Investors currently seem perturbed by two trends. Firstly, they are watching the crash in oil prices with part glee, part amazement, if not outright horror, depending on how much skin they have in the game. The second is that almost everyone seems sceptical about the sustainability, I even dare say “fairness”, of the rally in equities. I have little insight into the oil market, but something or someone is about to break. Demand isn’t coming back until the start of Q3, at the earliest, and while I get the supply-side dynamics of a broken OPEC oligopoly, I struggle to see that this Last Man Standing™ price war serves the purpose of any of the interlocutors. In any case, I’ll stick to the tape for this one, watching the price like everyone else. It’ll be a blast! On equities, it’s important to step back a bit and accept that Q1 was an outlier. The MSCI World fell 8.5% on the month in February, and then went on to crater nearly 14% in March, a denouement which includes a 32% round-trip from the highs in Mid-February to the lows in March. That’s record-busting pain, and no matter what type of bear market we’re in—and I do think we’re in just that—a rebound was coming, eventually. As I type, the MSCI World is up nearly 7% on the month in April, which doesn’t seem outlandish to me.
Read MoreEverybody knows the feeling that they’re getting more than they bargained for, and I suspect we’re about to see a crack in the market narrative along those lines. Let me explain. From the point of view of those who believe the benefits of economic stimulus far outweighs its potential costs, the Covid-19 epidemic is a convenient amplifier. A strong cross-party coalition has formed in response to the crisis emitting a rallying cry for governments and central banks to throw caution to the wind and unleash an unprecedented wave of support and stimulus. Policymakers have done exactly that. The number is still going up, but somewhere along the lines of 20-to-25% of global GDP is now on tap, and that excludes the fact that central banks are, in most cases, pledging unlimited support via various liquidity and purchase programs. What’s not to like? As I have been at pains to point out in response to this benevolent consensus on the idea that because money is freely available, no one should want for anything, reality is complicated. It’s relatively easy to create liquidity. It’s much more difficult to make sure the money goes to where it is “supposed to,” and in any case, there will always be disagreement about who should get what, and how much. The current situation is a case in point.
Read MoreIt is tough to look beyond the depressing daily death dispatches from around the world detailing the tally of the Covid-19 epidemic. Yet that is exactly what investors must to do, if they want to have a fighting chance to figure out what happens next. These data are undeniably terrible, but they are known quantities for markets, even in the U.S. and the U.K., where the numbers are rising too fast for their own good. They will continue to rise, for at least a few more weeks, at least. Meanwhile in the world as a whole, two immovable objects are now crashing into each other. We can’t return our economies to normal operation due to the risk of an uncontrollable public health crisis, but equally, we can’t maintain economic lockdowns indefinitely. The circuit-breaker in the form of a coordinated monetary and fiscal stimulus program to the tune of nearly 20% of global GDP is a stop-gap solution at best. This is because that is arguably the level of GDP that developed economies are set to lose through H1 alone. Contrary to popular belief, you can’t just freeze the economy, and then re-start at zero six months later after having printed trillions of dollars. Anyone who makes claims to this effect are, in my view, getting a little too excited about the second-order effects of our present misery, which is the economic shutdown itself, and the associated open invitation to unleash the MMT experiment. Don’t get me wrong, it is the right thing to do, but as I said, it is a second-order effect.
Read MoreIt has been clear for a while that Covid-19 would be a big shock to the global economy, but early predictions of a quick rebound, and a return to normal, now look fanciful. I am now inclined to believe that just about everything will change. My old colleague, and good friend, Jonathan Tepper is musing on a similar note in a recent piece on Unherd.com. I recommend that you go read it; it’s a great piece. For my part, I’ll split my arguments into two observations, not necessarily market-related, but both are key to understand the evolution of markets and the economy in the next few quarters, and I would suggest, beyond as well. We are not even through the first quarter yet, but it’s fair to say that the first chart on my next page already is the chart of the year. It portrays the “optimal” strategy to combat the virus relative to doing nothing, and a policy of loose mitigation. Leaving the Chinese and South Korean outbreaks aside—as well as the grim disaster unfolding in Iran—I think it’s fair to make two overall points. Firstly, there has been a significant debate about the correct strategy to combat the virus. The responses have been scattered on a spectrum ranging from (unconfirmed?) pictures of Chinese authorities welding doors shut to apartment blocks to halt the spread, over to “herd immunity”. Or, as former SAS soldier Ant Middleton’s suggests; “fuck Covid-19”, a statement that he, in fairness, has now retracted.
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