Blain’s Morning Porridge – June 26 2020 – Resilience is the Key!

Blain’s Morning Porridge – June 26th 2020 – Resilience is the key!

“To be successful, you have to hit the ground running..”

Get set for a surprise. I am bullish.

Stuff the doom and gloom. The Covid-19 pandemic could well prove to be a positive shock which propels the global economy into a new boom age.

The future makes a little more sense. The shifts the pandemic has kicked off across society, commerce, industry and finance are actually positive. They could trigger an evolutionary moment of creative destruction comparable to a major war – fuelling massive opportunities and wealth creation, and all without the dashed inconvenience of actually blowing anything up!

I suspect the predicted Pandemic Economic Apocalypse has been postponed.

It will still go down as the sharpest, deepest but shortest recession in history. For many individuals there has been personal tragedy, but the damage has largely been economic –caused by the lockdown, quarantine and distancing policies put in place by governments – who sincerely tried to do their best. (Let’s not go there on the blame game – but I’m not betting on the longevity of many bureaucrats.)

The downside is the reality of crushed earnings, increased leverage and a massive unemployment threat. Everyone is worrying how unsustainable corporate and sovereign debt, and crashing profits will hobnail recovery. The bears are looking for the next big name likely to collapse. Some will. The swift bailout and support given to the economy in the form of NIRP and QE infinity have utterly distorted markets. But they were absolutely necessary.

I said I’m bullish. My big investment theme of coming years is going to be Resilience! The recovery reality is going to painful – but not only survivable, but something that makes us stronger.

For instance:

· Companies have borrowed massively to give themselves a solvency cushion to get through a Coronacrisis of unknown duration. Its proving shorter and less damaging. That leaves business limited choices. Many will focus entirely on the bottom line – and cut out fripperies like investment and hiring. I suspect most business will be very predictable as they slash costs – which has enormous implications for jobs and consumption.

· But borrowing costs practically nothing at present. Smart businesses will be looking at the reopening for opportunities to expand, grow and innovate to grab and develop new markets. In the early stage of the lockdown I was struck how many firms immediately cut “friviolous” expenditures like advertising. Others went out and spent – and they’re the ones more likely to come out this lockdown flying highest!

· What if the virus triggers new creativity and entrepreneurial flair? In the last few weeks I’ve seen some superb new business and financing proposals.

The data is still very mixed – increased factory orders balanced by rising unemployment, record PMI increases are still below where they would be in normal times. But the pace at which economies are recovering is much more positive than we expected.

Whatever the coronanazis and the BBC would have us believe, the world did not lie down and die. I doubt we get a true V-Shaped recovery, but the outlook is nowhere near as bleak as we once thought. Much of the recent upside has been due to repressed consumption. As we shall see on July 4th here in the UK – it’s going to be the best day Pubs will ever experience. (I am expecting my local will be a ticketed reopening!) But, let’s not forget; these same pubs will require months of record business to pay off their losses (and rentals) from 4 months of lost business.

The coming recovery is going to be about far more than just the ability to go an spend all the money we didn’t squander at Starbucks or on train passes. Part of the recovery will be fuelled by a new technological revolution underway. It was the potential of the cloud which underlay my call to by Microsoft back in Feb.

Take a look round your office. Hasn’t the world changed? I know that I’m more productive because I’m not permanently angry and frustrated by SouthWest Rail! I’ve fallen into a working routine that suits. I’m taking a couple of hours each evening to go walk, cycle or sail – rather than fume on the train to nowhere.

I am missing my “Broker Ear” – the latent ability of any good bond salesmen to listen into every conversation on the trading floor to build their sense of what’s happening in markets. I’m now periferally listening to far too much financial TV – but aside from Jon Ferro on BBerg, its mostly nonsense. I’m calling or messaging clients far more. It’s all possible through a massive technological revolution that’s enable the home office. It’s happened over just a few months. Zoom is the obvious winner. There is much more to come – virtual reality could become the new real reality is just a few years – another revolution in working and also education.

Home Working and Communications are not the only tech sectors set to surge.

One of the other big trends is likely to be deglobalisation. The virus exposed the brutal fragility of cheapest to deliver supply chains. It may be cheaper to get “stuff” made in China, but I suspect much production will be repatriated in the pursuit of resilience. You don’t need labour for that – automation and 3-D printing are going to rule the production facilities of the future.

To operate modern factories will require staff – highly qualified engineers and programmers. That’s going to drive massive changes in Education policy. How many Liberal Studies graduates do we need? Government should be thinking about new training approaches to provide the skills we will need. It would cost government a fraction of what’s been handed to large corporates to immediately slash/forgive all student debt to get them on the consumption ladder. I would suggest paying students to take vocation-based degrees and training. Go to Uni and get paid to become a production engineer. Pay the government is you want to go do something socially useless – like journalism (sorry Marcus, but if you fly with the crows, you get shot with the crows..)

We do face many challenges.

Markets are.. somewhat frothy, looking absolutely overcooked even if the global recovery takes hold swiftly. But, perhaps that is the new reality – financial asset inflation has pushed up prices and repressed returns. Perhaps this is the new normal – and we just have to get used to a low return market? It makes choosing the right investments even more critical.

Is that likely to drive investment shifts? Absolutely. It makes finance more challenging. For instance; do you want to invest in domiciles where returns are based on government interventions – which is everywhere at present, but especially China and the Eurozone? China will face challenges holding on to its economic prosperity in the face of a resurgent and enthusiastic US economy 0and deglobalisation. All it would take for the Eurozone to fracture and sink Italy is a breakdown in the current bailout talks.

Everyone agrees it’s the UK that faces most trouble – trapped by Brexit and a miserably inefficient Virus response. Prepare for a quick slap with a wet halibut, but there is more inventiveness and commercial expertise in London’s little finger than there is in the whole of Europe… an by George, Andrew, David and Patrick we shall shock them..!  (Sorry, bit carried away there… but its true…)

There is a theory the age of the US dollar is over, the Yen will be sunk by the Chinese co-prosperity sphere, and the whole shaky edifice of the Euro will deconstruct. Great news for Sterling and Cuckoo Clocks – they say. I suspect… we will struggle on. The next few years will see something of a battle between China and US – a real risk, but resurgent US and UK strength and innovation could well surprise us all.

Short term much more pain to contend with. Long term – a brave new exciting world. Let’s see how it pans out…. Bring it on. Normal service next week..

Five Things Too Read: 

BBerg – Why Your Favourite Grocery Item is Still out of Stock

Bberg – American’s Rush To Start Businesses, Stoking Optimism for Rebound

WSJ – Here’s An Argument That Stocks Should Be Even Higher

FT – Civil service chief’s future in doubt as Boris Johnson eyes Whitehall shake-up

Torygraph – Global debt surging to “unmanageable” levels, IMF warns

And Something Special:

HTSI – Escape Special: inside the Elephant Boatyard

Have a great weekend…

Bill Blain
Shard Capital