Play dead?
I am probably being very cheeky criticising the august members of the Bank of England Monetary Policy Committee, but I am not alone.
Their recent actions strike me as being like an attempt to fight a grizzly bear with your camping cutlery tool set.
In the current situation, which is scary but if handled well might be very temporary, it would be better to either adopt immense confidence or play dead and do nothing.
As it is they are just going to get a bent knife and a more hostile threat.
When will markets hit the bottom? (m)
The facile answer to that is that we will only know after the event!
The message I want to convey today is that stock market values fall most dramatically when the cycle that precedes the fall was longest and had extended into ‘over valuation’. But that is not just because confidence is eroded and people start to think about investing on a valuation rather than a momentum basis.
Property fund suspensions – some thoughts
A couple of retail investor commercial property funds have announced suspension of all dealings for an unspecified period. This is because, for obvious reasons, the professional surveyors they employ can’t offer confident valuations.
As only a small number of valuation firms cover nearly all the market, it follows that all property funds will follow this lead. If I owned a commercial property investment that was still permitting redemptions, I would sell out of it immediately. I would do that even if a full bid/offer spread would be applied – usually 5% to 8% or so.
Most of my subscribers will have noted my general pessimism about that asset class over quite a while, so hopefully aren’t heavily exposed to it, if at all.
It is worth noting that liquidity issues (ie no buyers!) can impact the corporate bond market in surprising ways, but governments and central banks are acutely aware of how serious a freezing of corporate debt markets would be and seem to be willing and able to keep pumping in liquidity as needed, generally by acting a ‘buyer of last resort’.
In the short term that should bring to a halt the sell off in the bond markets and even see bond prices rising.
When the crisis ends, bonds are likely going to be owned in large quantities by the authorities and when they hint at unwinding those purchases, it will be time to quickly exit the fixed income market. Something to make a mental note about!
Possibly in writing!
To avoid a car crash, don’t use a car (m)
It occurred to me that the current advice/orders from governments around the world arising from the coronavirus spread are rather like the statement above.
Valid as logical advice, but not really sustainable.
I would explain my thinking like this, being someone in the ‘more at risk’ category – over 60, asthmatic from infancy with high blood pressure and mild Type 2 diabetes. I am staying at home, not able to shop, go to events and generally following the social distancing guidelines so as not to risk catching the virus (there are only about a dozen cases in the country where I live).
But so must behave a hypothetical fit 30 year old living next door.
Monday mashup – Desperate measures?
This morning a coalition of central banks in the most influential countries in financial market terms has announced a huge package of liquidity support and lower interest rates, yet markets have opened with sharp falls.
This is for much the same reason as when I wrote my blog entitled ‘Fed mis-step?’. The dramatic scale of the assistance package prompts market participants to think that the situation is utterly desperate.
On the other hand, at times like this where there is overwhelming systemic risk, fixed income assets start to lose value rather than offer their usual diversification characteristics, because no-one wants to buy anything. That creates a liquidity crisis, which is rather like throwing a tool bag of spanners into the global financial system. So the authorities have to try and avoid that and their actions today are consistent with that threat.
My current assessment, which of course evolves as the world reacts to the potential progress of the virus, is that equity valuations will keep falling until there is evidence that the drastic preventative measures have worked.
That means that share valuations will likely be the most ‘over-sold’ they have been in my lifetime at some point and if the virus recedes, investors with cash will need to act quickly to pick up bargains.
It has to be remembered that it is the potential threat of a massive pandemic that is driving negative sentiment – the actual number of cases is very small relative to population and the number of deaths is minuscule as a proportion of populations – at the moment. So if the illness caused by the virus is more or less contained within the resources available, which will vary from place to place, the eventual relief will be massive.
Of course, this virus may be the start of a long term fundamental change in human activity. Consumerism has become the opium of the people, succeeding religion in Marx’s aphorism and capitalism is now about 70% driven by consumption. If that falls away permanently, a recession would be truly structural and last a long time.
Such major structural changes are in fact normal – think of how the world differs from that of the Victorian era, the interwar years or even the 1960’s. The current cycle of economic restructuring and resource sharing began in the 1980s in my judgement.
One could propose that global financial systems are in the end always regulated by social or human issues and that the returns to capital had been lately pushed to out of proportion levels relative to other stakeholders, like ordinary people and the environment. That is not to propose that there is better way of managing economic resources than capitalism – just that the balance of interests has been due for a correction for a while.