The Covid-19 has been highly contagious (R0 -12-20) but its mortality rate will most probably prove to be quite low. The recession we are experiencing has been triggered by a global lockdown, not the Covid virus. We’ve been assisting at an epic crisis management debacle in most developed markets. More preoccupying, is the fact that the population is led into believing that the worse is yet to come. Is it on purpose? we can only speculate, but what seems a safe bet is to say that the consensus firmly believe now that the Covid-19 is extremely dangerous, not curable and with us for a long time. The “shock doctrine” (see Naomi Klein) is in full swing: the public is led into an emotional state that will prevent it to question/critic anything governments/medias will tell us (remember the Patriot Act…). Be prepared for surprises.
“Confidence in one’s belief is not a measure of the quality of evidence but of the coherence of the story that the mind construct”. Nobel Laureate D.Kahneman
The rapid global spread of an obscure virus with no known cure is a great story to stimulate our collective imagination. It is logic for our minds to quickly envisage the worst: our family health is at risk, we face years of lockdown in/out , unemployment and a world changed forever. Our transversal thinking can also put in perspective the virus apparition with recent HK protests, Yellow Vests, climate change issue etc.. So yes, this all becomes clear: the global reset was in the card! haha – great synopsis for our Corona Circus show.
So, we have all the ingredients for a blockbuster scary show:
Red everywhere. Financial markets correct sharply with losses not seen since 1929 (!) business confidence craters to all-time lows. The Financial media advertise that we are experiencing the worst economic shock since 1945 and extrapolate the crisis on base on 1918 Spanish flu outbreak model… Investors deleverage, go to cash, expect the worst and look at every daily stock market movement for clues for the next 2 years trends.
To keep public anxiety at high levels, we have our best actors on stage: politicians. On a daily basis they appear on TV to explain how deadly is the virus, why we must stay in lockdown for 2 or 3 months, that likely a second wave of the treacherous silent killer is around the corner. “We are at war” . “We have to learn to live with the virus”. The “shock doctrine” is probably the only way for politicians to appear less ridiculous after the crisis management debacle and ideally be seen as hero (!) when Corona Circus will close its doors. Or maybe they have another agenda…? (China is now in full control mode with compulsory QR codes and cell phone tracking apps)..
The politicians' anxiogenic message is further enhanced by the big pharma agenda. They are doing whatever they can to contribute to the story as expensive pills are in the making: the message they convey, cheap (and generally safe) medicine is killing patients!
This is I think potentially one of the major scandals that could erupt once the Corona Circus closes. Pr. Raoult treatment (chloriquine + Azytromicine) is curing at a rate of 90%+. Most African countries that are used to take this anti-malaria drug have the lowest death rate globally. Statistics, speak for themselves: Nigeria, 200M living people, 85 Covid-linked deaths - yes they might underreport, but proportions are here – France, prohibited chloriquine: 70M living people, 25K deaths!
The sub-saharian region has no access to expensive drugs, so they take what they have, particularly if this is a very common one. G7 have large healthcare companies that finance research (and politics..) for new molecules. As a result, the logic wants that no scientist will receive any financing for research on a generic drug as no healthcare company will be willing to finance it. The system is geared toward the research of new expensive drugs as this is where are the financial interest of the full production chain (scientists publishing, lab etc...). Last missing part in the healthcare drama: the vaccine. Vaccines are the holy grail for big pharma – don’t be surprised by the well distributed message that says that the Covid will disappear only when a vaccine will be ready.
Finally, echoing and amplifying our Corona Circus show: the media crew, as usual. Dead bodies everywhere, mass graves, newsflash with number of new contaminated or dead every 5 minutes. For sure there is no way we could miss a piece of the show! This is an amazing opportunity for the media industry, as the correlation between its sales and the proportion of bad news is probably close to one. You can count on them to continue to print bad news to fine tune the story of our Corona Circus show.
So, we have the perfect recipe for a blockbuster Corona Circus show: Scary story line, viewers in lockdown with lot of time to spend glued to their TV, media in siren mode, violent financial markets, politicians and scientists putting oil on the fire. No escape possible, everyone and his dog can understand that this is the end of the world.
But if we take a step back, the Corona Circus is probably fantastic in its absurdity. While the virus does exist, expected consequences are mostly a creation of our mind and a formidable example of reflexivity. The inertia of our cognitive bias is proportional to the strength of our belief.
When the voice of the consensus is loud and dwarfing anything we can hear, this is usually the moment to challenge it. The easier to understand, the better distributed a story is, the quicker it is priced in financial markets. This is generally a very fertile ground for asymmetric investment opportunities.
Below few highlights on the key divergences between macro and investors positioning:
Macro
. COVID-lockdown shock is transitory by nature. This is not a classic recession! the macro here is much simpler than in a normal recession: Simply put, economies in lockdown: GDP down big, economies not in lockdown: GDP rebounds big! Therefore, as the lockdown stops, the global Economy will rebound as fast as it came down.
. Despite the fact that we are experiencing a "technical" lockdown led recession - Central banks response has been a. coordinated, b. much faster than in previous crisis/recession and c. substantially larger in size - stimulus size never seen before
. Moreover, the private sector in G7 is not leveraged like it is always in recessions (see chart below grey line). Meaning that the private sector does not have to restructure its balance sheet to spend again.
. Global economic negative momentum is already decelerating - we are already in the rebound phase
. Companies inventories are at close to 12 years low, increasing the capacity of the global economy to rebound fast and in sync (!)
. The crisis accelerates the adoption of MMT approach - long advocated in this blog - which will finally help redistribute wealth and help structurally economies
. As politicians get acquainted with MMT, they will increasingly understand that MMT will please both left and right voters = they will realize that this is one of the most powerful tools to gather more voters. They might actually end up to be addicted to it!
Conclusion: We are curing a short lived – lockdown-led recession with monetary and fiscal policies that are far stronger than during a classic structural recession such as 2008 GFC. The rebound in private sector spending will be spectacular. As the Global economy rebounds, the probability of having "over stimulated" might become apparent as the crisis dissipates. Moreover, the MMT increasing adoption, might well lead global the economy to enter a secular structural bull regime with the real economy benefiting this time much more than during the last 10 years as monetary stimulus inflated assets but not salaries.
Market positioning:
. Mechanized/passive markets led to huge sell off pushing lot of investors to cut risk massively
. Size of quarterly loss will reduce investors’ appetite to go back long risk.
. Global macro data should continue to be negative and volatile, preventing investors to go long risk quickly
. Most leveraged investors are net short or out of the market (see below exposure of # type of investors): Recent rebound is only supported so far by retail buying
. Crude oil recent sell off is only re-enforcing the fear of global melt down
Conclusion: Investors are not positioned – at all - for an uptrend. I expect an V rebound and we could see global equity markets finishing the year +30-40%.
Asset price reflation is always faster and sharper than real economy rebound. This time the nature and the force of the politically led “emotional shock” will probably contribute to one of the most hated bull markets ever.
