Blain’s Morning Porridge, August 27 2020: Blind Hypoxic Euphoria

Blain’s Morning Porridge – August 27th 2020: Blind Hypoxic Euphoria

“No man can taste the fruits of autumn while he is still delighting his scent with the flowers of spring.”

Stock markets continue to grind higher. Why? There are reasons to be cheerful – global earnings haven’t been a bleak as feared, economies are posting some stronger than expected numbers, and the absolute numbers around the pandemic are improving in terms of better outcomes and fewer deaths. There are even a few analysts claiming we’re still headed towards a V-Shaped Recovery – although it won’t now be until mid 2021 – which sounds pretty much their best-case scenario is one year missing from Global Growth.

And that’s the best case?

Most Porridge readers think I’m some kind of Uber-Bear, a Casandra-like misery-guts always warning of impending doom and gloom.  Nope.  I’m a happy glass-half-full optimist. I believe things are never as bad as you fear – although they seldom turn out as good as you hope.

But, I am getting concerned…  This August has been a miserable end to the summer. The massive storm Laura has just hit the US. I have gut-feel the financial weather is heading for a deep low – I have a feeling late-October/early-November is likely to be when a reckoning hits markets…

The enormous efforts to sustain, stimulate, preserve and maintain global economies via furloughs, bailouts and rescues are running out of runway. As markets get fretful about the costs and soaring sovereign debt, the Torygraph puts it rather well as it warns of a brutal autumn as mortgage holidays and furloughs schemes end as massive waves of job losses hit. 2 million Brits are taking a mortgage break and nearly 10 million were furloughed. These people and jobs hit reality in a few weeks time.

And that’s just the UK. The Italian’s say the effective loss of 11% of their economy due to the zero-tourist season is accelerating their descent into madness insolvency. The Chinese claim they’ve recovered, but the anecdotal evidence of job losses and a hard hit working class suggest otherwise. And, lest we forget, there is still the virus – although it sounds like the threat of a devasting second autumn/winter wave is receding.

We all know the soaring stock market looks utterly disconnected from the grim reality of the real economic damage that’s already done. Deep down we all know the rally is nothing to do with improving fundamentals, but is driven by the effectiveness of Central Bank QE Infinity (which will be reinforced later today as the Fed promises lower rates for longer through inflation averaging).  We know ultra-low bond yields force investors to seek higher returns by taking greater risk in stocks.

All that central bank liquidity and rate repression is starving the markets of the oxygen of common sense – hence the current hypoxic euphoria.

It can’t last forever. Wake up, take a deep breath and glug a strong coffee.. There is a lot to worry about.

Just how vulnerable are markets? Thus far their conviction in the ability of central banks to maintain liquidity and thus the upside has gone unchallenged. It’s been supported by the stronger than expected economic releases, and the swift evolution of the global economy in terms of working-from-home, internet deliveries and new tech. Thus far, the gains from sectors having a good crisis have covered for the losses in sectors hit hard by pandemic.

That cosy sentiment could easily be shaken.

I am particularly concerned about what’s occurring in the US. The degree of polarisation across the economy is becoming a major threat. The haves are increasingly few in number, while the middle classes are beginning to sense just how disposable they may be as good jobs from healthcare to airlines evaporate. If the economy was to take a nosedive, you have all the conditions for a repeat of the 1930s.

Think about the 1930s in the context of rising political risk.

The political impasse in congress on a second Pandemic Stimulus Package isn’t even making the front pages – yet Govt support was promised, and its critical for markets in terms of keeping up the strong numbers. The swamp is focused on bargaining: apparently the Republicans will counter the Democrats $1 trillion demands with a $500 bln counter package. They bicker as the pandemic rages on, the dole lines lengthen, and current furlough and stimulus cash runs out. Their deliberations have a direct consequence on business and consumer sentiment – it’s getting wobbly.

The airlines are asking for another $25 bln. Delta is slashing pilot numbers. American Airlines sacking nearly 19,000 pilots and staff. These will be followed by the others. The same is happening across the economy and will be riggering multiplier effects across the economy.

But of course, no US politician is actually focused on the virus anymore. All eyes are on the election. And that is looking massively more scary. If you were still expecting an easy win for Biden – forget it. This election is going to be won and lost on the hugely polarised battlefield of race vs law and order.

The events in Wisconsin defy belief – what possible justification is there for shooting a man in the back, seven times? Listening to the chief of police last night he was arguing the state has to go through proper process and therefore can’t de-escalate tensions by arresting or even sacking the two officers. As riots engulfed the town, two more people died – but it turns out they were shot by vigilantes, and the guy arrested was a 17 year old from out of town dressed in makeshift militia gear.

In terms of the election, forget the state of the economy, forget the trade wars with China, forget the pandemic response. Suppressing uppity rioters has become the central issue of the election.

Their grievances of BLM will be stomped over as Trump goes long Law and Order, and support for the Police, while scaring the electorate that Biden is a pawn of the left-wing defunders. Trump’s betting his rock solid 44% support will be unshaken, and all he needs is small number of scared Dems to think Biden is weak. The timing could not have been better – for Trump in this election.

It couldn’t be worse for solving the divisions across the US to ensure its long-term economic success. There is something deeply depressing about the news from the US. It feels like a Reichstag Fire moment for divided American politics. BLM will be repressed – but not for long. It will come back even more divisive.

Americans will vote as they see fit, but what will it mean for markets? Trump’s global unpopularity may seem unimportant to voters in Peoria, but perceptions matter. If Trump wins because he’s “trumped” the perceived oppression of the Black minority by playing the Law and Order card, it will simply accelerate the already shifting power of US global influence, weaken alliancies, weaken the dollar equation and further shake the dollar foundations of the global economy, while opening doors to China.

Around the globe folk will increasingly wonder about the degrees of difference between Trump’s America and the soon to be Chairman Xi’s China?  Sad, but it feels the golden age of US influence is waning.

All these factors – the pace of recovery, the ability of governments to sustain bailout and jobs support programmes, the rising debt mountain, the escalating cumulative economic damage already done, the threat of a second pandemic wave, and the US election all come due in October/November. Have your hard hats ready in case it gets rowdy.

Five Stories to Read This Morning: 

City AM – The Corporate bond market is set for a record year – but also a dangerous and dysfunctional one

FT  – Small band of bulls keep faith in beaten-up bank stocks

WSJ – Why Hurricanes Can Take Gasoline Prices for a Wild Ride

BBerg – Rolls-Royce Posts $7 Billion Loss as Crisis Roils Jet Demand

BBerg – Women Have Been Better Leaders than Men During the Pandemic 

Out of time, and back to the day job..

Bill Blain

Shard Capital