Blain: From Meltups To Lockdowns

Authored by Bill Blain via MorningPorridge.com,

“Friday the 13th is still better than Monday the whatever…”

Friday the 13th – never a good day to set out on a new voyage or project… but someone will probably be offered the job as Chief of Staff at Downing Street… Any takers? 

Back in the real world, it’s been an extraordinary week as markets settle into a new upside trend after the Vaccine news on Monday. It’s not quite a “it will be all over by Christmas” mood, but certainly the expectation is vaccine(s) mean the war against Covid is won. There is lots of talk about a “Melt-up”into the Christmas market slowdown. (All of which ignores the fact every stock ratio is screaming over-bought… but let’s not spoil the mood by being bearish…)

Yet yesterday we saw the market back in dip mode – pulled lower as markets stumbled on the deepening and immediate Coronavirus crisis as numbers continue to soar. Lockdowns and curfews are being imposed in US cities. The prospects for any form of economic stimulus from what still passes as government in Washington look to be zero. We had warnings from the big three central banks about the ongoing dangers of coronavirus lockdowns to economies: Powell Warns of US Economy Risk With Pandemic at Deadliest Yet. 

As I said yesterday; the war is won, but there are still battles to be fought. 

It’s beginning to look like the current infection curve in Europe has peaked – but there will still be a lag before that translates into falling hospital admissions and deaths. The numbers all show deaths are concentrated 80% among the very elderly, but no government can risk health systems being swamped – hence the ongoing lockdowns.

UK numbers yesterday saw a record strong 15.5% quarter recovery from the first lockdown – but the economy still massively lags the pace of recovery in other European nations. The UK is still 9.7% down on the year! 

The really important question is how bad recovery from a second lockdown be? Will it be swift on the basis the war will be won by the summer, and the Chancellor is preparing a new basket of market and job boosting goodies to stimulate and enhance recovery? Or will a second lockdown spell the end for many struggling businesses as balance sheets snap and the cascading effects of business stress and default roll through the economy? Year end, the cumulative economic destruction to the UK is likely to be in double digits…

Interesting comment about long-term Covid damage from the US yesterday – the head of the New York hotel association says “if half the city’s 640 hotels survive it will be a “great” outcome” – occupancy in NY is down 60% this year. It’s that scale of damage and what it means for the long-term health of companies – not immediate recovery – that matters in the long term. Markets focus on immediate news…

Or maybe it’s worth considering why the UK economy is proving so slow to recover compared to the US or Germany? Perhaps it’s the fact our economy is so slewed to services, or maybe its fear – that the population was so comprehensively terrified by the success of the media campaigns during the first lockdown… or maybe we are just lazy and feckless? Whatever, I’ve had enough of businesses that use Covid as an excuse. Yesterday I spend 40 minutes holding on the phone to get broadband sorted out.. listening to annoying messages about “Due to the pandemic it may take longer to deal with your inquiry..”… Why? Does Covid eat phones?

The other issue that concerns me is how little attention markets are paying to the background noise of politics. I’ve been told by one reader of the Morning Porridge that my daily musing are increasingly rubbish because I focus too much on politics – fair enough, but he still reads it everyday… 

I think that politics matter – they are a major influence on market sentiment – or, at least they once were…

For instance; a positive piece of political news may be the likely appointment of Lael Brainard as Biden’s Treasury Secretary. As a well-regarded Fed member, she may be able to knock heads together to create a workable stimulus package. Her credentials for the job are strong – and frankly I suspect stuffy Republican senators will listen to good sense from a clever and successful woman rather than another political hack. That should be a positive market tick – a highly regarded professional in a position to actually do stuff…

There was a time, many, many, many years ago when politics was a gentlemanly game played with the illusion of calm and that our elected leaders were following a well considered and carefully constructed plan. (Under the surface… who knew what torrid stab-in-the-backs, tensions, murders and incarnadine warfare was being fought out.) 

Politics had the capacity to move markets when it shocked us – for instance when government was forced to pull a nation out a currency union, or a surprise election result, or an unexpected resignation. If the government picked a fight with the unions, and the lights all went out, we accepted that was probably part of the grand plan. If we didn’t like it, we knew that the political process meant one set of earnest politicians might or might not be replaced by another set of similarly earnest politicians when the election came around. 

Politics was dull, boring and predictable. So many years ago…

Not anymore. The mystery has gone. The conflict is open and shocking. Populism, indecision and conflict are the new forces that make modern politics such a source of instability and uncertainty in current markets. 

If you think the current bluster, delay and bitterness in the US is likely to result in stronger reasons to favour the dollar and the US in future long-term investment decisions.. be my guest.