Der Stand der Dinge - 11.6.2020

News: When one looks at stock markets one could be led to believe that the much-talked about New Normal is little different from the Old Normal: global equity markets have made up most, in some cases (NASDAQ Composite) all of the losses suffered during lockdown. Equity prices are supposed to be a forward-looking indicator. Looking forward, I see little that is positive for equity prices.

The OECD warns in its latest research report that we are in the greatest recession seen during peacetime over the last 100 years.

A bit behind the curve (I mentioned this about eight weeks ago), the ECB is working on a Bad Bank plan as many European banks’ loan book is in bad shape. And it is not just the Club Med banks that are suffering, Deutsche Bank mentioned on Monday it’s raised its loan loss provision to €800 million. Nothing to worry about then for DB, they wrote off $300 million for POTUS in a couple of his bankruptcies… To frame the size of the problem: the amount of debt in the euro zone that is considered unlikely to ever be fully repaid already stands at more than half a trillion euros, including credit cards, car loans and mortgages, according to official statistics. That will go up as the COVID-19 outbreak squeezes borrowers and could even double to one trillion euros.

I would call that a systemic risk, and it needs to be addressed in a fundamental way. Today’s consumption is built on easy money, low borrowing costs with little thought given to repayment. That is not sustainable in the long run. There will be a rather large implosion of the financial system which will lead to a correction in inflated asset prices, viz equity markets.

Equity markets are going up while unemployment, particularly in the States, is at record highs. That leads to a bifurcation of wealth distribution. The less well-off become even poorer while a tiny minority’s wealth increases. Perhaps the anti-racism protests are as much a statement in support of minorities as they are a way for young people to protest against the economic dead-end in which many find themselves. Rioting isn’t the way to move the discussion onwards, nor is ignoring social distancing guidelines during a pandemic, but everyone should be given the opportunity to do his or her own risk assessment.

Boris Johnson appears clueless and devoid of a coherent strategy, as pointed out yesterday by opposition leader Keir Starmer. Perhaps it’s not a good idea to have someone in charge of government who is still recovering from 10 days on a ventilator. As lockdown measures are being eased across Europe I am amused (note, not bemused) by the UK’s strategy. While infections are falling across Europe, air passengers arriving in the UK are forced into a two-week quarantine. That would have made sense at the beginning of the pandemic. As the virus spread begins to be controlled, it makes as much sense as driving on the left when the rest of the world is driving on the right… Schools are being opened without the input of head teachers. Statistics are being dropped from daily press briefings if they do not favourably reflect on the Government’s Covid-19 strategy. No thought seems to be spent on how to reduce the massive backlog in the National Health Service caused by cancelling all non-pandemic related treatment. A no-deal BREXIT seems to be the UK negotiating position, in which case the OECD’s estimate of a reduction in GDP of 11.5% in 2020 can probably be repeated for 2021. Not really, but you get my drift.

Financial Markets: US equity markets appear to follow Trump’s “America First” mantra: as the number of US Covid-19 infections surpassed the two million mark yesterday, trading near 2020 highs. Tesla traded above $1,000 for the first time. Its market cap now is higher than that of the big three German car makers combined. Go figure…

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