“This is what sums up for me ..”
FT’s Alphaville has a fun article listing 20 things investors should look for when trying to figure out who will next wirecardYou do not need to be a financial genius to understand which company they can talk about … This is a basic wake-up call. In periods of economic darkness, it is very easy to convince him of the effectiveness of snake oil. If something is overly promising, makes a lot of noise, while not enough, and is mainly a cult of personality, then this is unlikely to be a particularly successful investment.
Return to the real world …
We are almost halfway by 2020. Although we were shocked, surprised, and overwhelmed by the Virus and supported by the swift and effective intervention of governments to support companies and reduce job losses, while central banks calmed the markets with COP opium Infinity, I cannot help but wonder if the real earthquake is yet to come.
I remain optimistic about a long-term recovery as we adapt to the virus, and this spurs a new era in the development of technology. But I cannot help but feel deep concern about current markets and the sustainability of global financial systems.
This crisis is not like anything that I experienced before. Usually a market crash is an explosive event – it happens when something in the financial sector breaks down; for example, trust in housing and financial systems in 2007, or valuations in the collapse of Dot.Com, or faith in credit structures, as during the European sovereign debt crisis in the 2010s. In each case of financial turmoil that I encountered after the Great Crash of Perpin in 1986, the initial shock and horror gradually diminishes as the market discounts the shock, dismisses it and continues.
The global financial crisis of 2007-2008 has some similarities with current events – it was slow. More than a year passed from managing the Bear Stearns structured lending funds to the collapse of commercial paper markets, the Northern Rock run, until we reached the Lehman collapse in September 2008. When banks were saved and saved, in 2008 there were about three months when it seemed that financial markets were irreparably destroyed. Of course, they were not – governments and central banks looked after them. Stock markets were extremely volatile – but were equally quick to arbitrage this support – causing a rally that lasted 12 years! (Mostly against markets distorted by ultra-low rates and QE.)
This time it’s different. The crisis began with a meteorite strike – a virus. We have never seen anything so much affect the real economy. Usually – this happens the other way around: financial collapse affects markets, and only then does the pain penetrate the real world. This time the first were real jobs and production. This is fundamentally different.
I’m not sure that the markets really understand this difference. The impact of financial insolvency on the real economy is felt in terms of capital inflows into the business. If the bank explodes, this will affect depositors and borrowers. This time, we will look at how incomes and declining rental income will collapse on financial markets – but they behave as if this is just another QE Infinity round for markets where arbitrage is possible. As we all know, markets are currently completely separate from the real world.
Nevertheless, the damage that the real world will cause to financial markets will be enormous – but I don’t see what the banking regulators and authorities are preparing for. They push financial institutions to participate, weakening lending and maintaining confidence. You can understand why – but they also know that a crisis is coming. Just read special statement Fed manager Lael Brainard after she backtracked on the Fed’s decision to allow bank dividends: “Many large banks will probably need more capital absorbing losses so as not to disrupt their reserves in adverse circumstances next year.”
The bottom line is that global central banks know that a financial crisis is possible / probable.
There are a lot of questions. Is market pricing in the face of a major financial crisis – to a limited extent. What if growing problems in the real world cause a massive crisis in bad loans? In fact, the entire financial system currently relies on financial assets (stocks and shares), which are backed by state support. How sustainable is it?
For example, in the UK, we know that commercial landlords received less than 20% of their rental income in the last 2 quarters – the day tenants must pay rent for the next three months. Real estate experts expect homeowners to return most of this rent after the virus. It will be interesting – how many more names are likely to disappear from the main streets and how many shopping centers get into the stadium when people shop from home?
Companies that do not pay rent or dividends are no longer a banking problem. Currently, risk is much more widespread throughout the financial system: most city offices have insurance companies and government investment funds. Fund managers who rely on dividend income are likely to be sadly disappointed as income runs out as a result of government orders or due to the sad earnings season we are about to survive.
The path to the markets will depend on what surprises us next. In the previous crisis, I watched the markets get agitated by a huge shock before falling on a predictable path: daily news becomes less shocking, markets become less volatile and start looking for opportunities.
This time I do not think that a real financial shock has occurred. The dominant problem remains the virus. Market news generating current RO / RO volatility (risk on / risk off) is all about how COVID-19 slowly sweeps through the statistics in the southern part of the USA, causing resumption of locks and frightening markets. The sheer size of the US is one problem, but poor blocking and early reopening in states that have not reached anything close to their peak infection rate is another problem.
The virus will remain a serious threat, but real economic and political problems will appear in the coming weeks. Dull corporate revenues and stories, such as the collapse of gas fractionator Chesapeake energy or Boeing, struggling to re-launch the grim 737 MAX, will dominate the news stream.
geopolitics ranging from the deepening confrontation between China and the United States to the EU’s fighting in Brexit, the poor South and democratic problems from the East, are likely to remain negative.
And let’s not forget about domestic politics. More fund managers see the November US elections as their greatest fear. Few admit that they are Trump supporters, but there is a clear fear that the Biden presidency will achieve complete purity both in the Senate and in Congress. Meanwhile, Macron in the local elections in France and the encouraging pro-European elections in Poland underscore the dissatisfaction of voters with the current regimes.
As I said – I’m bullish … but selectively, and there is a lot of noise on our way.