April 17 2020

The Positive Case

Not that we are bull ourselves these days, but sometimes you’ve got to see the glass half full and list what could make for a prompt recovery. As a starter, the World has invested about 5% of its GDP in fiscal easing so far, and it should clearly prop up some parts of the economy. Then, institutionals and HNWI entered the current recession with plenty of dry powder, and the sudden drop in asset valuations offers opportunistic investment entry points. And of course, consumer activity can only bounce back from the shocking drops we’ve experienced in 1H20. Finally, don’t underestimate the very visible hand of the market… the central banks, ready to do whatever it takes to repress this financial recession.

Clearly the animal spirit has taken the measure of this positive thinking and got back into the buying mode with a vengeance. Indeed, who cares about earnings, jobs, and valuations when money is pumped into the market like there is no tomorrow? The 20m lost jobs in 4 weeks, erasing 10+ years of US job creation, are probably going to be claimed back within a few months, or will they?

The bet that Governments are making is that if they can throw money at the economy for as long as the virus lasts, in proportion of the economic impact, then people could get back to doing their business like nothing happened, or will they?

Who benefits the crime? Clearly, buying back corporate bonds in the market at a premium to NAV (Net Asset Value) doesn’t benefit the layman who just lost his job. Like it did in the 2008 crisis, it benefits wealthier asset holders, while also rewarding their higher risk taking. In short, you’re borrowing from future generations to subsidize an asset inflation, which (a) didn’t need that in the first place, and (b) would make buying an apartment even more unaffordable in the future. The bubble goes on.

No, really, you can’t have your cake and eat it. Asset deflation is needed to reset affordability for generations to come. How do you do this? Probably wealth tax, higher real estate tax, or more freedom to launch new businesses and projects (i.e. more supply). But first, you’ve got to let investors, who over-extended their risk, take their losses. It would only be normal and positively just to do so.

360 Advisory – Markets