Blain’s Morning Porridge – July 31 2020: Consequences?

Blain’s Morning Porridge – July 31 2020 – Consequences?

“I see the bad moon rising..”

There are clues in this morning’s financial news about where this goes next. 

The headlines are about the stunning success of the Big Four Tech giants – beating expectations and proving themselves largely impervious to the Cornonavirus.  Stand that against the news the US Economy showed a notional 32.9% annualised GDP decline through Q2 – its worst performance since 1947.  As virus hotspots erupt around the globe, we’ve got Trump tweeting about cancelling the election – which he actually can’t do. And buried deep in the back pages is news of the coming crisis; proof the whole system is in deep trouble as the UK’s University Superannuation Scheme (“USS”) faces the consequences of QE Infinity. 

Back in February, I put down Apple as one of the likely strong stocks most able to survive the coronavirus crisis – arguing an iPhone sale lost in March would simply be a purchase delayed. I was wrong. Apple’s revenues increased 11% as it sold more Macs, iPads and selling phones right through – especially its cheaper ones in China – boosting sales by 35% at a time when competitors like Samsung saw sales decline 14%. What’s happening?  I need to go speak to marketing experts, but it looks like firms with a clear domination of their space are getting a boost as consumer behaviour shifts and they make deliberate decisions to prioritise quality over price. 

A second factor is the Advertising Industry – lots of firms deliberately cut advertising spending early in the crisis. It’s a decision they probably regret – smart companies went out and spent more to boost their profile. That’s reflected in the increased revenue at Facebook – where the “boycott” by leading firms failed to dent the firm. Facebook saw revenues grow 11%! 

Amazon was barely troubled by the crisis protocols – the number of smiley face boxes bearing the logo piled up in the globes litter bins. I suppose there must have been a collapse in waste carboard prices as a result. It may be second place in the cloud computing battle to Microsoft – but Amazon hiking revenues to near $90 bln is pretty impressive.

In contrast – rising unemployment, smaller companies facing the end of support and solvency catastrophe, plus the ongoing virus outbreaks, confirms the global economy is increasingly divided into good and bad.  Talking to clients over the past week, it’s become clear no one really believes there will be a solid cross-economy recovery – a common v-shape. You need to look sector by sector, stock by stock to understand the winners and losers, but that’s being made obscure by the effects of the QE Infinity and Zero Interest Rate Policy. 

When Fed-head Jay Powell earlier this week said it’s all about the virus, he was being disingenuous.  It’s about winners and losers – and the Fed looking the other way as it pretends it not… 

There are seriously large icebergs out there.. and I can’t help thinking pushing the QE Infinity engine all the way up to 11 is dangerous…

I’ve been arguing since 2008 that government interventions, regulatory overkill, QE Infinity and ZIPR will have massive and painful consequences. When it comes down to financial assets – liquid listed stocks and bonds, the result is now clearly visible financial asset stagflation: financial assets cost must more and return far less. That’s the way prices work. A stock that cost $1 dollar in 2010 and made $1 in profit costs $10 today, but still makes $1 in profit. A bond that yeld (or is it yielded?) 10% in 2010 makes 0.8% today. 

University staff in the UK are furious. They are threatening to strike because their gold-plated final salary schemes are at risk. The USS faces a £20 bln funding gap – which will require universities and staff to significantly increase contributions to maintain its pension provision. It’s not just the effect of Financial Asset Stagflation on the final salary scheme that’s causing the crisis – people are living longer, shifting the actuarial goalposts even as the returns plummet.

The brutal reality is that ZIRP and QEI have a voracious appetite for more. As long as markets are distorted, they will consume all the salaries and contributions of the university sector, and there will still be an unfillable hole at the centre of the pension scheme. Consequences.. consequences.

It’s not just the Universities. This is going to happen to every occupational pension scheme. In the case of the USS, we’ve already seen the richer universities pull out – apparently unwilling to share risk. It won’t help the UK’s university sector faces a double whammy from the virus and declining student numbers. 

Who can afford the costs of final salary pension schemes in today’s Zero-return market? The maths simply don’t work. Yet, as angry Academics are demonstrating, no-one holding a FSP is willing to give it up. Of course they aren’t – those of us outside defined benefit schemes, and saved our own pension pots face the same problem.. without the benefit of being able to go on strike at the injustice of it all. 

It’s going to get worse.  I sometimes wonder if whole UK Government might just be a Ponzi Pension Scheme that’s going to bankrupt us all. Within a few years the UK will be paying about 25% more in gold-plated pensions to government workers than it receives in tax revenues.  Meaning, those of us saving for our own pensions will be taxed more to pay theirs. While I understand the need to ensure the retirement of our brave front line medical and service personnel, I’m struggling to feel much sympathy for bureaucrats. 

And that, dear readers, is why the Blain yacht is well stocked, seaworthy and able to flee these shores when the revolution erupts led by angry Torygraph and Guardian readers.. 

Five Things to Read This Morning

WSJ – Big Tech’s Embarrassment of Riches

FT – Investors in Gold and Investors in Bonds can’t both be right (er.. for the moment they can!)

FT – Sanjeev Gupta’s personal bank faces losses over failed commodity trader

Spectator – The real Jo Biden: what would his presidency look like?

BBerg – US Economy rebound looks shakier after worst quarter yet

Finally this morning – delighted to announce the launch of Leifbridge – a new wealth manager set up within Shard aimed at solving the many tax and investment issues facing US Expats. There is a great article on the initiative here – the name comes from Iceland, where there is an actual bridge across the US and European tectonic plates.  You can find full details on the website, and if you are a US expat reader, please let me put you in touch with the team. 

Have a great weekend

Bill Blain

Shard Capital