Wednesday 13 May 2020

How long can the markets be wrong this time?

The FTSE today closed at 5900. It is a long way off January's 7674 level  - a nice 24% down.

From just that you would expect a bad year, but actually this is a pretty shocking level to me in terms of resilience. The UK economy contracted 2.5% in Q2 and is expected to drop anywhere from 15% to 30% in Q3. This is much worse than 2008/9.

In 2008/9 it did take 6 months but in the end the market ended up 50% down for a short while, albeit with recovery also very sharp due to all the algo trading, so the low did not last that long, a matter of days and weeks.

This time though is it different? On the plus side the banks are not bust, on the downside....everything else is.

Another indicator is the oil price, which is rising slowly back towards $30 per barrel. Whilst this is a 50% drop so far this year, there ia a huge glut in the market. Look in the sky, there are no planes. It takes seven barrels of oil to make one of Kerosene. How, with Saudi and Russia still exporting, is the price holding up?

To me the answer to both questions above is twofold. Part A is there is a huge amount of trading going on and some people taking some very silly naked positions. The Covid situation may only just be beginning of the pandemic but the markets are pricing it in as if it is over. I hope they re right, but it seems a very risk-on for a position. Part B is the huge printing of money by the Fed and others to give liquidity to the banks has seeped, as always, into assets. Fake money swapped for real assets by those happy recipients banks. This is the desired effect as far as the central banks are concerned.

I don't but it myself, when the next set of GDP figures come out or anyone one of hundreds of potenitla covid-related bad news stories the markets are going to head back down at least a thousand points on the FTSE, two thousand it events go badly. Apparently the markets can stay wrong longer than I can stay solvent....doubt it this time but I guess we will see.


Timbo614 said...

Maybe I should chip in here but be a little less flippant than last time.

To my mind the markets are for once being rational. The market panic has passed I hope. We all know from fairly recent* that the economy will recover in most respects. This time it may be different but the difference will be in the way the economy ends up working not that there won't be one.

There will still be a need for oil for transport and the thousands of other by products. There will still be a need for food and heat and light. We will also want to be entertained and be able to get a bit tipsy!

Life and therefore circulating money and profits will not stop.

Cheers! Timbo the eternal optimist - less of your misery forecasts!

*20 years & 12 years ago

Timbo614 said...

/recent* recent events*

Anonymous said...

I think we're in a bit of 'pause' moment, as no one knows what the mid or long terms consequences are going to be.

As we start to reopen, what businesses are still able to function?
What will unemployment be?
What will happen if there's another spike?

There are no prior events to run metrics against, so there's a lack of knowledge about what to do. It's all "unknown unknowns"

Once things start to clear we'll see movements, my expectations are downwards.

If I was feeling invest-y, I might be inclined to look at private healthcare as the NHS is going to be operating covid first for a while, and they'll be used as extra capacity

andrew said...

On the FTSE defying gravity:
A -
~2.5% down so far today.
B -
Money is being pumped into the economy like a french farmer feeds a goose. Some of that will be piped into equities.
C -
We live in a very low interest rate environment.
It is rational that one looks at the discounted value of things and the lower the interest rate, the longer out you look and the higher the value.
If you look at a startups projections, they all say they will own 115% of their market in 5-10 years.

So prices will stay high until they are not.

Nick Drew said...

What does the C@W crowd-wisdom think about property prices? What will be the hit when the markets re-open properly?

E-K said...

Healthy under 65s 99.96% chance of surviving if infected improving to near impossibility of dying the younger you get.

Healthy under 75s 99.95% chance of surviving if infected.

But this is only analysing people who have shown symptoms. We are yet to know the true rate of infections among asymptomatics.

We should be shielding unhealthy people. The WHO states that CV-19 may be with us forever. How long do we cower ? How many lives do we sacrifice through poverty in order to have the lowest CV-19 death rate ?

Please check my maths for the section: Mortality Rate by Age.

New tests are coming and from that we will get a true measure of how lethal this disease is. I was fully expecting to see coffins line up in the roads and mass burials by now. Bearing in mind that virtually all news agencies and pundits are saying that the Government fucked up its handling of this crisis.

Well. Clearly not then. I do, however, think it's right royally fucked up our economy though !

E-K said...

Good luck CU.

