about monetising part of its fleet by raising senior debt on unencumbered aircraft. Its eyeing up its $5 bln in bank lines for drawdown. Its CFO has resigned on health grounds.
The crisis for airlines will get worse as credit card companies hold back on paying immediately on any ticket sales because of their declining credit, and fuel suppliers demand upfront payments. I’m seeing Airlines around the globe engaged in a similar scramble. Easy Jet got £600 mm from the UK Treasury y’day, and took bids on financing part of its fleet. Name an airline and I can probably tell you what they are looking to sell, steal or suborn in order to raise cash.
Global Travel and Tourism accounts for about 10% of Global GDP, and its clearly the first hit sector. Tui got a massive bailout from Germany last month. Its back at the front door asking for more already.
If it’s bad in Travel, go factor what a sudden 30% unemployment shock does to demand for clothes, tech, cars, and property. Listen to the anecdotal evidence around you. Workers not yet furloughed having their salaries cut because of tumbling demand. Managers beginning to panic about whether government support, subsidy and payroll schemes will kick in before they go bankrupt.
And then widen your focus outside the developed world, and wonder how critically this is going to impact across Emerging Markets and the Developing World.
There may be a few bright spots – although Zoom is getting it in the neck about security.. There are jobs in supermarkets and healthcare.
However, all that glitters is not gold: former US FDA executives say the only reason Cholorquine treatments have been getting attention is not due to any scientific evidence,but purely down to Trump advocacy of the drugs. (Some might wonder if manufacturers of the drugs might feature in the President’s personal undisclosed portfolio – that definitely, absolutely, and categorically does not exist. (US Readers – Sarcasm Alert.))
Economic mayhem is the reality. Not the fact global markets briefly made it into a 20% recovery bull market yesterday.
This is going to be a long, hard, slog of a recovery.
I suppose I better say something about the big European meeting y’day If that was test of European Integration, then it was a F- Fail. Some kind of hash-up will be announced involving blah blah and some more blah with a bit of really, yeah-but, well, if and maybe. Not our problem – except it probably is.
Five Things to Read This Morning
If you are as bored of lockdown as I, then please use the comments function on the Porridge, send me an email or give me a call!
Out of time, and back to the day job..