Blain’s Morning Porridge – 30th March 2020
“Damn, he was good. Came out of nowhere. Hit us with a full broadside, cut across our tail and took out our rudder. Damn fine gunnery.”
According the press, China is experiencing normal traffic jams, while the major threat is reinfection from the West, so borders are locked shut. They are anticipating business as usual. They are in for a shock.
JP Morgan are on the wires saying markets have made their lows, and although it will be volatile, its time to “average into oversold markets.” In my opinion… they are fools.
I suspect this is going to be a very very bad week for markets.
April is going to hurt. Last week’s rumbustious rally on the back of kitchen sink government fiscal promises, QE infinity and “the boys will be home by Chistmas” market optimisim, is going to be crushed. The flow is about to get much worse, in a trifecta of economic, business and virus news.
We are about to learn a sharp brutal lesson about expectations versus reality:
· There is no swift end in sight. The UK has been warned to expect months of distancing. Trump isn’t reopening the economy for Easter – he’s closing America down till May.
· Oil prices have crashed below $20.
· Rising economic damage, business failures, and confirmation of massive unemployment – especially in US – will come to fore in this week’s data and numbers through the month. Government support packages will take months to become established – months the markets don’t have.
· Aside from a few ultra-high Investment grade cash-rich corporates, there is a massive industrial scramble for cash underway. Anyone able to raise cash should lift any offer – before a slew of downgrades and defaults closes credit markets completely.
· Emerging Market economies were pummelled by dollar strength, are now about to be devasted by the global virus demand shock, and as virus countermeasures hits already unstable nations could well plunge into chaos.
· Market chartists will tell you optimistic bear rallies are a standard part of every market crash – and the bottom will be retested a number of times.
· There is still pain to come. There are a large number of investors – both institutional want-to-be’s (like JP Morgan) who buy the stimulus and are thinking there are easy returns to be made after such a large “correction”, and retail buyers who are fearful their retirement savings have been shattered who are willing to shake the dice. They can’t quite believe what’s happened, don’t compute the scale of the economic shock, and won’t face up to a changed world till they take more pain.
If any of these are positive reasons to sustain last week’s rally, feel free to explain in the comments section of the Morning Porridge below.
A number of good analysts suggest the chances of a swift recovery are better than the bleak headlines suggest. They quote issues like obvious market opportunities will swiftly attract smart money – which is true, and the natural resilience of capitalist economies in the face of economic catastrophe – which was once true.
I hope they are right, but I wonder about human economic behaviour – which tends not to have read Rational Expectations economic text-books. What tends to happen is at the individual agent level, where they seek to maximise personal gain by arbitraging distortions like government bailouts and free money in unexpected ways.
Not every entrepreneur will use a government guaranteed loan to tide over their business – some may use them to wreck the competition, enrich themselves, invest in risk, or act in a thousand other ways. Market distortions and interventions have unintended consequences which ultimately prove negative – a lesson governements and central banks have been trying to ignore for the last decade of monetary distortion and experimentation.
(If you don’t believe me, explain why thousands of corporates spent the last decade buying back their stock instead of investing in new productive capacity and new product innovation?)
Get ready for a long-haul of increasingly dire economic news. A month – at least – of Lockdown helplessness, as corporates and individuals scramble for cash, struggle to obtain funds and face unmeetable demands for rent, mortgages, and to pay off debts. It’s going to be brutal.
Is there any good news?
Perhaps in the virus itself – but this isn’t about the Wuhan flu. It’s about the economy. In the absence of real data in many countries due to the lack of testing, we’re forced to make guesses. But the trends are showing infections rise (as testing kicks in) and a falling mortality percentage. The pace of mortality deaths is declining – as was expected to happen as lockdowns lower the R transmission rate and the all-important “critical cases in hospital” curves. We will find out how successful its’ been in coming days.
On the other hand, the first obituaries of coronavirus victims are appearing; including a number of fit, middle aged men, demonstrating the random nature in terms of victims and symptoms.
To tell a story: after struggling with the disease for over a week, a fit chap in his late fifties I know in London ended up in Hospital, (and fortunately got better quickly once given oxygen and sent home). Meanwhile his partner and her daughter are showing zero symptoms and feel absolutely fine (although badly traumatised by his illness), despite all being cooped up together in a London flat.
The virus storm will likely escalate across North-West Europe and the US this week, while plateaus across Italy and Spain are expected. Will Europe reopen as quickly as China – unlikely because there has been less testing, less source tracing and very little real information to base decisions upon.
Don’t be fooled – as markets were last week – that there is an easy and quick answer to this crisis. However, there are definitely investment opportunities out there. The trick is grabbing them and holding on through the coming storm..
Five Things To Read This Morning
Bloomberg – Dutch Hospital Staff Show “Insidious Nature” of Coronavirus
Bloomberg – South Africa Rand Slumps to Record Low After Moody’s Cut to Junk
FT – EU back bank rule delay to spur crisis lending
WSJ – America’s Make or Break Week
Torygraph – British Land Boss: retail caverns will be exposed by crisis
On Wednesday I’m being interviewed by Aviation Specialists on a Webinar: The Markets and Aviation: Today and The New World. A “work-from-home” chat with Bill Blain. Please feel free to use the link to sign up. We will be covering all kinds of aspects of the crisis relating to aviation and aviation investments. I won’t hold any punches…
Out of time and back to the day job!