Nick. My betting is on regional disparities. An Escape to the Country mentality. A re-evaluation of garden space and decent walks over small dwellings within reach of a theatre district which can be closed down so easily.

Zoom works, sort of. Working from home does too.

It must be claustrophobic trying to raise a family in London these days with nowt to do. Here it's been utterly brilliant. Views from the house, a dozen country walks from the doorstep and a bit sand between the toes can be found within easy reach too. I've never seen so many happy families out and about.

Over all, housing market down, waaay down. This will knock-on to the banks in a bad way a' la 2008 but a lot worse. Just a feeling.

Charlie said...

House prices in GBP: perhaps up to 20% falls, but the currency will be sacrificed (again) to keep nominal falls as small as possible. House prices to halve in gold.

I feel Mr Market is starting to wake up to the fact that it's end of cycle, and the next one will be a) industrial and b) inflationary. That's the coming macro environment that I'm positioned for and is, I think, the reason for FTSE knocking on the door of 6k. Some FTSE listed companies still look cheap, but there's at least half the index I wouldn't touch even if it halved from here.

dearieme said...

When does it become time to invest in the belief that the whole Green con will suddenly fail?

Raedwald said...

WFH will also mean many essential security improvements; in relation to the breaking cyber attack on Elexon "The National Grid has been on high alert for such attacks since the start of the Covid-19 crisis, with ministers fearing that criminals may attempt to target Britain's energy networks at a time when staff levels are significantly reduced." The bad guys can also use computers.

Won't be the last, I guess. I wonder how many national infrastructure firms have included a series of events such as the progress of this pandemic in their risk and contingency planning?

London house prices fell 16% in 2008. I suspect this time around they will drop by twice that. Commercial will also be hit right across the board; from pubcos whose P&L depends on vertical drinkers packed at the bars to offices having to scrap hot desking and double the 6m2 per worker benchmark. Any building whose prime purpose is to accommodate people will be worth less. One of the few bits of commercial I can see gaining value is automated warehousing with robot stackers and pickers, robot loading docks and driver routing ...

Anonymous said...

Invest in North Korea. No sign of the dreaded virus there.....

Anonymous said...

@ND - I think city centres will start to see a reverse of the influx they've had over the years, and those expensive, badly-put-together boxes laughingly called apartments will become tenement flats part deux.

So cities will suffer, and a lot of city councils (many Labour) who've happily lent money to developers to farm council tax will be screaming with the pants round their ankles. A lot of the service charge parasites will get dunked in bleach too over that as they start to look like sink estates.

Rural areas with good broadband and decent commuter links will see prices head north, rural areas without good broadband but with good commuter links can expect a lot of Openreach vans round their way.

Traditional commercial property will get hit, more flexible ones where they rent out chunks on daily rates will do well - companies will see it as a 60% saving on rental costs, not paying double per day of use, but will expect the premium price to be a premium product, and not just beer taps after 4.

A lot of pubcos will be fucked, I expect the likes of Brewdog and some of the smaller, regional ones - with better business models than getting suckers into escalated rents, then go finding new suckers when the last lot find their commercial viability wasn't what said pubco was after - will do well.

I'm curious at how Spoons will do, as they cater to a wide range of people, and over half of them are primarily interested in cheap food and cheaper booze, and how that could square with less boozers is a real unknown.

Anonymous said...

Local Authorities that have been borrowing billions from the PWLB to speculate in commercial property will have lost millions (if not billions) in value. They have been taken for complete mugs. Another scandal in the making.

Nick Drew said...

LA's speculating ... yes, check out Bristol Energy and Robin Hood Energy


(sorry about that)

Matt said...

Somehow being able to borrow money at a lower rate than the private sector will make these failing shopping centres a success -
"But if it's being done in order to regenerate their towns, to make them better places, to create employment and make them fit for their residents then that definitely is the right thing to do."

"The private sector can't take that long-term view because in many struggling locations, the projects simply aren't commercially viable. We need councils to kick start these developments, to help bridge the funding gap and bring private investors in."

Council wonks with no idea of what the real work is like think they can come up with a plan that the private sector can't hey? Or it's the market saying that this way of shopping has had it's time and something new (Internet shopping) has taken over.

CityUnslicker said...

Matt - HAHAHA, what a find, that is epic!

Matt said...

CU - it would be epic except it's not their own money they are spunking away, its ours!