Blain’s Morning Porridge – April 17th 2020
“One of these will surely screen out the sorrow, but where are you tomorrow?”
What is the global economy going to look like as we recover from C-19?
At the macro level we’re pretty much agreed Global GDP is unlikely to post a sharp V-shaped recovery. It might not be as bad as the IMF and others predict, but we’re going to experience on-going crisis flashpoints as a result of the virus. Escalating geo-political tensions, a host of blame-game narratives, crashing demand and surging unemployment are going to challenge and distract markets – it was ever-thus! It’s going to complex and challenging. Even the most bullish corona-virus traders see trouble ahead.
Some countries will recover faster and stronger than others. This morning 6% Q1 contraction in China sounds brutal, but the expectation is they will post a strong recovery through the rest of the year – as long as the rest of the world starts buying again. The critical driver of global economic growth stumbled – but has the ability to pick itself up. Most countries will also get there – eventually.
There are very real policy risks in some countries. I’m impressed by the fact the US has already blasted through its $350 bln SME paycheck programme, the Swiss can approve and get money into business accounts after 5 simple questions on the same day, and the Germans managed to disperse gazillions of paychecks without breaking sweat. Yet here in the UK less than £1.1 bln of loans to SMEs have been approved. I was told by one chum yesterday he’d been offered a call to discuss his loan application in Mid-May! Good intentions are worth diddley-squat if not delivered.
The prospects for collective Yoorp don’t look so hot…
I recommend a read of the FT’s two pieces it’s hoiked together from an interview with Emmanuel Macron (US Readers: the French President). Ongoing unpleasantness in Europe is pretty much nailed on as nations fail to agree how to use their common currency to survive. Macron effectively challenges Europe with an all or nothing mutualisation play: “Macron warns of EU unravelling unless it embraces financial solidarity”. I don’t see the Dutch or Germans agreeing to subsume themselves into the young Sun King’s vison.
The second article contains the video of the interview – Time to Think the Unthinkable – and Macron actually comes across pretty well. Problem is the world does not really need a brilliant and thoughtful French philosopher at this particular moment. I liked it and there is lots I agree with… He’s absolutely right that the virus will change the nature of globalisation.
None of that is likely to help Italy in the next few days/months. The Italian bond spread is the ticking Geiger counter that’s going to alert us to the coming European sovereign debt crisis. When it starts screaming.. run. It will.. think Chernobyl.
At the business and industrial sector and individual stock levels a very different picture of global C-19 implications are apparent..
This morning’s photo is a A380 Superjumbo being scrapped. Despite all the government bailouts, it’s looking pretty dire for airlines, aircraft manufacturers, and aerospace. Boeing has seen over 300 orders for its acursed 737 MAX plane cancelled – though it still has a 5000 plane backlog. Thousands of small suppliers rely on orders from the engine makers and plane makers. Its why companies like Boeing, Airbus and Rolls Royce are strategic assets. Whatever you do, don’t Google how RR’s engine business is doing – it will ruin your day.
Over half the global fleet has been put in storage (check out this onBloomberg) – and many of the older and larger widebodies are unlikely to ever fly again. One of my closest aviation clients was telling me it could be 10-years before aviation recovers, and it will be a massively different business – which means there are massive transformational opportunities there!
The collapse of aviation, aerospace, tourism, hospitality, et al, will have massive multiplier effects on economies – but also open opportunities to reinvent and innovate.
Other areas like healthcare are set for boom-times – as long as we remember why. People are going to keep buying smartphones – which is why Apple making a song and dance about relaunching a cheap and affordable bright-shinny thing catches the zeitgeist so well. (Oh! 10 points extra to me for gratuitous use of zeitgeist!!) Microsoft’s cloud business is infinitely expandable and doing exceptionally well. Tech stock prices are on the up, their long-term moving averages are positive, suggesting it’s a sustainable trend.
The bottom line is there will be winners and losers from the Covid Recession. It will be transformational for the global economy. What does that mean? That we will have to think about everything in a new light – rethinking every facet of the global economy in terms of manufacturing, delivery and pricing in terms of new supply and logistic chains, but also how the global economy works.
However, it’s also a massive political challenge, and this is where Macron might be on to something. Are we going to let the massive government bailouts simply flow to the top of the tree? Are we going to accept increasing wealth inequality if all the cash simply goes into the pockets of the 0.001? Are we going to accept that nurses earn less in a year than a private equity dude earns in a minute?
And are the Chinese going to sit back and let the likes of Trump continue to curse and bully them? I think not. A global shift in economic power is completing… its been underway for years, and now its happened..
Lots of big issues to consider…
Meanwhile.. back in today..
My chum Robert Hillman of Neuron Capital has produced a great piece looking at how quickly nations can relax lockdowns to kick start economies: What are the risks of relaxing lockdown too soon? If there is only one thing you read today – this is the one. Neuron have offered their data and model free to national authorities and health services.
Robert’s conclusions are: It’s unlikely any significant easing of lockdown (US and UK) can occur in early May without considerable risk of cases rising again, but easing will make sense by late May. The benefits of intense lockdown will start to diminish if easing is delayed beyond May. Some degree of easier lockdown will need to be maintained for a considerable time.
What do we mean by “ending lockdown/reopening”? Robert said: “The next phase will need to be a very careful relaxation of existing measures, and no doubt the introduction of new measures and guidance (for example the enforced wearing of masks, testing and tracking).”
Five Things to Read Today
FT – Why we fail to prepare for disasters
BBerg – European Car Sales Drop Most on Record in Sign of Deep Downturn
WSJ – Funding Exhausted for $350 Billion Small-Business Paycheck Protection Programme
ZH – Ford Tests Buzzing Wristbands to Keep Workers Six Feet Apart
Torygraph – The OBR is far too optimistic about the economy’s ability to bounce back
I just realised its Friday already! Have a Great Weekend.. and let’s do it all again on Monday… Out of time and back to the day job!
Bill Blain
Shard Capital