Blain’s Morning Porridge – 1st April 2020
“When she looks at me and laughs, I remind her of the facts….”
In previous years I’ve been able to sneak some marvellous April Fools days jokes on readers. Due to circumstances, it would not be appropriate this year – we’ve had enough shocks. But, this morning’s announcement petrol will be rationed until June 31st has still caught many by surprise…..
As the sun rises over the river, the second quarter of 2020 opens bleak. Another day of market high-jinks as participants arb stimulus packages. UK Banks suspend dividends – so much for investment fundamentals and my buy stocks with a decent dividend strategy then… Who will be next? Oil majors? Long held investment equations are all changing. The laws of financial physics are not as unchanging as we think.
Let me start with a warning:
Under no circumstances allow yourself to read the following media articles. They are dangerous. They will cause conniptions and leave you in an anguished “what if and maybe” frame of mind for the rest of the day. Do Not Read This Article or Any Othersabout Sweden. It will only upset you.
Meanwhile..
Life continues to batten down here in Hamble. Our brilliant little Co-op, where once there was a wider choice of Iberico’s than Waitrose, better Bordeaux than Berry Bros, and more fine chocolate choices than Brussels, is now only offering Cadburys. Things are slipping. Hats Off to the staff of shops around the globe – Proper heroes doing a fantastic job, doing a far more useful to society than parasites like myself, and I suspect most readers.
What to worry about next….
I got a call from a Swiss Broker chum y’day telling me they see a rise in demand for TIPs – Inflation Linked bonds. Although I’m not seeing any significant action in the inflation linked ETFs I watch, it makes sense to keep a weather eye on inflation: the global economy isn’t actually producing anything much, but we are still buying lots of stuff. If demand exceeds supply – that pushes prices higher = inflation.
You could argue that no one is earning any money, therefore can’t spend anything, that’s deflationary – but we just created billions of billions of cash. The real issue is where all that ersatz cash actually goes.
Last time we did that – 8 years of the experimental madness of QE – the result was massive inflation in financial assets, even as contradictory austerity policies in the real economy cut services. Money that would have been directed to building industrial and service capacity, therefore increasing productivity, and raising consumer wages, was siphoned off into financial assets, meaning we got deflation instead.. Too many goods were chasing consumers with stressed wallets whose real incomes tumbled for 10 years.
This time we’re talking about Helicopter money in some economies, and paying wages of otherwise unemployed workers in others by nationalising payrolls. It might just work this time and generate inflation.. Well, at least the ECB will be happy. They should be careful what they wish for… Inflation – for those of you too young to remember – is a vicious and unpredictable bounder, destroying savings, and financial asset values.
If goods are in short supply then prices will rise through the mechanism of the market.
Or…
Governments can chose to avoid riots, and ration goods and services through legislation. I am sure there will be many politicians thinking rationing will not be an issue… they’ve already done just about everything else… How long before we get food stamps entitling us to a rasher of bacon a month, a pound of lard and a packet of dehydrated mashed potato from the Government emergency stocks?
It begs a wider question. Where does government stop? When Jeremy Corbyn called for the nationalisation of the railways a few months ago we fulminated at his socialist communistic insanity. The government did it the week before last, and nobody even noticed.
Or Victor Orban promising to hand back power when the crisis is over. Sure. We know how that ends… although the inhabitants of the US city of Cincinnati could tell us the story of about the only example of a politician voluntarily laying down power.
Global Risk Sentiment – Stressed!
I read a very interesting report y’day – The Crisis Sentiment Index (CSI) produced by the Directors and Chief Risk Officers group (DCRO). The CSI has been reactivated for the Covid-19 crisis. They surveyed over 200 CROs at leading investment firms. The higher the number from 0-100 the worse the crisis. Their current number is 68 – “indicating substantial stresses”.(No Sh*t Sherlock award winging its way to them.)
64% expect a 50% change of Global Depression with GDP falling 15%
64% are planning for significant disruptions in activity for 6 months or more.
93% believe there is 50% change of material unrealised global impact
10% believe it is likely the Pandemic will be under control within 3 months.
Interesting snapshots from the survey include:
“We are engaging with our people and teams to assess emotional resiliency – which has not been considered in prior planning.”
While China talks about recovery, a North American exec said: “for my industry, the estimate is for a 40% decline in global revenue for 2020.”
An Asian manager commented how China, Taiwan and Singapore have dealt with it through a combination of “social controls, social action and top-quality medical careavailable to all. The danger is re-contagion from the West where there is little social discipline and regressive health care systems.”
Bigger Changes are Coming
That last comment from Asia is particularly interesting, highlighting the increasing divide between the Occident and Orient in terms of society. Socialised or liberal?
Let me pose a question:
What is the difference between the state threatening to jail a doctor for complaining about the lack of preparedness to address a new disease, and a medical company threatening to dismiss and prosecute staff who go on social media to reveal the lack of protective gear in stressed hospitals?
I’d like to hope voters will eventually look back on the crisis and fundamentally assess just how well their elected representatives did. But you know that’s unlikely to happen. But maybe politicians will be smart enough to refocus priorities – perhaps its time to rebalance western economies… National Heathcare that’s properly acknowledged as the primary public good would be a great start. (And that’s going to be a massive investment opportunity!)
Because it made me laugh out loud, I’d like to finish by pinching a line from the daily blog of my old chum Ara Levonian at BGC: “The US look all over the place in a coordinated response to the pandemic and the Trump administration is coming unstuck due to its lack of attention to detail. The problem is the administration seems to consist of 4 men, 2 of whom do not really believe in science.”
Five Things to Read this Morning:
Torygraph – Carmakers in crisis as virus threatens to burst leasing bubble
WSJ – What the Nurses See: Bronx Hospital Reels as Coronavirus Swamps New York
BBerg – Five “Ps” That Will Help Determine If the Market Has Bottomed
FT – How central banks beat back the “bond vigilantes”
ZH – Oil Producers Are Now Paying Clients as Wyoming Sour Price Turns Negative
Finally, I’m being interviewed by Aviation Specialists Ishka on a Webinar later this morning: The Markets and Aviation: Today and The New World. A “work-from-home” chat with Bill Blain. Please feel free to use the link to sign up. We will be covering all kinds of aspects of the crisis relating to aviation and aviation investments.
Out of time and back to the day job!
Bill Blain
Shard Capital