Blain’s Morning Porridge, 19th Oct 2020: Swirling Uncertain Days

“Let the autumn leaves fall where they may.”

It feels we are caught in some kind of revolving autumnal depression – inflicting successive fronts of bad news and uncertainty upon us. The US election is just over 2 weeks away, and the divide between Trump and Biden is said to be narrowing in the betting markets. Sterling markets have been curiously muted following the missed “hard” Oct 15th Brexit deadline – anticipating a last-minute deal can still be found. Pandemic lockdowns threaten across Europe as infections rise, raising the fears of a double-dip depression. Meanwhile, China is all smiles as the economy gets back on track for a bumper year as the West remains mired in dissent.

The factor most colouring markets remains the US election.

There is an “interesting” article in the Spectator on the election – it suggests Trump will only lose the election because elderly US voters think he’s left them in danger. However, it also suggests the primary reason Trump won the 2016 election was because he was up against the worst possible democratic candidate – Hillary Clinton. That’s an interesting perspective. It doesn’t appear to be a lesson the Democrats took on board. Biden is hardly the most convincing choice – but the numbers do show he is attracting Trump’s votes.

In recent weeks markets had gotten comfortable with the increasing likelihood of a Biden clean sweep – talking up stimulus plans and talking down threatened tax increases. However, this morning the latest polls are looking more mixed. Betting odds compiled by RealClearPoliticssuggest its getting closer. (Although PaddyPower shows Biden 1/10 and Trump 5/1.)

The closer the result looks, the more likely it is to scare markets – uncertainty is what markets fear most, and the closer the election result, the greater the perceived likelihood Trump will not concede and will contest the results.

Any chance the Republicans see to stem a Biden landslide will increase the negative news flow – for instance this morning Biden is being dismissed as a China stooge, there is renewed noise about Hunter Biden’s nefarious misdeeds, another that Joe is mentally and physically exhausted by the campaign, that Facebook is in trouble for pulling stories about Hunter Biden, etc, etc, etc….  I’m assured such “fake-news flow” is all true and hasn’t been carefully engineered to paint Donald as an honest, virile statesman. (Sarcasm alert.) On the other hand, the New York Times did a full hatchet job on Trump on Sunday. Whatever happens on election night (or the months it may take to resolve the numbers) America is likely to remain a house divided.

The next two weeks are going to be interesting on the other side of the pond. And that well know Chinese curse “may you live in interesting times” applies equally here in the UK as well.

There is much talk of just how distracted the government looks in terms of the missed Brexit deadline, dissent from the regions on Coronavirus lockdowns, and claymores being dug out the heather in Scotland (a sure sign of rebellion). Rumours of dark deeds, superinjunctions, and political skullduggery swirl around Westminster. These do not look like Boris’ finest hours.

Cut through the noise, and the outlook for the UK boils down to how you perceive three questions:

1) How secure is the nation’s Pandemic response?

There does seem to be an increasing realisation the Pandemic is a long-term economic hurdle. It’s essentially very simple: the NHS will not be able to cope if a large part of the elderly population is infected.  It’s now well understood the young are essentially not in any real statistical danger, but all it would take to swamp medical services is 10% of those over 65 to catch it. There is a growing consensus the government has done an appalling job managing and communicating its policy which is to essentially stretch out the pandemic to keep the hospitalisation curve below the crisis level – which means (in the absence of a vaccine)… this goes on longer and the friction continues.

2) What is the likelihood of a Brexit deal?

The Brexiteer faithful claim a no-deal is best for the country, but that’s largely bravado. A deal is always a better option – but not at any cost. The rumours say there is still time for the last minute stroke of midnight agreement with Yoorp.  A deal would be pragmatic – but no one can afford to look weak.  Not Boris, not Macron and not the faceless nomenklatura of Brussels. Someone is going to have to give ground… Still.. I’m sure we’ve gone to war with France over less than fishing rights in the past. Pass the Tennis balls (extra points to anyone that can explain that reference…)

3) Where is UK policy going?

It sounds like the Bank of England is going all-in with Negative rates on Nov 5th. Good or bad thing? Short-term market plus – long-term creates all kinds of negative consequences and immense difficulties in terms of moving the economy back into normalised growth and kickstarting entrepreneurial spirits.

We also have the clamour on how the government pays for the crisis – should Chancellor Rishi Sunak really be raising taxes and cutting spending in time of recession? Of course he should not, but he has to convince economically illiterate Tory MPs and party bosses that Margaret Thatcher was wrong about the nation having to stick to household budgeting to balance the books – and that’s heresy!  I wrote about it last week in City AM: Be Brave Mr Sunak.. Keep Spending.

Put these three factors together and work out if the UK is a buy or a sell. The opportunity is certainly there for the UK to use its ability to finance itself out of this Pandemic depression – which will be much more difficult for Europe, hamstrung as it is by the ECB. Buy/Sell UK is not a binary call about a Brexit deal, although many analysts present it as the main market factor.

And then there is China.

No virus worries as the economy grows 4.9% putting it on track for something that may look like a steep left-skewed v-shaped recovery. The numbers look good – the economy contracted 6.8% as the virus hit in Q1, before posting 3.2% in Q2 and near 5% in Q3. China will post positive 2020 growth.

How did China do it? Is it all down to the strict Q1 lockdowns and controls we’d never accept in the west? Was the speed at which their economy adjusted to supply increased demand for PPE and other health products, or fed the West’s demand from WFH computers? How much is due to increased consumer confidence in China – an article in the WSJ this morning quotes the head of Domino’s Pizza saying China is “a terrific success story in 2020.”

As a final comment on China this morning, I was writing about the regulatory threat to US Tech – someone suggested I buy Alibaba instead as there is zero chance China will hamstring their own tech while the West acts. As a smart Chinese philosopher once said: never interrupt your enemy when they are making mistakes.

Five Things too Read This Morning

WSJ – Pressure on New York Commercial Real Estate Worries Investors

NYT – Trump Runs the Kind of Campaign He Likes, But Not the One He Needs

FT – Eurozone budget deficits rise nearly tenfold to counter pandemic

Bloomberg – The Paradoxical Potential of a Biden Presidency

Torygraph – The Long-Term case for investing in China remains intact

Out of time and back to the day job

Bill Blain

Shard Capital