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Weekend reading: Get ready for the drop

7

What caught my eye this week.

Remember a thousand years ago – or more precisely, in March – when we watched with horror news stories of Italian hospitals overwhelmed with patients and footage of sullen families barricaded inside their homes?

I think most of us failed to connect what was happening on TV with what could happen here.

Oh, I understand not you – you saw it all coming.

Me too, of course, as I’ve banged on about for months.

Well… maybe.

The truth is it’s very hard to truly envisage a reality revamp until it slaps you in the face.

In mid-February a good friend of mine was banging her head against the wall because all the factories she dealt with every day in China had shut-up shop. All of them!

In theory I knew this from the financial news – I’m a stock market junkie, after all.

What’s more I’d had a morbid fascination since January with what we then called the ‘novel coronavirus’.

But it wasn’t until I saw my friend despairing for her business – right there in front of me – that I truly weighed up what would happen if the virus got here. And then I sold some shares.

I think we’re in a similar place with the economy.

Look out below

Most people now understand that a lockdown craters the economy. The statistics are coming in every day – I’ve included a few in the links below – so it’s impossible to refute.

The debate now is how quickly we can bounce back, and to some extent whether it will prove to have been worth it.

But I don’t think any of us are really processing what this graph might look like in real-life:

Compare our deep dive to the blip of the financial crisis.

The graph comes courtesy of the Bank of England, which this week told us it expects GDP to decline 14% in 2020 as a whole before rebounding 15% in 2021. It will be the worse slump for 300 years.

Does it yet feel like the worst slump in 300 years to you? Are we all so sanguine because we’re confident we’ll see the same ‘V’ that the Bank of England is sticking up in front of us?

Or are we not actually thinking about it?

Will we even get such a strong bounceback, after such disruptive chaos?

Economic forecasting is a thankless task and I don’t envy them their job, but these guys haven’t exactly covered themselves with glory with their predictions over the years. Anyone who has followed the inflation target saga can tell you that.

I do hope we’ll see a ‘V’, and provided Covid-19 quietens down it’s what you’d logically expect. Whatever the pros and cons of our economy, the recession we’re in wasn’t precipitated because the economy was structurally overwhelmed. It’s more like a storm that superficially smashes the place up (the pandemic), as opposed to dry rot that ruins the foundations from the inside out (sub-prime mortgages or dotcom valuations or over-powerful unions or too much crappy investment or whatnot).

If the big bazookas being fired this way and that by the Government and the Bank of England have done the trick, we’ll have stunned the economy senseless for three months, but we could emerge something like how we went into it.

If…

The new most hated rally of all time

Time will tell. As for the stock market, I’m still not as offended by the rally as most people.

Central Bank action has lopped off the truly disastrous tail risks that the market was facing in March.

After that, the shares that have rallied the most are by far the superior companies. As I’ve mentioned before, in many cases they’re companies directly benefiting from global lockdown Even where they’re not, their valuations are typically based on earnings due far into the future.

In contrast, the hardest hit firms are mostly still in the dumpster.

Also consider when exactly we’re likely to see meaningfully higher interest rates.

I have I hard time imagining UK Bank Rate reaching even 2% by 2030. Anything is possible, but for reference a 30-year gilt is currently yielding 0.53% so don’t hold your breath.

I bought my flat after a decade of prevarication and got my stupidly big mortgage because I finally became convinced rates weren’t going anywhere in a hurry. That was more than two years ago. Now future rate rises will take the extra-scenic route, and stop off in every quaint village along the way.

Companies that survive the imminent recession are almost certainly going to do much better than cash in the bank over the next 10 years. If some of the world’s 1% have the spare money to buy them now while they’re still – just about – on sale, is it any surprise?

Of course markets can do anything, so it equally wouldn’t surprise me if we saw the indices halve again by Christmas. I’m just saying I don’t think the rally is unjustified.

Anyway have a great long weekend, and I hope neither the virus nor the counter-measures have laid you too low!

