Covid-19 Is Fast Exposing The Market’s Reality…

Authored by Bill Blain via MorningPorridge.com,

“Failure is not falling down, but not getting back up again..”

Someone important in the Hong Kong Government reads the Morning Porridge! Last week I was talking about the use of “Helicopter Money” as a policy response; dropping wads of cash direct to consumers to juice the demand side of the economy – and this morning the HK authorities announced a HK$ 10k handout to each and every citizen! 

Back in London, I’ve heard staff were sent home from the London office of a top-rank US investment bank because their spouses had attended the Milan Fashion Week.  They’ve been told to go into self-imposed quarantine.  The Irish govt has called for the cancelation of the Ireland vs Italy game.  Two meetings on one of my deals next week have been switched to less effective conference calls because key staff may be unwilling to travel to Yoorp from the US.  It looks like my annual Lads Ski Trip to the top of the Aosta Valley in 10-days time is unlikely to go ahead.  

Dang.  Covid19 is becoming dashed inconvenient…

The market reality is becoming… fraught.  By the end of this week its entirely likely markets will be down 10% or more from last week’s top (currently 7.5% down and watching!)  That’s serious.  But, what’s scary is that this crash is utterly different to anything that’s gone before… This is outside our normal experience.

Yesterday’s market was like watching Homer Simpson tumbling down a steep slope.  He bounced off a ledge, rose higher for a moment, before gravity inevitably took over.  Doh!  Will the market stop tumbling today?  Probably not – the trend is further economic, virus triggered, reactive slowdown. But, this is not a conventional end-of-the-world-as-we-know it stock death plunge.  This is a slow-motion catastrophe as shocked realisation bites; where the reality of the virus induced snap recession and its consequences will continue to depart from the path of a conventional crash. 

The upside of this slo-mo crisis is it gives market participants more time to think and react – which equally means more opportunity to get it horribly wrong! 

This is going to prove a new experience for everyone.  Most crashes, and this is my 6th or 7th since my first in 1987, see the whole market tumble in lockstep.  This crash is going to be more about unknown coronavirus-driven fundamentals – which sectors and names are most vulnerable to broken supply chains, permanently lost orders, travel lockdown and industrial siege mentality, and which are most likely to benefit from critical sector government support.

It’s also the subject of an exogenous force – the unknowns about the virus.  This will be driven by how governments react to an external pandemic threat rather than the usual internal crisis vectors like stupidly unwise bank lending, or a stock bubble bursting (although it doesn’t help the valuation bubble looked very close to popping!)  The effect is the tempo of the crisis will rise and fall dependant on the non-economic factors – the spread (contagion) and effect (mortality) of the disease. 

Someone will suggest can probably write that as a formula:

P = f{(C*Ci/1/M*(CP)})*G 

Where Panic (P) is a function of Contagion (C ) * the increase in Contagion rate (Ci) / Mortality (M) * 1/Cured Patients (CP) multiplied by the Government (G) factor on whether policy is good/bad .. or something like that… 

Problem is… none of us in markets are experts on pandemics – hence we’re as likely to be wrong as anyone.  Industry talking-heads pretending they understand the virus are likely to be as wrong as anyone. 

Take it for granted that the experts advising governments on lockdown are experts, and while they might not know all about it, they know more than us…  

That’s a reason to be worried.  The crisis, the disease, has only just burst out of China, and as it explodes elsewhere the shock effect on market sentiment has already been massive – perhaps out of all proportion – or so say a number of market pundits. As the pace of cases rises and falls, deaths occur, treatments and cures are found, and we see more reaction from the authorities, then the likelihood for sustained market volatility increases. See my formula above. 

The slo-mo crisis gives time to make investment calls. I’ve said before I’m not so worried about solid names like Apple – if you can’t buy an iPhone today, you will be able to buy one in a few weeks, months, next year. I was tempted to buy Spotify and Netflix, till figuring that if people are bored in quarantine skimming through Spotify, then it actually has to pay more in Royalties if more people are streaming content! (Which might be a good reason to buy Music as Asset (guess what? I’m doing a Music deal at the moment!) 

Maybe sell Italy bonds and banks? A cancelled ski trip means resorts at the head of the Aosta – Courmayer and La Thuile (my favourite ski destination) – will effectively close, with multiplier effects down the Valley. I’ve seen the effects of a bad winter before: the following year there are shuttered restaurants, skimped piste maintenance, and older skis in the hire shop. Cancel the whole season a month early – and you are talking a whole regional economic ecosystem in trouble. 

