The Current Economic Climate – Thoughts From Our Chairman

Tuesday 31 March, 2020

Anthony White cut his teeth in the financial sector, in these times of crisis the changes being made on a daily basis are concerning. We wanted to share a summary of thoughts from someone who has weathered a similar storm…

LATEST – 09/04/2020 – Equity Markets

  • The difference between the performance of the global equity markets and the underlying companies has rarely been larger. 
  • Recovery from the peak of panic selling has been impressive with some indices up nearly 30% from their recent trough.  
  • Equity markets have always been there to discount future expectations, i.e. hope or doom. When the dramatic fall came last month, expectations became very bad very quickly and now that has changed. (It could of course change again).
  • The major economies are seeing the 7-day rolling average of new Coronavirus cases either flatten out or decline. The countries which were first afflicted are slowly coming back on economic stream. New York which is the Global Capital of the Financial Markets Worldwide is seeing its 7-day rolling average flatten which is very significant as that is the HQ for decision making in the Financial Markets.
  • Importantly the US starts releasing its 1st quarter earnings numbers next week. These are expected to be pretty bad. However, if the equity markets don’t react negatively to these announcements this could offer up another positive move. If they are worse than expected expect a move lower again for the Global Indices could be expected.
  • We have seen a huge decline in oil prices thanks to a price war between Saudi, Russia and the USA. This acts as another huge easing of inbuilt costs and is very helpful to our economic recovery.

27/03/2020 – Response Phase

  • Vladimir Putin has done the decent thing and postponed the vote which could have extended his rule by 12 years.
  • We are through for the most part the ‘Deer in the Headlights’ phase and are into the Central Bank and Government response phase. The ECB have removed all constraints upon the debt buying program, the US has passed a $2t package, the UK and several other countries around the world have done a similar thing and rates are being cut globally.
  • Governments are transferring as much of the balance sheet destruction that would have accrued to consumers, businesses and banks to the fiscal government. This is moved onto the Central Banks balance sheets to be resolved later. The ultimate goal is to reduce damage to businesses and the consumers as much as possible. This type of manoeuvring by Central Banks has always worked in the past. It always takes longer than expected to be put into place and governments tend to work independently when they might be better off working as a team.
  • If you are looking wondering which industries recover soonest, it tends to be those that got hit the hardest. It’s never wrong to like a strong balance sheet.

26/03/2020 – Sending in the Cavalry

  • The lasting commonality behind any economic recovery of victory in war is multiple people working together. We should all be grateful the US Cavalry has ridden to the rescue with a near $2tn package. It probably has more rights than wrongs, and similar to the UK version offers support to workers and not just large corporations.
  • From Trumps’ Tweets, he seems to think the country could be open by Easter which plays against all advice given by his ‘specialist medical team’ and those elsewhere in the world (except Sweden which still hasn’t moved to lock-down).
  • An interesting quirk of the USA is that State Governors can issue State of Emergency lockdowns over which the President has very little sway.  Several senior supporters of Trump have suggested that running an economy with hospitals overflowing just won’t be possible.
  • Given the high ranking Trump’s supporters (Cheney, Graham et al.) making these points I suspect Trump may change his messaging. It will be interesting to see how quickly the tune changes in Russia where the President is playing a similar game only to be called out recently by the Mayor of Moscow.
  • The People’s Bank of China is in discussions to cut rates for the first time since 2005. There is also a mandate to lend money to companies which may not being run very well which looks like a short-term move to sustain employment. The latter looks like storing trouble down the road.

