THE RETURN OF, NOT ON!!
There’s nothing like a week of the most horrible economic numbers delivered in modern history to keep Equity markets rising, ending in China’s worst GDP numbers in 40 years.
Australian markets followed the international lead this week, as usual, rounding the week out with a Stella 2.0% gain for the All Ords as of lunch time Friday.
So far, for all the turmoil this virus has bought global markets, the Aussie All Ords is down a mere 15%!!!
Are we back to “Good news is Good news and Bad news is even better”?
Equity markets may have been over sold at some point in March, but this is getting a little ridiculous.
Nothing sums up the last few weeks better than the below, from last week.
But let this not blind you to the enormity of what is happing here.
For example, we read through a survey of economists via Bloomberg network over Easter, estimating a 25%, annualised, hit to US GDP for the April to June quarter.
It’s probably safe to assume the number is similar throughout the world and the chances of this quarter’s drop in Global GDP of being a “one off” is very very low.
Therefore, it surely the case that a great V recovery is now off the table and a move from Depression type numbers to standard recession will be applauded, as a recovery.
None of this is properly factored into Asset markets yet, a nuance that will pay investors to note.
It may have been Lenin that said, “there are decades where nothing happens, then there are weeks where decades happen”.
The 3rd of January, the date of the assassination of Iranian general Qasem Soleimani, and associated fears of an oil supply shock seem like a lifetime ago, but it happened just last quarter.
We hope you also remember the last quarter of 2019 as the quarter that we recognised the financial system was in serious peril, as of September 17, 2019.
This “collapse of something” (it may have been a Hedge Fund) was the first sign that the “Everything Bubble” was finally collapsing, forcing the US Fed to reopen the QE money printing spigots to prevent it turning into an all-out “Lehman”.
Well, that was then, BC, as they call it. “Before Corona”.
We’ve simply run out of superlatives to honour the “now” as we start to look at the effects, both long and short of the twin pandemics we face. The Real Virus, and its economic counterpart.
You probably don’t need any extra commentary on the virus, but the lock down of the entire global economy and its effects are truly staggering.
To understand the economic impact, one must first see the Virus as a catalyst and not the cause of the real economic woes heading our way.
The Global Central Bank response, so far, has predicably been to continue to focus on holding up asset markets. Specifically the ones with the biggest bubble’s. Stocks, bonds and, in some countries, property.
The property market in Australia has been of particular focus for the RBA, such is the vulnerability of the Australian Banks thanks to multi decades of excess leverage, largely encouraged by Government incentives and in recent times, record low interest rates.
This Global Central Bank response of the last few weeks have a couple of characteristics that make it just a little different from the last 12 years of “stimulus”.
The first is the sheer size. Trillions is the new Billions.
The second is the direct injection of monies to individual constituents (eventually), a wise move to stave off any social unrest at yet another bail out of misbehaving corporates. You can expect much more of this “helicopter money”.
The response from asset markets was very predictable, ALL UP!!
However, let this not delude you into thinking this rally in stocks is anything but a typical bear market rally.
Think of it as a gift, a gift to those that didn’t de-risk their portfolios when this first started.
Our concerns in times like these with regard to any advice is; be more concerned about the return of your capital than return on your capital.
We are now in the throws of the endgame of a 40 year credit cycle and we suspect that the same central bank policies that go us this far will not be enough this time.
Don’t think for a minute that this will deter them from going larger and larger and larger……….as the talk of a possible “reset” becomes louder.
More on this potentiality as the situation unfolds and its implications for certain assets.
In the meantime, in the case of the USA, the Federal Reserve looks like it’s going to buy ALL THE THINGS.
Ironically, starting with shitty debt, Junk Bond ETF’s.
We really thought they’d wait for things to get a lot more serious before this level of desperation, but here we are.
Even more irony lies in the fact that this ETF purchase program will be administered by the world’s largest ETF “manufacturer”, Blackrock. NO CONFLICT HERE!
There’s always a silver lining to massive money printing and rating agency reliance, some humour.
In a fine blowback to 2007, S & P reaffirms its rating of the US to….”S&P Reaffirms US At AA+, Outlook Stable”
You read it, folks. “Outlook stable”.
During the last Financial Crisis the peak disaster was that of Bear Stearns and Lehman, both corporates. This one is big enough to take a sovereign.
We mention this as we fully expect to come back to it in the near future.
Just to make sure you understand life since 2018…….to infinity.
We’ll be sure to update commentary as this whole crisis unfolds, but for now, enjoy the rally.
Finally, lets put a face to the largest “bailout” the world has ever known, US Treasury Secretary and former Hollywood movie producer, Steven Mnuchin (and wife).
This photo was taken just after his appointment.
All portfolio management queries welcome!!!
