Blain’s Morning Porridge – March 13th 2020
“Climb Mount Fuji”
I don’t think we will be getting any kind of “buy the dip” rally this morning – fool me three times and I must be stupid! Europe is opening down. US Futures are suggesting a limit down market open. Donald Trump has banned Yooropeens from Columbia’s shores. (Except for the UK). Apparently these filthy Yooropeens are seeding infection clusters in America. As I cycled into the office this morning I’ve never seen the streets of the City look so quiet and empty.
It really does feel we entering a new stage in this crisis. Suddenly It feels very real! But there is upside. There are signs from earlier hit countries the Virus can be contained, and that’s a hope for normality. The question is where do we have to travel before we get there? We are already looking carefully at China and Asia wondering about opportunities to buy!
Yoorp..
As we enter an official bear market, today we’re going to waiting for what the ECB does. What can it do? Triple up on QE, cut interest rates, announce a stream of TLTROs and LTORS and SNAFUs, while putting their hands together and praying? I’m afraid we are well part the stage of monetary tinkering – it hasn’t worked these last 10-years, so why will it work now?
What Europe needs is something much more direct – but of course they can’t do that. The ECB is not a political construct and can’t give its permission for states to spend Yooropeen money to juice activity through fiscal stimulus, bailout packages, tax cuts and cash handouts. That’s up to the national politicians to approve – and they answer to their domestic electorates. Good luck persuading a German car worker to pay Italian and French pensions.
There are lots of articles out there talking about how this is going to break the Euro, how Italy will default, and all the usual stuff. Over the last 13 years Europe has proved surprisingly resilient in terms of the Euro’s survivability. While its Economy is effectively hobbled by the Euro – it just keeps going and confounds the doomsters. Wait for the inevitable crisis and Italy bonds to balloon out – and they buy them when the ECB manages to squeeze in a rescue package disguised as something more acceptable to Brussels and Berlin.
What Europe needs is what Britain did. Fiscal independence. But the Euro will go on.
UK
Much as this hurts to say, I’m actually slightly impressed at the Mark Carney / Rishi Sunak double act yesterday. An emergency interest rate cut looked overdone and fairly pointless, but taken together with Chancellor Sunak’s “address the facts” budget, regrettably I find myself scoring them high. It matters not a jot that UK stocks finished lower – they were addressing the economic consequences of the Coronavirus on the economy and the people. Markets don’t matter – we’re talking about the real world here. Full marks to the UK!
Away from that, the market news remains downright bad. US companies – including Boeing – are rushing to draw down all their bank lines, anticipating a credit crunch and liquidity squeeze. Travel and airline stocks have been hammered again. Expectations central banks can keep juicing the markets higher are crashing – which will fuel further declines.
The big issue now is confidence in Governments to address this. While I score the UK high for their ambition in yesterday’s budget, we are still likely to see crisis in across UK hospitals next week as emergency services are swamped. Our thoughts will be with patients and especially the staff. But at least we’re now getting in place the kind of mass testing and containment that’s required.
Containment works – we’ve seen that Italy. The towns hit by the initial wave 2 weeks ago are no seeing the number of new infections tumble and the mortality rate fall. Although we question the numbers out of China, its also clear that containment worked there. Across Europe we are likely to see painful lockdown over the next few weeks – but it will work. The pace of transmission and infection will slow.
Once we see the numbers start to fall, that’s when confidence will start to return. While it might not be an immediate buying boots on moment – it depends on how much damage there is to the global economy – things should stabilise quickly.
It all depends on how quickly the key drivers of the Global Economy recover. I am not so worried about China. There will be issues and problems – but containment worked and the economy will reopen.
US
I am less certain about the US. In fact.. I predict a riot..
I reckon we’re going to see real crisis in coming weeks in the US. And you can lay the blame squarely at the two left feet of President Donald Trump. Coronavirus will be the defining event of his presidency come November’s election – and he’ll likely be exposed as a blusterer who led the nation unprepared into disaster.
Donald Trump has made this Crisis Worse – Potentially Much Worse.
We’re all familiar with Trump telling us the Virus was “fake news”, “no worse than a flu” and how it would vanish in the spring. He’s pinned it on the Chinese, and last night he sounded like he was posing a trade embargo when he said: “Anything coming from Europe to the United States is what we are discussing”. Now the Virus is proving very real, and markets and the electorate will be losing faith in the Great Clever President to address it.
When it’s done and dusted, Trump’s, and his gang of hang-picked yes-men, are going to look pretty damn stupid:
· By denial of the crisis, Trump failed to provide any kind of decisive or strategic leadership as its unfolded.
· The right strategy would have been to react proactively to a potential threat. He didn’t. He gambled the lives of US citizens that it wasn’t a threat. It’s a bet he is going to lose.
· There should have been an immediate Containment policy – stopping anyone from infected regions with symptoms like sniffles or a high temperature, slowing and recording anyone from source countries while immediately ramping up testing, identifying those carrying infection, source tracing all contacts, and then quarantining all individuals to ensure they did not spread the virus. Nothing solid was put in place in the US – aside from half-heated travel bans which came too late and didn’t stop carriers like Chinese nationals coming through other countries. Stopping Europeans now is a dollar late.
· As seen in Italy and China, Containment would not have stopped the spread of COVID-19, but it could have slowed the transmission number and reduced the infection trendline to a much flatter trajectory. Instead, failed containment means we are likely to see a parabolic spike in infection rates.
· To be fair, an infection spike is going to happen across most Western economies – but they have been making preparations.
· Slowing infection rates through containment would have relieved sudden pressure on the medical system – what we are seeing in Italy today – reducing the likely panic effect and the numbers being triaged in corridors. As infection would have been slowed, there would be the possibility of providing all seriously ill patients with ventilation and effective treatments. Very little is in place to address a sudden deluge of cases.
· There have been 10 weeks since the virus was called by the Chinese on Dec 31st 2019. Trump had 10 weeks of vital prep time. What did he do? Try this from the NYT a few weeks ago: How prepared is the US for a Coronavirus outbreak.
· Testing in the US has been minimal. Just over 5,000 people out of thousands who have the potential to be infected by the virus have actually been tested. The numbers are tiny to any other nation.
· The initial US test kits apparently had defective reagents in them. It didn’t matter – rules and regulations actively discouraged testing anyway. Health care professionals calls for wider testing were ignored.
· The big issue for the US will be: Who Pays? Who can afford to be ill in the USA? While other developed countries have varyingly effective free health services, free testing and free medical care for those infected with the virus, America does not. American low paid workers will be encouraged to under-report infection because of loss-of-work fears and the lack of insurance to cover the unknown cost of treatment. It will lead to additional transmission as folk keep going to work, infect co-workers and travel contacts, and magnify the crisis.
The Irish have already cancelled St Patrick’s Day Parades. Chicago plans its usual party – 500,000 people will likely attend. Don’t drink the green beer.
If the US suffers a catastrophic spike in infections, the collapse in confidence in the government to address crisis will not just impact the markets, but changes the likely electoral outcome in favour of the Democrats. That’s going to be interesting.
Five Things To Read Today
FT – UK Fiscal Watchdog Fires Warning Shot At Sunak
WSJ – US Travel Bank Fuels Global Stock Rout
WSJ – US Banks Can Weather Market Turmoil, CEOs Tell Trump
BBerg – Christine Lagarde Has Three Big Options
ZH – Inside The Red Zone: An Interview From Italy During COVID-19 Lockdown
Interesting times.. Out of time and back to the Day Job
Bill Blain
Shard Capital