Bad? Buy Stocks!

Authored by Bill Blain via Morning Porridge,

“When things in life are rotten, there’s one thing you’ve forgotten...”

It’s fascinating to read US Online Brokerages have attracted record new punters, over 800,000 sign-ups – through the lockdown in March and April. Sport followers and racing gamblers have given up the lure of professional sports and now punting on the market – apparently fuelling the rally. They’re must feel like they are finally winning – backstopped by the rising market and the Golden Fed Put. Zac from Alabama is making $1000 a day trading, according to web sited promising to share the secrets Wall Street won’t! 

I will share Blain’s Market Mantra No 1 with them for nothing: “The Market has but one objective: to inflict the maximum amount of pain on the maximum number of participants.” 

Back in the real world… 

The news remains unremittingly bad. Therefore... buy stocks would seem to be the obvious counter-intuitive recommendation...

Yesterday turned negative as the markets realised the Moderna trials showing “maybe” positive results in 8 of 37 patients isn’t quite the salvation we’re hoping for. Fear not.. Tomorrow, some other drug trial will announce the person its testing its virus on looks slightly happier, or a Central Banker will say something really market supportive like: “We’ve got lots of money and we want to give it to you so that markets don’t fall…” 

The big risk is that people are going to tire of this B/S. Bank analysts and big investors trying to look past the vaccine/treatment noise, past the Central Bank puts, and focusing on fundamentals all say the same thing: Stocks are massively overvalued ahead of a looming recession. Corporate bond yields need to reflect rising default risk. Simple as. 

As I predicted the global aerospace industry is in serious trouble. Rolls Royce are cutting 9000 jobs and preparing for years of disruption. That will have enormous cascading knock-on effects on specialist engineering and aerospace SMEs across the UK that subcontract for the aerospace giants. The Chancellor, Rishi Sunak is being open and honest about the economic crisis in terms of jobs and growth: “a severe recession, the likes of which we haven’t seen”. He’s crushed the Bank of England’s hopes for a V-Shaped recovery.. 

Someone should tell the BOE everyone else on the planet stopped taking about V-shapes weeks ago.

We can’t simply ignore the global reality – the recession is here, and that has profound implications for growth, supply and demand. 

China is supposed to be great driver of global growth. Not anymore it’s not. Virus flare ups, rumours of mass lockdowns, and rising bankruptcies underly the hits we’ve seen in China GDP. Chinese consumers are resisting spending again – they are all in re-building/savings mode, expecting the picture to remain bad. While the economy has re-opened, news reports speak of empty shops, malls and streets. We’re likely to see the same phycological behaviours here in the west.

In the US we’ve even seen a decline in e-commerce sales, hinting at the demand shock from the 37 million Americans now on the dole queue are likely to create. 

The latest BAML Survery is clear – A U or W shaped recovery.  What is really interesting is the focus on what the new economic landscape will look like. Its clear we’re going face external pressures including challenges in addressing new supply chains and increased protectionism, and the prospect of higher taxes to pay for it all. Lots of folk now fear resurgent inflation will follow deflation!

The report also identifies three main risks – a second coronavirus wave triggering a repeat lockdown, sustained high employment and a European breakup. 

I’m going to go out on a limb here, and say we can probably discount two of these. 

A second Coronavirus wave is certainly a threat, but we will be better prepared logistically and in terms of therapies. We’ll know enough about how it infects and kills to manage a second partial lockdown better. Better contact tracing will make the response far more targeted and measured. The damage from subsequent waves could be contained – if we are prepared. 

I also doubt the Euro and The EU will simply implode. It’s gone this far, and it will keep grinding on in a sub-optimal fashion for years yet. I’d bet the Euro eventually implodes or morphs into something more focused – but it’s a while down the road. What it does mean is years and years of continuing European underperformance. 

The area that does worry me is Unemployment. 

We may eventually find a vaccine for the virus, but not everyone can be saved from the coming recession. All around the globe corporates are looking at the recessionary outlook. Naturally, they are scaling back investment plans, rejigging targets and budgets, and looking to prepare for a number of lean years – which means cost savings and head count cuts. Let’s assume – as UK ministers admit – that 1 in 5 furloughed workers never return to work. Add that to the number of companies that will remain permanently closed – and its clear we’re in for potentially decades of trouble. 

When the economy recovers, the lost jobs will have gone permanently. 

I admit I am worried about my kids – one of them has already seen his salary cut and is working 14-hours a day for a company that has had to furlough 80% of staff. My daughter lost both her jobs (her main one in design, and the weekend job she was paying her rent with), but she’s now got a min-wage gig as a barrista – which she loves as it gets her meeting people. I am lucky they are so self reliant… but litterly millions of under 30 year olds in the UK working in hospitality, tourism and retail are going to struggle!

All round the global economy a whole generation of young adults and teenagers are going to find their roles on the bottom rungs of the corporate ladder to be stifled. That could play out badly.

Finally, but I have to take yet another pop at Bloomberg this morning. 

I read a truly extraordinary “article” yesterday: “Merkel and Macron Conjure Hamilton Moment to Fight Euro Break-Up”. I am not hyperlinking it because it’s just a too embarrassingly silly opinion piece that is not news. The authors suggest the deal cobbled together by the EU, Germany and France is a brilliant diplomatic solution to save Europe and the Euro (which it is not), but also it’s a deal worthy of “Alexander Hamilton” – which is utterly irrelevant tosh. 

Oh! these clever Americans. Apparently, all we need to save Europe is a better understanding of US financial history, and everything will be fine. Please. The travails of a half-baked political compromise between the unelected Brussels technocrats, France and Germany which will take at least a year to reach fruition, have zero to do with the first US treasury secretary who became of post-factual sensation because of a recent hip-hop musical fitting a story of “America then, as told by America now.” Its irrelevant to Europe.

Having read the book and not seen the musical, Hamilton is a fascinating character. I can confidently state the reality is the creation of a centralised US treasury and single currency shared by all the culturally aligned 13 states of the fledgling US in 1790 under Hamilton illustrates exactly why the Euro won’t work. 

Or watch it when it comes out on Netflix next month and figure out the lessons… 

For the record – the new Euro Recovery Fund has already run into to roadblocks from Austria, Sweden, Denmark and Holland. They don’t want the EU dishing out grants, they want it charging for loans. It also appears the fund won’t be up and running till 2021, which bodes ill for Southern European economies facing a 20% plus tourism hit this year, in addition to all the other economic damage the Virus is doing!