It’s entirely possible restrictions in global travel will push the more vulnerable airlines into default – although it’s also predictable governments will step into support them. That’s a market call – which airlines have enough government clout and support to sustain them through a lean period? Norwegian will be one to watch. And how much pressure will bailing out a Middle East national carrier create when the underlying economy depends on the oil price – which has been pummelled by uncertainty on virus slowdown, and the strained Saudi/Russian relationship? 

Spread that analysis out over every sector of the whole economy. The Chinese are trying to do it by mandating no layoffs, and telling the banks to lend and assuring them they will be bailed. (That’s a whole can of unintended consequential worms in terms of possible banking behaviour…) Western economies might have to make similar calls. 

The closest parallel I can think of is the organisation and management of a wartime economy. There are some fascinating histories comparing the success of the UK coalition government directing the economy through 1940-1945, compared to the undirected dither, competitive powerplays and wastage within the German Reich – most folk will be entirely unaware how badly the German economy failed to adapt, and why it’s a major and often understated reason they lost the last global conflict. 

Meanwhile… 

While all eyes are focused on where markets are going in response to the Cataclysm of Coronavirus news.. there is plenty else bubbling down below on the front lines of finance:

Another emerging market debacle is unfolding in Lebanon, US company downgrades as unwise leverage and M&A raising the ire of rating agencies are rising, the Democrats self-immolating in the US, and the doubts about politicians eyeing each other to see who might try to garner a boost from the current virus fixated market. (A bit of competitive devaluation anyone?)Or how about story in FT this morning about the rise of hydrogen – which has enormous implications for the hype over electric cars! 

In short, there is plenty to think about out there aside from the darn virus! When you need something to not understand, let’s move on to Europe. 

The big issue is the UK trade agreement.  Yesterday the Yooropeens agreed that Britain must be punished for Brexit. If we want to trade with Europe, it can only be if we accept every rule of the EU. Does anyone outside Brussels understands that’s going to trigger crisis? The UK will not accept it.

Strip it down to the basics, and it feels like we’ve got a continuation of the 1000 year war. It’s not about protecting the Yoorpeen Union from a more nimble and more perfidious Albion undercutting its trade and good standards. It’s about France getting payback time.  The smart economic outcome for Europe would be a good trade deal with the UK, where the damage to the Union is minimised and trade carries on as before. Instead, the French won the argument, together with their salivating Irish poodle. They want to humiliate us, choosing their moment as a distracted and senile Germany snores in the background, to make its play.   

That’s a bad decision. As M. Barnier struts the stage of history demanding Britons submit as slaves to the Franco-Yooropean hegemony… our politicians will not dither or shilly-shally, but make a very clear guesture to Europe in terms of access to British fish, thus stoking a future of on-going trade protectionism.  The default position from angry right-wing Brits will be simple: Europe is very welcome to our fish – they can buy all the fish they want at whatever the market price is from British trawlers. We might be willing to do a few side deals in return for some consideration. If you want the best fish in Europe – it’s going to cost. It will cost more in France.

That won’t be good for anyone. 

Listening to calm reasonable European parliamentarians a few weeks ago it sounded like a negotiation likely to result in a sensible Canada style deal was underway.  

Now, the UK has to circumvent the French dominance of the hollow EU. Boris and his gang need to deliver messages direct to European leaders telling them the UK is not even going entertain France’s demands. Let’s start again and let it be widely known we are willing to sign up to the agreed Canada style deal with Europe, and negotiate from there. If they refuse, as they have been mandated to do, lets break the rules. 

Let it also be know we’re more than willing to strike side deals with each European state –  except for France and Ireland – on everything and anything. The Spanish want our Fish? No problem. The Germans want to sell us their cars? No problem. The Danes want to sell us Bacon? No problem. Let’s chat. 

Now I know that isn’t possible when dealing with the Yoorp trade monolith – where one size fits all, but France better. Its time to let European voters know what a trade block with the UK will cost. Let the national press, farmers, fishermen, the Eurosceptics and the right wing know, and reinforce the message that France’s singular desire to hurt perfidious Albion can only be achieved by crushing German, Dutch, Danish, Swedish and the rest of Yoorp’s exports. 

The French have tried to mount economic blockades of Britain before. Didn’t take rest of Europe long to work out dealing with a merchantile trading economy like the UK beats dealing with the dead hand of French state policy every time.