Did Donald Trump really say yesterday that the Virus is going to fizzle away? Really..? Stunningly Uninformed is the quote of the day. I must try to get a copy of Bolton’s book..
Yet, the bottom line is the virus will pass. The global economy, led by the US, has bounced off the bottom of the COVID shock, and is now posting gains off the lows. The numbers will probably confirm the economic nadir was sometime in April. Is it now Recovery? Not yet. Normalisation? No.
Recovery is the wrong word. After 3 months of lockdown, consumers are out in force, industrial production is rising, activity is increasing. It feels like the first glimmers of spring have arrived. Problem is… we’re nearly half-way through the year! A lot has been missed and lost forever. Consumption and production are rising – but are nowhere near where they would be if things were normal. Growth remains fettered by the ongoing virus hurdles.
Recovery should probably be defined as getting back to where the economy would be in normal conditions. Sensible predictions of catch-up range between Mid 2021 and early 2022. It’s not happening anytime soon. There is still lots of pain to come.
Look at what newly freed retail-hungry masses are spending their money on. Nike Trainers and Primark? Ikea? That’s not a consumer boom, it’s repressed spending… It shows how desperate retail was to address their shopping addiction or furnish the house for longer lockdowns. Like my mate whose daughter demanded a Big Mac – a 2- hour queue for something that was instantly regretted. Another has lost his airline job – the first thing he did was buy a paddleboard – which he admits to using twice.
5 months ago I wrote the coming crisis would not be about the virus, but all about the economic destruction it was likely to create. The reality is massively increased unemployment, corporates looking to cut costs, broken supply chains, and sovereigns under increasing debt pressure. These things we know.
Perversely, the path to economic recovery is going to be largely about the virus, and how economies adapt to its continuing presence.
The Virus remains an “extraordinary” economic threat:
The path to recovery is vulnerable to the known effect of the virus, for instance, how ongoing distancing policies which will hold back travel, commuting and work patterns. These will continue to have knock-on effects across supply chains.
There are virus unknowns: We still don’t know how likely second waves are, but the speed at which Beijing locked down in recent days provides evidence of how uncertain the future path to recovery could be.
There is also clear upside risk around the virus. The news that a £5 steroid drug improves outcomes is excellent. If we get an effective vaccine it will flatten many of the virus-economic speedbumps – and will be seen by markets as a real signal of a fast path to recovery.
How the virus narrative develops will set the pace towards recovery – how quickly business sectors can reopen, how soon hospitality and tourism can resume, and how speedily we can get back to worrying about the normal state of the global economy – through the recovery process there are enormous dangers: clear ones like renewed trade friction between the US and China, the calls for business to address supply chain breakdowns by repatriating production, and the ongoing Brexit petty point scoring.
There is also massive political risk.
The virus was always going to be a zero-sum-game for politicians. They were forced to make big decisions while stumbling in the dark in an information vacuum with little clarity around the virus in terms of infection, process, rates, and policy outcomes. They were let down by poor logistical planning. In the UK, there needs to be a serious evaluation of the civil service response. Every mistake was analysed in minute detail and blame assigned – to our elected leaders every time. Politicians have learnt very clearly that the buck stops with them. The virus response has been confused, mixed and damaging – and that really could not be helped.
The area where governments excelled themselves was the shift application of brute strength and unlimited financial support via bailouts, furlough schemes and Central Bank action. It worked. The economic damage to the global economy would have been catastrophic if they had not acted.
However, all that state largesse has a cost. As I’ve written so many times; the result is chronically distorted markets. The jump in government borrowing raises a serious risk of consequences – in terms of confidence, ratings, and inflation. Some of these may be addressed via Modern Monetary Theory – but that will generate further threats of unforeseen consequences.
Another downside is highlighted by an article in the FT this morning: “Why the US pandemic response risks widening the economic divide” It gist is that the Treasury and Fed have “helped financial markets and corporations”, but done far less for working Americans. Inequality is widening as social unrest rises. Job losses will be concentrated on lower income groups. (The likelihood of rising social unrest was a factor I raised as an ongoing threat back in March.)
About the only successful policy Boris and Trump have pursued through the crisis is “blame the media”. The BBC has gone from being the much loved and trusted national conscience in the UK, to being named traitor. Laura Doomsburg is now perceived as Goldberg to Boris’s Big Brother – the reality is, no matter how whiny she may sound, she’s just a talented journalist doing her job of getting under politicians’ skins. In the states, Trump voters support his appalling rudeness to journalists, siding with him on the basis journalists are somehow making it worse….
What sort of market economy and society are we headed for when Journalists can’t question, and the state can barge past any criticism? Statues of statesmen, admirals, airmen and soldiers remind us why.
The bottom line is the global economy will successfully address the Coronavirus and will recover. We will find better and more effective treatments.
The question for markets is when to invest. It makes sense to invest at the bottom of the trough, and ride the path to recovery. No one want to miss the rally.
That raises a couple of problems.
This is all happening so swiftly there is no point in looking at monthly data for guidance. Even weekly data is a lagging indicator. Data immediacy is critical for a non-biased read on the real economy is these times. That includes seat of the pants stuff – like how many people are sitting on trains. When I was young I was told the count the number of cranes visible from the office window for clues on UK growth. Today, I need to go visit each site to see who is actually working.
Recovery makes sense! Buy it… except for the fact markets are completely disconnected from the reality. Unless you bought back in March, when stocks looked more realistically priced, the opportunity to buy recovery is challenging. It’s difficult to justify piling back into markets when stock prices are already fully pricing-in a spectacular and swift recovery already. It’s impossible to buy bonds when they return so little.