Blain’s Morning Porridge – 3rd April 2020
“So, what do you think about a recession? Well, I thought about it and decided not to participate”
Apparently, its Friday? What? Already?
I only know it’s the end of the week because my iMac is telling me. The news remains unremittingly awful. The US unemployment data was a shocker. The threat level across the global economy is scary. Is there no end to the dismal tone? I really need to get out more.. but we all know that isn’t going to happen any time soon… I need some clam and zen-like reflection.
Please forgive me if this morning’s Porridge doesn’t try to try to guess what the numbers, curves and spikes all mean, is a little less frenetic and a tad more reflective… There are some one-line market outlooks at the bottom to make it worth your while persevering, or cut straight to them…
Exhausted..
I think I’m suffering some bizarre form of “exuberance exhaustion”, perhaps triggered by: 35 years of trading room pressure upended by working from home, adapting to new ways of communicating (a month ago I’d never heard of Zoom or Houseparty), worrying too much about anticipating the consequences of desperate government and central bank action, while unravelling the spectacular market moves we’ve seen.
WFH has been a game changer. I don’t miss my miserable commute (although many morning porridge readers say they most enjoyed my daily tirades at the failures of South West Trains). I have a new one for you: Rail company says we should claim full refunds for our season tickets – but apparently we can’t do it online, only by going to station!
Meanwhile, I’m at my desk early each morning – but it’s actually easier writing the porridge on the train.. less distracting. Rather than staring at grizzled visages of my colleagues each day, this morning I’ve been watching a Robin getting territorial in the garden.
But there is a lack of interaction with colleagues, a fear I’m not doing enough, and a constant sense I might be missing something. On the other hand, I’m finding I’m busier and doing more in terms of chasing deals and data. I’m also lacking discipline to walk away from the “office” – still answering emails late into the evening.. It will take time to adapt.
I’m even thinking I might have to sign up again to Bloomberg (an addiction I kicked last year) to keep more broadly in touch with the market.
And then there has been the coronavirus – trying to be unemotional and putting it into considered and coherent market and economic context. That is not so easy as it sounds. Everything around the virus is becoming too politicised and emotional – which worries me in terms of sensible policy decisions. We need government to lead, not react.
I am starting to get a bit snappy with some of the nonsense:
There is a lady posting on the local Facebook page her “shock and horror” that children are out for walks with their parents and aren’t wearing masks: don’t these feckless parents realise their little petri dishes of deadly infection are going to kill people. Please stop! (We can learn from the Swedes – let adults be adults.)
Or…. reporters screaming down the government’s lack of preparedness of the medical services. Hang on. The NHS has very well paid and pensioned professional managers to plan and run the thing – and whose fault is it they didn’t follow up on a 2016 wargame exercise simulating a pandemic? Please forgive me for sounding like I am criticising the NHS, which is now a category 1 treasonable offense..… but every single Doctor and Nurse will tell you the NHS desperately needs reform and refocus! That will not suit the bureaucracy that milks runs it, and it’s become political suicide to even question how it works..
Or… there are the “British” tourists stranded around the globe whose families are now demanding the government flies them home at public expense… sure some are tragic but medical care is likely to be better in the UK than Pakistan. Or, what was that woman thinking when she booked herself onto a Goa yoga retreat in March.
Or… how about the American Aircraft carrier where the captain wanted to abandon ship because 2% of this crew had the virus – none hospitalised – which meant, apparently, they were all doomed!
And…
There is serious stuff – the cancer sufferer with her life ahead of her who has just been handed a death sentence because a critical operation has been delayed 5 months so the hospital can focus on the virus. That is a serious policy issue, and prioritising the virus is probably a mistake.
I will be pilloried for saying this.. but things are bad enough without do-gooders with a story they demand we all hear making it worse…
The last few weeks have been… interesting…
BACK TO MARKETS
The next few weeks are likely to be even more upsetting as the virus peaks in Europe and the US. Markets will remain tender, but also looking for signals the crisis is ending and for signs of where we go next.
Among the few things we can be certain about is this will end, and the global economy will come out of it. Although we talk about a “Wartime Economy” it’s nothing like a real war – there will be factories, offices, shops and sites for workers to go back to when, not if, we reopen. That’s a positive… we just don’t know how big the shocks will be.
My son Jack, who works in the Ad business, shared this with me this morning – Advertising in a Recession. I think it’s got some interesting clues on where we go:
· 7/10 people expect their household income will be affected. That’s serious for discretionary spending.
· 24% of global brands have completely paused ad spending. Most have cut budgets.
· 74% of ad buyers expect the Virus to have a heavier impact than the 2008 financial crisis.
It’s a great article – puts a very different perspective on business than our usual market focus.
Outlook
I thought it might be worth scribbling a few conclusions on current market outlook:
Government Bonds:
Gilts and Treasuries are a buy on the back of QE Infinity – forget the bond vigilantes, Central Banks can set whatever rate they care to set. Trade accordingly.
European Sovereign Bonds – the risk of a fraxious split in the Euro will be addressed, but Euro Sovereign bonds are a curious hybrid; sovereign credit.
The Long Term risk is policy normalisation, but it didn’t happen after the last crisis. Governments will need to consider the long-term consequences of false markets on the economic allocation process.
Corporate Bonds:
Investment Grade is a buy on the back of QE Infinity Programmes – hence the biggest ever Corporate Bond New Issue Binge. Yippee….
Junk Bonds are a buy on the back of likely yield tourism from investors seeking higher returns, confident junk bonds will track investment grade spreads tighter – as they did last time.
Risks: Fundamental analysis required on issuers on the cusp of being downgraded into junk – it’s still a big falling angel tumble that will trigger losses, and downgrades will accelerate. Pick and choose names and sectors likely to benefit/be passed over by government bailouts, support and nationalisation.
Stocks:
Pain still to come as newsflow worsens.
Dividend pickers are in for a shock – the “dash for cash” to cover the effective closure of the global economy for a few months is likely to allow boards to reconsider dividend policy.
Fundamentals – some obvious winners, like condom sales in Germany being up 3000%, grocery stores and mask makers are short-term.
Long-term it’s about how the world changes when this is over – and that will likely include the long-term consequences of sudden high-unemployment, savings and spending on growth. Many companies are going to find themselves in a very different environment.
Commodities:
Still a substantial chance of global recession/depression in medium term, but recovery thereafter.
Oil:
Trump really is a giggle.Will the global economy ever need oil again? Yes. Gas even more so.
Green:
The Environment is still there. It might even have benefitted. It should still be a factor in long-term investment decisions.
Five Things to Read Today
Eric Lonergan – Macro Policy Proposals – immediacy is the metric
BBerg – Marcus Ashworth: Goldman Sachs Has a Point on Credit Recovery, but be very Careful
FT – Rating Agencies brace for backlash after rash of downgrades
WSJ – Record 6.6 million Americans Sought Unemployment Benefits Last Week
Out of time, back to the day job, and try to relax over the weekend..
Bill Blain
Shard Capital