25/03/2020 – Finance and Peacetime Activity

  • The US has failed to get an agreement thanks to Democrat Leader Nancy Pelosi through the Senate pushing back on greater oversight on funds given to larger companies, a whole raft of green issue and the need for more money to be given to employees.
  • US Politicians are arguing in the eye of the storm and putting politics before country. The ECB announced a 750bn euro debt repurchase plan, but similar to last time, politicians are arguing in the background and no one quite believes they will carry it out.
  • Meanwhile the Chinese are recovering and beginning to carry out soft diplomacy upon those countries caught with Covid-19. Given many of the countries in Europe haven’t yet fully recovered from the poor handling of the 2008 crisis some are only too willing to take help from whoever makes the offer (including Italy allowing the Russians to fly in troops and supplies which in better times might be considered an act of war!). In 2008 the Chinese and American politicians worked very closely to help create a resolve. Today Trump and Hsu are both being undiplomatic about each other’s countries.
  • One of the great things enforced by the regulatory bodies in the broking industry was “Know Your Client”. This embodied understanding every aspect of your client including their ability to pay for trades executed upon their behalf. Settlement was 2 days and if they didn’t settle the cost loosely came out of your hide. That could be very expensive. Most industries have settlement nearer 60 days which is terrible for manufacturers.
  • In these trying times “Knowing Your Client” is vital to your future. Rate them by revenue. Highest revenue is highest risk. Create a risk rating which relates to your industry, understand their business. Dissect their filings at Companies House, they have an excellent search engine. If you subscribe to a credit rating agency like Experian or Equifax now is a good time to become an expert. While all clients would like to do business as before this just isn’t realistic, so understanding where you have problems and making adjustments to payment terms is vital. Remember cash is king

23/03/2020 – Navigating Through the Information

  • I was asked a few weeks ago at a talk to students of a local university whether the 2008 the fat cat bank bail-out by the US and UK was morally OK. Interesting question. On the surface no. Delve a few inches lower and the answer was absolutely yes.
  • Real answer was the much delayed and argued bail-out in Europe was a disaster, morally awful. There was too much belief by the ECB (very political) in the system at the EU being blessed by Divine Right and therefore it didn’t have the same problems as the US/UK banking system. They were so wrong and ended up with unemployment in the 20% + in many countries within the EU while the US/UK rate fell to a recent level just below 4%.
  • CFOs now need to divine their expectations and what they can do with current cash supplies. Employees can also look to the future again, albeit with some trepidation. The race is on to get the funding to the companies as soon as physically possible. The UK has a Conservative Government with a very large majority and is therefore able to push legislation through quickly which isn’t happening in other countries.
  • Until we see a package out of the US and multiple other countries, which helps both the corporates and their employees, the effect of the UK package will be limited however much of a gold standard it might set.

20/03/2020 – More Business Focused Observations

  • Creating legislation to fit the pandemic takes time. The dislocation between Central Banks not working together and not necessarily singing of the same hymn sheet means the time to success is longer that needed. The ECB continues to have internal wrangling with similar dislocations between North and South.
  • Chancellor Sunak is to unveil a line-up of plans to help employers fund employees. The Prime Minister offered to ‘stand by you’ if you the employer ‘stood by your employees’. The currency weakness this may create should be offset by other nations enacting similar policies. The market’s reaction to both the potential support from the UK and from the US was positive. Help of this type is very hard for the politicians, it means trusting the public with government funds which they find difficult.
  • The weakness in the Norwegian Krona is more a reflection of it being perceived as an oil based economy. One should remember they have a Sovereign Fund which stands at around $1t in asset value which for population of 5.4m people is very supportive.

19/03/2020 – Business Focused Observations

  • The huge sell off in US Treasuries marked a warning shot against the lack of initiative offered up by Trump and other leaders around the world. The bond market is the most important of Global Market and when confidence is so low – it gets sold off. Politicians need to listen. Central Banks have for the most part actioned answers for a ‘normal recession’.”
  • We need to see action by leaders around the world to helicopter money into the system to support jobs and employment costs. If you offer an arm of certainty – with a future ahead and not just in the rear view – the markets and panic should ease. We are not there yet.
  • If the State is requesting or demanding the population stays at home and not go to work, it needs to become the “provider of last resort” in terms of wages, credit support for business and insurance.
  • On a positive note the $5 bbl decline in the oil price (and the continued inventory build thanks to weak demand) adds another $200bn in cost reduction to the global economy, not big but OK for one day’s work.

18/03/2020 – Surviving an Economic Health Crisis

  • The really interesting positive step which has received little airtime this time around is the oil price war by Saudi against Russia and the USA shale producers. This has knocked the oil price from around $57bbl to around $30bbl. If you look purely at the decline in price and the net benefit to the global economy, it takes about $1 trillion a year out of oil spend or input costs. This frees up around 1.25% of Global GDP ($85t) to be spent upon more important items.
  • In both Sweden and Denmark, they have enacted policies to fund a large portion of wage costs to keep people employed. Given the Chancellor has suggested the move yesterday was not his last, maybe his next move will include some employee support.

To find out more about Anthony White, his background and to gain more of his expertise visit Anthony’s LinkedIn Profile and share your thoughts.

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