Friday 5 June 2020

C@W channels Ambrose-Evans Pritchard

When I was younger I use to always read AEP, I felt he was the most serious economic journalist in the UK, taking a global view of macro economic events, speaking to key participants and reporting in a complex but persuasive way. As the years go by, his track record though builds up, he always thought the next recession was round the corner and with it would be the end of the world as we know it. In effect, he really is a marxist analyst, much as he would reject that label, his work speaks for itself, somehow capitalism will always fail (well, everything will, he is bearish on China too for balance).

However, at the moment I feel very AEP myself. The markets are nice and frothy, with the FTSE barely 15% down from its pre-Virus year high. The US market is UP this week, after the largest civil unrest in a generation and one hundred thousand visu deaths - obviously.

There are though some key markers coming up, the June quarter rent day in the UK will be important. At last quarter end most rent got paid, but lockdown had only been in place for just over a week. This time it is 3 full months. Landlords have made preparations for this event but it could get ugly. If not enough rent is paid, borrowing covenants will be breached and banks will start to call in their loans. This may set of a chain reaction and credit crunch - not on the scale of 2008, but very bad nonetheless.

Also at the end of June the Q2 GDP figures will come out across the West. These will be bad, with 15-30% falls - for just one quarter. This is far worse than anything in living memory. Maybe if the viurs recedes markets will live with this and look to a better future.

But to my mind, even if we get a quick bounce back, markets can't stay at a mere 12% off pre-crisis levels when the economy as a whole is smaller than this and only is at that level because of hundreds of billions of Government spending and debt creation all over the world.

To me the only question is how big the dip will be in the summer.


BlokeInBrum said...

Sell in June - before things go BOOM?

Anonymous said...

Yup, don't mention the RIOTS!

Thud said...

Unknown territory for everybody but for me things will return to some sort of reality quicker than many believe, we are already much further along than most people bargained for.

Sobers said...

The thing is we are uncharted territory for the current incarnation of the worlds monetary system. Monetary authorities everywhere are in full money printing mode, and all that money has got to go somewhere.

Which would you prefer to have, £1bn in cash in the bank, or some decent sized stakes in actual businesses that will continue to create wealth, regardless of what tokens are used to keep count of the profits? That £1bn might be worth nothing if the bank goes bust, or hyperinflation kicks in once all the printed money reaches down to the mass population, so whats the rational thing to do, if you are a recipient of central bank largesse? Buy hard assets, even if their price might go down 40-50% in the short run in current currency units, or hold cash which could go to zero?

In short which is a better long term store of value in todays world, 0.1% of Microsoft or $1.4bn in cash?

Oli said...

My problem is I agree with CU *and* Sobers. I feel the market crash coming, but the warnings of inflation make just as much sense. Where else are you supposed to put your money?!

CityUnslicker said...

Even with massive money printing - which is happening - there is a huge demand shock with some much unemployment and travel/business restrictions due to covid. with a fall in demand you tend not to get inflation. however, if products are also not made then this can cause inflation (e.g. care prices are about to rise quite a bit becuase the factories have all been shut).

AndrewZ said...

Normal economic activity has been put on hold due to a public health crisis and as soon as the threat abates it should resume very quickly. However, there will be some disruption in the short term for reasons that have been discussed on this thread. It will be like a motor that initially misfires and then quickly builds up speed.

The end of the Brexit transition period will also have an impact. There is unlikely to be an extension, meaning either "No Deal" at the end of 2020 or an absolutely minimal FTA that leaves British exporters facing lots of regulatory barriers that didn't previously apply to them. Therefore, a significant chunk of our trade with Europe may not return at all.

So, I'm expecting an approximately V-shaped recovery but the right-hand side of the V will be a wobbly line that stops short of where we started from.

dearieme said...

I might buy a Hebridean island with a castle, and a mini-sub for use in foul weather.

With a spare million that should be on.

andrew said...

-dont know what money is anymore
-the GDP fall is already known
-if there is a crash it is dumb money panicking

I am not sure what money is.
well, yes it is
- a medium of exchange
- a store of value

It used to be coins
then fiat money,
then (as pointed out by some economists) banks lending money create new money - so I am not sure what cash money is really.