From Monevator

All of the action was in the 200+ strong comment thread this week – Monevator

From the archive-ator: How gold is taxed – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

Economy is set for an unprecedented crash after services sector is paralysed in April – ThisIsMoney

UK lenders have granted nearly 1.2 million payment holidays – Guardian

Pandemic sends US jobless rate to 14.7% – BBC

Covid-19 to push EU into a recession of ‘historic proportions’, wiping 7.7% off growth – ThisIsMoney

How lockdown has changed house buyers’ property priorities – Which? and Guardian

The US stimulus is so gigantic that for Q2/Q3 2020 it’ll offset the income hit of 30 million Americans becoming unemployed – Cullen Roche / Goldman Sachs via Twitter

Products and services

‘Hey Google, dim the lights’: how smart home devices can save you money – Guardian

RateSetter has cut its interest rates in half to shore up its provision fund backstop – RateSetter

What Covid-19 means for your travel insurance – Which?

Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade

How to get the housing market moving: From virtual viewings to a stamp duty holiday – ThisIsMoney

Homes for anglers [Gallery]Guardian

Why the stock market?: mini-special

Why you should invest in the stock market: #1 – Of Dollars and Data

Why you should invest in the stock market: #2 – Humble Dollar

Why you should invest in the stock market: #3 [US specifics but relevant]Get Rich Slowly

Comment and opinion

Beds are burning [Is the UK’s fixed rate mortgage market a time bomb?]Finimus

The rise and the fall – The Irrelevant Investor

Will the UK Government just write-off the wages of 6.5 million people on furlough? – Simon Lambert

Rebalancing a portfolio after sinning a little – AAII

War games – Indeedably

When distressed markets don’t give you distressed prices [Er, for long…]AWOCS

Obfuscation – Retirement Investing Today

What the heck and now what? – Investing Caffeine

Gloomy economist Nouriel Roubini [always] sees a depression on the horizon [Podcast]OddLots

Cheap vs expensive factors: Does valuation matter for future returns? – Alpha Architect

Naughty corner: Active antics

Warren Buffett’s peek into the financial abyss – Institutional Investor

This version of Warren Buffett – The Reformed Broker

How long will the [US] dividend drought last? – The Evidence-based Investor

The case for EBIT/TEV – Alpha Architect

Stock performance of Glassdoor’s ‘Best Places To Work’ companies, 2009 to 2019 [PDF]Glassdoor

Covid-19 corner

A new tool from the FT enables you to compare one country’s pandemic with another [Tool]FT

How to sniff out the good coronavirus studies from the bad – New Scientist

Enough with the phoney ‘lockdown debate’ – Quillette

More people dying at home during Covid-19 pandemic: UK analysis – Guardian

How this crisis will take us back to the 1970s [Search result]FT

Does obesity increase the risk of dying from Covid-19? – BBC

UK scientists condemn ‘Stalinist’ attempt to censor their advice – Guardian

The pandemic will forever transform how we live [Search result]FT

Government now giving us nation-based per capita Covid-19 data – GOV.UK

Relationship between Covid-19 cases and governments’ responses [Tool, needs work]Oxford Uni

A sweet take on the side-effects of corona-confinement – Humble Dollar

Positive actions to take to improve your chances if you’re infected – The Escape Artist

Segregation cannot set you free [US take on herd immunity]Interfluidity via Abnormal Returns

More: The [daunting] mathematics behind staying locked down – Slate

Ermine admits a sneaking admiration for Donald Trump [!]Simple Living in Somerset

A [very left-wing] view of the Covid-19 recession and what to do about it – Richard Murphy

Kindle book bargains

The Basic Laws of Human Stupidity by Carlo Cipolla – £0.99 on Kindle

What You Do Is Who You Are: How to Create Your Business Culture by Ben Horowitz – £1.99 on Kindle

Money: A User’s Guide by Laura Whateley – £0.99 on Kindle

The Hating Game [‘The very best book to self-isolate with’] by Sally Thorne – £0.99 on Kindle

Off our beat

How the Internet kept running even as society closed down around it – The Atlantic

American Idol – Epsilon Theory

“It’s bullshit”: Inside the weird, get-rich-quick world of drop-shipping – Wired

Michael Lewis reveals how he became the happiest person he knows – via Twitter

Life is short – The Retirement Field Guide

VE Day: Churchill in 1945: “We may allow ourselves a brief period of rejoicing” [Video] – via Twitter

And finally…

“When you’re a conservative Republican, you never think people are making money by ripping other people off,” he said. His mind was now fully open to the possibility. “I now realized there was an entire industry, called consumer finance, that basically existed to rip people off.”
– Steve Eisman, quoted in The Big Short

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  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []

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