The global struggle continues
Investing—like life itself—has always meant dealing with uncertainty; yet the first half of 2020 has forced people to deal with far more uncertainty than usual. There is always uncertainty about the distant future. The issue today is the incredible uncertainty regarding even the near future: the days, weeks, and months directly ahead of us.
In their recently published mid-year update, JP Morgan made noted that “the Covid-19 crash has been a stark reminder to expect the unexpected”. Very true. The same report also pointed out that “…at the start of 2020, very few experts predicted that within a few months a new pandemic would cause the global economy to effectively shut down and equity markets to go through one of the most severe bear markets in history, and then rally over 40% in 50 days from the bottom.” Uncertainty remains the biggest issue we face for the rest of 2020 and beyond
Without a doubt, 2020 will be a year to remember
Early in 2020, dreadful pandemic, the deadly virus, Covid-19, swept the world, initially identified by doctors in the Chinese city of Wuhan; then the virus spread west with the sun–first to Southern Europe and next to the Americas. By mid-March, before the end of the first quarter, the new virus had already become a global phenomenon.
The initial responses to the deadly virus included a combination of lockdowns, quarantines, work-from-home orders, and business shut downs–all imposed by various government officials scrambling to react to the rapidly-moving humanitarian and public health crises. Following these man-made shutdowns, economies everywhere screeched to a halt, resulting in some of the worst economic numbers since the Great Depression of the 1930s– almost 90 years ago.
As of early July, it appears that the low point has probably passed, and that most economies now seem to be recovering, albeit slowly and unevenly. In the US, this could turn out to be both the sharpest and potentially the shortest recession in the country’s history.
Markets bottomed on March 23, tumbling in just four weeks from all-time highs in late February to new lows, as Covid-19 initially appeared to represent an existential threat.
Central banks and governments reacted swiftly, implementing coordinated monetary and fiscal interventions which led to powerful rallies, pushing markets close to new all time highs. The amount of support injected in response to this crisis is unprecedented; the fiscal, monetary, and political responses to the crisis globally have led to a world awash with liquidity. Much of that liquidity (along with a new wave of optimism given obvious government support) has helped support stock markets, explaining much of the markets’ recent ascent.
Once again, central bankers have promised to do “whatever it takes”. Also, there has been rapid and effective coordination of monetary and fiscal policies between central bankers and government officials, that has become a new normal.
Globally, policymakers have earmarked an astonishing $18 trillion in support, and central banks have cut rates 122 times. This support was designed to help keep business and household cash flows going during the lockdown so as to avoid a devastating wave of bankruptcies and business failures. It seems to be working. In the US, the Federal Reserve fixed the troubling volatility in Treasury markets, and managed to reduce spreads across issuers and maturities by providing a funding backstop for many types of borrowers.
The responses from central banks and governments are likely enough to avoid the worst-case scenario. Still, the path ahead to eventual economic recovery is murky. Business models have been forcibly disrupted. There are questions regarding the long- term viability of the corporate real estate sector. The evolution of the virus remains unknown.
Still, a recovery will come, and may already have started. The contraction has been severe and painful; it will lead to lasting consequences. But there is reason to believe this recovery could happen even faster than the recover after the last global financial crisis, back in 2008.
Powerful rallies in most risk assets…
As John Mauldin recently noted: “The Dow Industrials just closed out their best quarter since 1987, which tends to bode well for stocks. The S&P 500 rose 40% from its March 23 low—its strongest 100-day rally since 1933. And the Nasdaq is the only index that’s up for the year, rising 16% and trading above the 10,000 mark.”
…yet there is still a lot of anger and frustration in the streets
In late May, the death of a man during the course of his arrest by police officers (sadly, a not uncommon occurrence) became the spark that set off weeks of global protests. The fact that the victim was a black man–being arrested by white police officers, in a major American city, and the entire episode was captured on a smartphone video by a bystander–was bad enough. The fact that this event took place during a period of heightened political and social tension, literally added rocket fuel to an already combustible mix that suddenly exploded. People reacted with anger, frustration, and indignation. Mass protests erupted across the USA and eventually in many countries around the world. Sadly, some of the protests turned violent too.
The videotaped death of the suspect was the spark, but the frustrations that fueled social explosion had been accumulating for a while.
At Anson, we have worried about the undercurrent of dissatisfaction for years. When the Occupy Wall Street movement began a few years ago, we were worried that we would soon see “torches and pitchforks” in the streets. We had no idea when the conflagration would light, or what the actual spark would be, but we expected something like this to happen.
We believe that a number of elements have combined to bring forth the anger we see today: the lingering effects of the 2008 Great Financial Crisis, unequal recoveries, the drumbeat of concerns about inequality (whether economic or social), the perceived unfairness of current systems, widely publicized cheating by elites, all combined to fuel anger in the average citizen.