Then the definition of 'bank' became blurry - I have a larger balance at the wine society than the natwest.

Then central banks started supporting asset prices and so some corps that are effectively 'too big to fail' stocks are effectively money now

and so more and more things seem to be become money-like

no, i do not count BTC as money, but it is on the money-like spectrum.


Some people who own shares - which are quite money-like will want to exchange them for money that really is money at some point in June, but the people who have real money will expect more of the money-like money for their money.

why - because over the last 3 months the money-like money has made less real money than last year.
But we know that already.

Smart people will have been buying the optionality that is real money by buying options.
Bumb money will panic and sell at some point.

Anonymous said...

Bumb money will panic and sell at some point.

Made sense until then. Friday fat fingers or a smooth Barolo?

Matt said...


Banks do not create money - they create credit. It's a subtle difference that just about every MMT Leftist either doesn't understand or cares not to. There is always a corresponding liability that (at the end of the loan term) cancels out to zero.

Graeme said...

Are we out of the phase where we don't buy the dip? Every central bank is pouring out liquidity. Where does it go? Bank balance sheets and assets. Maybe this time only 90% will go into real estate. I fear a mega stock market boom

Anonymous said...

It will be interesting to see which Central Bank / Sovereign Wealth fund wins out.

Corporate assets could be picked up by the (liquidity fuelled) proxies of the Chinese Central Banks or the Russians or even the Indians. All this time, governments are more preoccupied by keeping their media at bay. The real work is being done at the banks.

Anonymous said...

"The real work is being done at the banks."

LOL. How many N95 masks or pulse oximeters did RBS produce in March?

"Corporate assets could be picked up by the (liquidity fuelled) proxies of the Chinese Central Banks or the Russians or even the Indians."

Highly likely. Roll up! Sale on! Everything must go!

Anyone remember "Invisible Earnings" which used to feature when the balance of payments was being discussed? (it vanished from the news around the same time as "standard of living" did. Invisble Earnings must be way negative by now.

CU, ND, BQ - anyone like to comment on the piece in Chinese media by Qiao Liang, retired PLA general and director of the Council for Research on National Security? It translates pretty well with Google. His basic argument is that of James Dyson, Eamonn Fingleton and the historian Paul Kennedy - that without a solid manufacturing base no country can long remain a great power. Which is why the "fifth largest economy in the world" looks to the skies for a Great White Bird with a cargo of useless Turkish surgical gowns.

From half a century ago, after the dollar delinked from gold, the United States gradually used the dollar to profit from the world. In this case, they abandoned their low-end manufacturing industry and gradually made themselves a country with hollow industries.

If the world is peaceful and everyone is at peace with each other, there is no problem. The US prints US dollars to buy products from all over the world, and the whole world works for the United States. These are all fine.

But when there is an epidemic or when there is a war, can a country without manufacturing be considered a powerful country? Even if we continue to have high technology, continue to have dollars, and there are US troops, but all of these need manufacturing support. Without manufacturing, who supports your high technology? Who supports your dollar? Who supports your US military?

To understand this, China’s next response is to continue to maintain, develop, and upgrade its manufacturing industry, not only to upgrade, but also to maintain traditional manufacturing. It is impossible to upgrade all of them. If all of them are upgraded and replaced, the traditional manufacturing industry is thrown away. When the United States needs a large number of masks like today, the entire country does not even have a complete production line. Under such circumstances, it cannot respond to the epidemic as quickly and forcefully as China. Therefore, do not underestimate the low-end manufacturing industry, and do not regard the high-end manufacturing industry as the sole goal of China’s manufacturing development. You cannot throw away the housekeeping skills.

Matt said...

@ Anon

We still have manufacturing in the UK - it's just not the same as it was in the past with a large workforce. F1 teams made ventilation units in record time, chemical firms and distillers made hand cleansers and many SMEs made PPE. Almost all were hindered in doing so by the dead hand of government (in particular PHE).

Elby the Beserk said...

Sobers said...
The thing is we are uncharted territory for the current incarnation of the worlds monetary system. Monetary authorities everywhere are in full money printing mode, and all that money has got to go somewhere.

Same place as before...

Sighs heavily...