Strange Times – 17.04.2020

The Equity Market Rally – Are We There Yet?

Global equity markets will not get a sustained rebound until the virus infection and death curves flatten (left charts), growth rates in infection and death approach zero (right charts) and shares fall to levels that are cheap. The first two factors are happening due to severe lockdown restrictions applied across the world. However, we believe that the latter is far from the case (shares are not cheap) because profits are about to collapse everywhere. The current rebound in global equity prices is unlikely to be sustained.

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The Great Lockdown

The Great Lockdown will be the worst downturn since the Great Depression, says the International Monetary Fund (IMF). It warned this week that the Australian economy will slump by 6.7% in 2020, followed by a V-shaped recovery in 2021. We do not agree. The latest NAB Business Confidence survey shows the extent of the headwinds companies are facing:

“Business confidence saw its largest decline on record and is now at its weakest level in the history of the NAB business survey … Business conditions also declined sharply in aggregate and across the bulk of industries … Forward orders collapsed to their lowest level on record, while capacity utilisation also saw a sharp decline. Overall, the decline in forward orders and business conditions imply a large fall in GDP in the next 6 months.”

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The Laws of Economics are as Unforgiving as the Laws of Physics

In this excellent piece for Firstlinks, Professor Tim Congdon, Chairman of the Institute of International Monetary Research at the University of Buckingham in England, argues that the US Federal Reserve’s preparedness to finance the coronavirus-related spending may prove suicidal to its long-term reputation as an inflation fighter. Professor Congdon states that the US Government will not repay its debts at the Federal Reserve while it is running an annual budget deficit of $3 trillion, and if too much money is manufactured on banks’ balance sheets, a big rise in inflation should be expected. The laws of economics apply without discrimination to both Latin American countries and the USA.

The chart below, highlights the extent of quantitative easing (QE) from the world’s central banks.

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Can The Price of Oil Go Below Zero?

The Covid-19 pandemic is turning oil markets upside down, says the Wall Street Journal. While U.S. crude oil futures have shed more than half of their value this year, prices for actual barrels of oil in some places have fallen even further. Storage around the globe is rapidly filling and, in areas where crude is hard to transport, producers could soon be forced to pay consumers to take it off their hands—effectively pushing prices below zero.

The problem is the industry’s limited capacity to store excess oil. Efforts to curb the spread of the virus have driven demand to record lows. Factories have shut. Cars and airplanes are sitting immobile. So refineries are slashing activity while stores of crude rapidly accumulate. This build-up of crude is overwhelming storage space and clogging pipelines. And in areas where tanker-ship storage isn’t readily available, producers could need to go to extremes to get rid of the excess, including paying for it to be taken away. Perhaps one day your local petrol forecourt will give away a tank of fuel with the purchase of a coffee and a doughnut!

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Who’s Zoomin’ Who?

We are all Zoom users now. Stanford Brown now conducts the bulk of our client and internal group meetings via Zoom. We are not alone. The number of daily users of Zoom has increased from 10 million in January to 200 million today. This has caused problems for Zoom, mainly its lack of water-tight security permitting random users to ‘Zoombomb’ meetings. “I really messed up” said Zoom boss, Eric Yaun, last week.

During a similar 17th century virus-related lockdown, Sir Isaac Newton made use of his quarantine to invent calculus. At Stanford Brown, some of us figured out how to get an Easter background on our new weekly Zoom Town Hall staff meetings. Baby steps…baby steps.

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