"And all I ask is a tall ship, and the wheel’s kick and the wind’s song and white sail’s breaking….”
Another day in lockdown begins.
When they come to make the film of this crisis, it will quickly become apparent the Virus is just the McGuffin, the plot device behind the most massive economic calamity of all time.
I started the morning reading through emails and newspapers. The news is? Dismal. Depressing. Scary. Frightening. And occasionally something rational. Yet stocks are 20% up since the low a few weeks ago – a bull market? What have I learnt? Nothing I hadn’t already figured out. Markets and reality remain disconnected. I could be writing exactly what I said on Tuesday’s Porridge Lite-Bite video clip – see it here.
But the sum total of all the news is a growing awareness of the potential consequences – which is why it feels the ongoing market euphoria is unlikely to last. Surely even the most rabid market bull can’t ignore reality this bad, and its likely to get worse. As the real economic news gets worse.. reality bites.
Unfortunately, that is not how markets work. Markets price the opportunities that stem from manipulation and distortion. Central banks and the Authorities have done everything possible to support the global economy. Markets are delighted at the buffet of opportunities that have been created!
Among the many games to play are junk bonds. European Banks in particular hold a stack of junk debt – having expected to have sold it to yield hungry investors. If these junk names widen, or look more likely to default, it’s going to trigger yet another banking crisis. The ECB can’t afford that, and in the spirit of “Whatever it takes” will mumbleswerve some accommodation to buy junk under some new programme. What does that really do? It encourages bankers to take more junk risk, secure in the knowledge central banks will bail them… and risk remains mispriced. No wonder we are in trouble..
Consequences, Consequences… Someday there will be a terrible price to pay..
Meanwhile we are learning what is working, what is not, and how the consequences are crashing light lightning through every aspect of our modern, complex interconnected society, and ripping it apart. It’s going to be a hell of a job to put it all back together again.. when this is over. And over it will be.. sometime. Just not tomorrow, or the day after that..
And putting it back together is why I’m still hopeful about finance – we are going to have a massive and very rewarding job to do building a new global economy.
This morning’s crop of market stories confirm the growing economic nightmare:
There will be no Coronabonds to bail out poor Europe, recession across the continent looms. Spain will fare worst. Investors are feeling the pain from gated property funds, difficulties accessing pension accounts, and a collapse in dividend income.
A modicum of good news for my chums at the UK Debt Management office – they won’t need to sell as many Gilts as quickly as they feared. The Bank of England has extended the UK’s overdraft facility, allowing Govt to borrow/print directly. House markets are crashing.
Even the end of the Wuhan Lockdown isn’t proving terribly useful to Chinese citizens trying to get home and finding they have to spend 14 days in a state quarantine hostel first. Other parts of Asia are isolating again…
I don’t need to list all the bad news. Just open any financial news wire to hear more bad news. The whole planet is a bit of a mess, but the fact oil prices are on the rise will probably be enough for Wall Street to light up a fat cigar and declare it a buy day!....
What’s the Good News?
Markets adapt faster than we think.
Already we’re seeing the likely shape of the new post-virus economy. For instance, hedge funds stepping into buy distressed cash poor tech companies at “more” realistic valuations – see AirBnBraising new cash y’day. Go figure what that means for every It and other deals are signals there is rationality out there – as smart investors start to anticipate what the future looks like.
And that is what makes finance interesting – the markets may be stupid, irrational, and daft, but they are cunning. There is always something smart to focus on.
I’m working on funding deals for SMEs, asset back deals in aviation and corporate lending, seeking to finance a critical but ESG difficult economic resource, looking at building new infrastructure and a host of other things – all of which will become part of the new Post-C19 economy.. Or so I hope…
It’s going to be exciting...