Chamath Palihapitiya, CEO of Social Capital, made some excellent points in his 2019 Annual Letter, comparing our world with the Gilded Age of the late 1800s:
..Imagine a time of incredible economic expansion and wealth creation punctuated by periods of class warfare, strife and political upheaval. During the Gilded Age of the 1870s-1900 we saw all of these: rapid economic growth, wage growth, immigration and expansion of social programs like education with the standardization of primary schools and the emergence of high schools. At the time, the major industry of growth was the railroads which in turn led to technological expansions in factories, mining and farming.
As is the case today, Wall Street played an important role during the Gilded Age as a financial intermediary and financed everything including a bubble in railroads which eventually burst. While this economic expansion was happening, immigrants fled to America in droves and a class division started to emerge with the 1% owning more than 25% of all property and the bottom 50% owning less than 4%.
…Central banks [may not be able] to meaningfully manage inflation, in either direction, but that doesn’t mean [they] won’t continue to drive stock prices higher by unnecessarily cutting rates and flooding markets with money.
…As money gets cheaper, the credit markets continue to expand because CEOs become motivated to artificially boost earnings per share. They do this by buying back stock, seek bad acquisitions, make poor capital allocation decisions or avoid taxes. All enabled by borrowing massive amounts of essentially free money
…The result is a seemingly ever higher stock market. [All of this] has created a complex, interconnected credit-equity bubble. And like other bubbles before it, it will end badly.
Social Capital 2019 Newsletter
Expected outcome and outlook for rest of 2020
Obviously, it is impossible to know how exactly how things will play out, there are so many different opinions and paths possible.
As of early July, the pandemic is clearly still with us, and its impact on global economies will continue to be felt until it has run its course–either naturally or through development of a treatment or a cure.
While there are reasons for optimism amid the crisis, it remains possible that the current predicament may persist for much longer than many analysts currently believe.
Still, there is no denying that the massive interventions by central banks and fiscal authorities worldwide have been supportive and stimulative–even if the effects are mainly psychological and affecting investor behaviors.
The US economy remains more dynamic than many others around the globe, but the country also remains vulnerable to a second wave of Covid-19 infections.
Some sectors are already responding strongly. Per a recent Financial Times story on the major banks:
Wall Street’s top five banks have posted their best quarter for trading in a decade after the coronavirus pandemic led to frenzied market conditions and radical interventions from central banks. JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup posted combined trading revenues of $33.4bn in the second quarter, their highest tally since the $33.7bn they made in the first quarter of 2010. The gains cushioned the blow of more than $20bn of provisions for loan losses on the banks’ income statements.
…“It was probably as good an environment as you could have,” said Carey Lathrop, co-head of global markets at Citi and a 32-year trading veteran. He described two key factors: clients rapidly adjusting their portfolios to deal with fast-changing economic forecasts, and the huge bond-buying programmes launched by the US Federal Reserve and other central banks — which had also slashed interest rates.
…Traders said that the Fed’s promise in March to buy sovereign bonds in unlimited amounts and to buy corporate bonds for the first time, followed by a pledge in early April to buy riskier credit, helped to stabilise the market. The actions changed investors’ mindset from “…‘how far can this go, how negative can it get?’ to ‘what assets should I be buying right now?’…”
Traders warn of slowdown after best quarter in a decade – Financial Times 17-July-2020
Industrial metals (especially copper) are also pointing to optimism about a potential economic recovery. Per a recent Wall Street Journal article, by early July copper had rallied over 30% from its low in March, “…reflecting optimism about the potential for a sharp economic recovery, as China and Europe lead large parts of the world in easing lockdown measures. That has helped erase most of the commodity’s losses for this year.”
The article continues: “…A revival in Chinese economic activity in recent months has helped propel copper prices higher. The commodity is particularly sensitive to the Asian manufacturing powerhouse, as the world’s second-largest economy accounts for a large part of global demand for the metal. The reopening of major economies in Europe is also helping bolster demand for the industrial metal, analysts said.”
Returning to the JP Morgan Midyear Outlook, they summarize the situation well: “…The range of possible outcomes related to the virus is wide; at opposite ends of the curve, possible tail risks include either a second wave in the Fall (a clear negative), or the development of an effective vaccine or treatment (a clear positive).”
Also, it is good to remember that markets don’t move in straight lines. So we are likely to see multiple stages of relief rallies and corrections in financial markets before a recovery eventually takes hold.
Stay safe out there!
It is no exaggeration to say that the biggest uncertainty facing us all at the start of the third quarter is still the outlook for the Covid-19 virus. Without knowing how the virus will play out, it is very difficult to know what to expect for the rest of 2020.
Despite the uncertainties, our entire team here at Anson Funds remains committed to navigating the stormy seas that lie ahead. While regulations prevent us from disclosing the specific performance of our various funds on this public blog, we can say that we are pleased with both the performance of our funds and with our overall risk management during the volatile first half of 2020.
Going forward, we intend to keep doing what has worked for us so far: continue to invest carefully, mindful of the uncertainties and disruptions we will likely face for the rest of 2020 and beyond.
Questions or comments? Email Bruce Winson.