Observations from the sidelines of financial Armageddon….

Thursday, 19th March 2020

Observations from the sidelines of financial Armageddon….

Okay, we all know the score….

Even folk who don’t ordinarily follow the markets know exactly what’s been happening in the markets – a surefire indicator of unfolding chaos, havoc and carnage….

Just a few short weeks ago stocks were flying at record highs. But the market has had a drastic and swift rethink….

COVID-19 has stimulated a global sell-off of unprecedented proportions….

  • Financial Armageddon….

The crash we were expecting here at MT finally materialized. Not quite how we thought. But that’s how Black Swan events work….

Nobody sees or hears the Black Swan event coming. That’s what makes it so devastating. It comes out of clear blue skies with destructive force, lightning speed and the utmost stealth….

Stocks aren’t worth anywhere near what they were a few weeks ago. Nor are the companies that underpin those stocks. Stockholders are not as wealthy as they had previously believed….

About half-a-trillion pounds has so far been wiped off the value of FTSE 100 companies….

Global losses run into trillions. It’s been the financial version of Armageddon for funds and private investors with money in the markets….

  • An instructive period….

But, of course, you already know all this….

You follow the news reports and the market moves, just the same as I do. I don’t need to rehash the acres of news reporting that have covered the story….

But this has been an instructive time to live through….

Watching on from the sidelines as this situation has unfolded, one can’t help but make observations….

I thought I might share some of those with you today (in the hope that one or two might prove useful or instructive)….

  • Be careful who you listen to….

Donald Trump, for example. As recently as 27th February he was telling the American people – with a straight face – that  they had ‘little to fear’ from the coronavirus outbreak….

Fast forward 3-weeks and Federal government is preparing for a pandemic that could last for 18 months and include ‘multiple waves of illness’ according to an official report seen by CNN….

Everybody has an agenda – reelection, for example – that isn’t always wedded to your own best interests or the truth….

Is there someone else I’m glad I didn’t listen to? Yes – JP Morgan’s chief US equity strategist, Dubravko Lakos-Bujas….

Back at the end of February, he was out on maneuvers advising investors to do again what has worked so well over the last decade and ‘buy the dip’….

I haven’t done the calculations to figure out how wrong-headed that advice was. It hardly matters. The important point to recognize is that asset managers are incentivized by commission payments. And that their advice is almost always weighted to that end….

  • Prepare for pain….

COVID-19 is going to be the trigger for a big recession….

Capital Economics predict the UK economy will shrink by around 15% in the next 12-weeks….

That would be an astonishing reduction in economic activity. And it is a reduction that would mean real pain and misery for millions of British people….

It’s only a prediction, of course. And nobody knows for sure what is going to happen. But I wanted to put the figures into perspective so that they might be better understood….

The 2008 financial crisis was pretty bad. Thousands of businesses went bust. Thousands of jobs were lost. Thousands lost their homes….

The UK economy shrank by just 6% during and after that crisis. And those losses were spread over a 12-month+ period….

This time it is going to be harder, steeper and more painful still – for more people too….

The pain won’t just be local either. It will be global….

Ratings agency S&P Global issued a warning this week: ‘The sudden economic stop caused by COVID-19 containment measures will lead to a global recession this year.’

  • Keeping the wheels turning….

Worldwide governments and central banks are preparing to prop-up the world economy with stimulus (in many and varied forms) worth trillions….

What is happening now will be just the first phase. There will be more to come. Much more….

From Australia to the US, from Europe to New Zealand, politicians and bankers promise faithfully to do whatever is necessary….

What they are saying – in code – is this: we will print whatever money is required to keep the wheels turning….

Helicopter money – where the government sends individuals like you and I money to spend and live on – has never seemed a more likely scenario….

Over the last decade, the US, Europe, China and Japan have produced a combined and giant bubble of debt  worth trillions. COVID-18 is a jagged knife that tore a gaping hole in that bubble….

Now, if the world economy is to avoid defaulting on its almost unthinkable debts – an action that would unleash a giant wave of global bankruptcies, worldwide banking system collapse and an arctic economic winter  – then the system needs new money and lots of it. And fast. Trillions of new currency units – in every denomination known to man….

That is what we are witnessing right now. Politicians, bankers and the news media refer to it as ‘stimulus’….

  • Where now from here?

Since 2008, we have gotten used to money-printing as a way out of economic catastrophe – as a way of avoiding economic reality….

Now it has become the norm. And central banks worldwide (hand-in-hand with government) are about to embark on a money-printing experiment the like and scale of which has never been seen before….

How will this thing play out over the long term?

Nobody knows for sure. We are on unchartered ground….

Perhaps the addition of trillions of new monetary units will bolster investor confidence and chivvy-up asset values to new heights – like what happened post-2008….

Everything went up post-2008 – stocks, property, crypto, fine art, wine. It was hard to make a wrong move. Even fools did well in such an asset-friendly environment….

If it is just a question of how much oil will it take to get these wheels greased to spin this way again, we may well see another big boom to come – a bear market rally of gargantuan proportions….

Governments and central banks have made it very clear that they will run the metaphorical money-printing machines day and night for as long as necessary….

How long and how fast must those machines run to restore market confidence? That is the trillion-dollar question. But my best guess is we are going to find out how much confidence costs…

  • A word you don’t often hear….

Of course, freshly-minted monetary units do not exist in isolation – and money-printing can have negative consequences….

It can lead to rising asset prices that are disconnected from real values….

It can lead to rising prices (consumer price inflation)….

And it doesn’t necessarily lead to real or sustained economic growth….

We’ve already seen that over the last decade – where money-printing has seen markets fly high as kites whilst actual economic growth remained sluggish or outright flat-lined….

Stagflation is a word you don’t hear very often these days. In fact, you only really come across it if you’re as dull as ditchwater and spend your leisure time reading specific types of book….

Stagflation is an undesirable economic scenario in which prices rise persistently, economic growth remains stagnant and unemployment is high….

Its effect is to send the economy into a tailspin….

I’m not saying that stagflation is going to happen. But at least some of the ingredients are in the pot. And others look set to be added….

I just wonder if we might start hearing more of the word as time goes by. It’s a potential scenario on the road ahead….

  • Interesting times….

A global flu pandemic….

A world more indebted than at any time in history….

A market crash from all-time highs….

Now a global expansion of the biggest – and potentially most dangerous – monetary experiment ever conducted….

Who knows where all this is going?

It seems inappropriate to encourage you to enjoy the ride. But it should be acknowledged that we are living through interesting and instructive times….

That’s the truth of it as we see it….

All the best,

Dave Gibson

Money Truths