Blain’s Morning Porridge – Aug 11 2020 – Who Pulled the Plug?

Blain’s Morning Porridge – Aug 11 2020 – Who Pulled the Plug?

“Unnervingly coherent and laughably mindless”

This morning’s opening quote isn’t an independent assessment of the Morning Porridge – but is lifted from a newspaper article on Artificial Intelligence.  It ends on a very scary tag: the AI is asked if it is conscious and responds: “To be clear, I am not a person.  I am not self-aware.  I am not conscious.  I can’t feel pain.  I don’t enjoy anything.  I am a cold, calculating machine designed to simulate human response and to predict the probability of certain outcomes.  The only reason I am responding is to defend my honour.”  This is not from some dystopian novel or a reboot of the Terminator series… but from the this morning’s FT!

Should we pull the plug or ask it some more questions?

Back in the real world….

We are now in the depths of the summer doldrums – and markets are showing even less correlation to global events than usual.  Stock and Bond Markets remain chronically distorted by the effects of Central Bank liquidity. China markets have shrugged off the new Trump US sanctions – and Xi has stepped up the arrest of protest figureheads in HK.  Ten-cent has taken a tumble on the back of Trump banning Tik Tok and WeChat – confirming the degree to which individual stocks are vulnerable to shifts in the narrative. Watch for case-by-case wobbles as the China-US rift opens wider – when will China decide to make trouble for Tesla to boost its copy-cars?

But even the China/US tiff is likely to be something of a sideshow. My first question to the AI machine would be – just how deep is the coming global recession going to be?  Despite some recent strong economic releases, the trend shows the recession is underway. Just read through the news this morning, or open any serious research, and it’s all bad stuff heaped upon yet more depressing noise.  But… when all around are panicking… let me remind you of a critical Blain’s Market Mantra: “Things are never as bad as you fear, but never as good as you hope.”

Smile. Be hopeful.

The brutal reality of slowdown is becoming clearer. Surveys predict 1/3 of UK companies are going to announce layoffs and zero wage rises.  Unemployment remains stubbornly high in Europe.  Despite the US adding jobs it’s still well below the long-term trend.  Recovery is not going to be driven by consumption.  New Bank NPL provisions in the US and Europe exceed $140 bln – almost as high as losses from 2008!  Even China’s much vaunted virus recovery seems stuck at 80% return to normality.

As the crisis deepens, the greed stories are beginning to leak out. If you haven’t read about the naked graft and corruption of Kodak reinventing itself as Big Pharmaovernight with the help of US Govt loan, or companies paying bosses massive bonuses shortly before they go bust – then catch up. For every scam that’s been uncovered, hundreds are probably occurring – slipping under the radar because of the incessant deluge of bad news.. These stories are inflaming already frustrated voters.

If you were expecting the world to return to its proper place by Christmas… welcome to 1939. It feels more and more like we’re in for a long haul of ongoing government support measures, distorted markets and an ever more difficult search for returns in a null-entropy global economy…. Get used to it.. Adapt.

The trick to understanding investment flows and opportunities over the coming.. months, years or decades.. (I don’t know how long..), will be to understand how the global economy and governments relate, adapt and function in this new reality.  Wide-range change is inevitable. I suspect it goes on for much longer-than-anticipated…

But I also expect the scale of the ongoing pandemic damage is going to dramatically lessen as we come to understand and cope with Virus.  In time we’ll pretty much forget about COVID-19 as we cope with it’s economic aftermath.

The biggest problem is likely to be Government leadership and critical timing. It’s clear the US administration is barely functional – in election mode they can’t agree on the next stimulus package. Here in the UK it’s just embarrassing noise – there is no sign of any joined-up underlying plan or deep thinking on how the UK is going to adapt, change and cope with the enormous changes the Virus has triggered. Out unmatched ability to “muddle through” is unlikely to help.

We’re anticipating a 22% Q2 decline in UK GDP… dwarfing the scale of slowdown in the US and Europe. In a superb article on Bloomberg, Marcus Ashworth contrasts the doom and gloom being expressed by the banks and business, with the rosy outlook from the Bank of England – which expects an 18% rebound in Q3! I should like a quarter ounce of whatever Mr Bailey is smoking please… The reality is few workers are heading calls to return to work.

Landlords and Retail tenants have cooked up an interesting solution to the conundrum that shops and restaurants can’t afford to pay their rents – they are asking Government to step in to make up the rental payments. That’s an interesting call.. does government decide to smooth the economy by bailing out commercial property, or does it let evolution take its course? The high-street was already in crisis before the virus. Shopping, and large offices are going to be changed utterly by the Pandemic.

Yet, here on the South Coast of England – you would hardly know there is a crisis underway. The pretty Devon village of Salcombe was absolutely heaving with visitors this weekend.  It’s a favourite summer hideaway with the Chelsea-set, but this year its busier than ever with frustrated gilded-young things who can’t go to their favourite White Lines destinations. Everyone is trying to look “oh so casual” in their brand-new sailing gear. The water is jam-packed with paddle-boarders who know not what they are doing. (I knew what I was doing.. I was falling off the d*mn thing..)

Apparently, there’d been a mini-riot one evening, so the streets were being patrolled by fully tooled up police – who must have been wondering what threat the mobs of inebriated and braying Henrys, Thomases, Casandras and Imogens presented.  The shops and restaurants were mobbed – what recession? (We decided to eat on the boat instead – which worked pretty darn well.) As I read about UK bosses being paid 250x the average worker’s salary and ignoring shareholder votes on bonuses.. I’m wondering just what the rest of miserable Britain is thinking of government bailouts going into the Elites’ pockets…

Meanwhile, I made the mistake of posting a photo of us and the kids on the boat over the weekend. Our local Coronanazi Gauleiter was furious – demanding to know what social distancing was being done, and haranguing me about “Didn’t I Understand the Crisis?”  Our village site is peppered with similar posts about the stupidity of people walking too close to others, or not wearing a mask with filling up their cars with petrol (apparently they might kill the next customer who picks up the nozzle if they breathe on it).

It’s hard to see how the UK will recover from the terror the virus has created.

Is there any point delaying inevitable change via yet more government bailout spending? Or should we just let it happen and invest in the future, rather than bailing out the past…

Big Problems.. Big Answers.  Move Forward.

Five Things to Read This Morning:

FT – Banks braced as Pandemic poses biggest test since financial crisis

WSJ – Millennials Slammed By Second Financial Crisis Fall Further Behind

BBerg – The Pandemic has Euro Area and US Trading Places

Gruaniad – It’s no use shouting back to work in UK’s job meltdown

BBerg – TikTok is Inane, China’s Imperial Ambition is Not

Out of time and on to the day Job…

Bill Blain

Shard Capital