Greetings Passengers, this is the Captain – Please return to your seats
If you had the nagging feeling that you are not getting the full story from the cockpit of the media, you are right. Let’s give it a name, the GPC (Global Pandemic Crisis). It is a complex Health, Economic, Financial, Social and Geopolitical crisis, no amount of modelling has prepared journalists, academics or economists for it.
Until mid-March the Irish media focus was exclusively about the onset phase, there was a deafening silence about economic outcomes. The early calculations of the IMF, World Bank, OECD on the dampening effects were way off. Since then locally there’s been some cosy bedtime stories about dozy hibernating bears and chat about extreme monetary magic pills as if this is a single-issue crisis. When fearful we wish for the comfort of what is familiar, suck the sweet, watch the demo and fasten seatbelts, it will be a short bumpy ride before business as usual and you can play your favourite movies meantime.
Social media is awash with people supporting each other, funnies, music, tips for the bored kids, buying the line that this is a short interruption before a return to BAU (Business as Usual). But I think we deserve to hear the truth.
Unhappily what follows below is the grown-up version of GPC The Movie. It is strictly over 18’s so if you’ve a sensitive disposition stop reading now. Here’s the Trailer; there is no V-shaped recovery. It is a long fat ‘U’ with a lot happening at the bottom. We are only at the onset and counter-measures phase of this crisis. The flood and fractures are yet to come in the deep valley of the ‘U’ before recovery.
But first a short note; As everyone knows I’m not the PhD in the room but unlike many of those that are I have published form. In 2005 I originated, co-wrote and presented Rip Off Republic a polemic that exposed how the Irish development land bubble economy was having the effect of eating our young. Then I wrote Loot. Referencing the risks in the US economy, in that 2006 book I advised slashing leverage to under 50% of property, swapping to AAA rated banks, selling equities for bonds and buying gold. It is there in black and white on no other Irish publication. Two years later the GFC hit.
I’m not a Chicken Licken, mid Feb 2009 at the frenzy of the collapse in stock markets I’d said on Irish morning TV that the USA market was about to take off like a rocket. A couple of weeks later March 6th the US market hit the bottom setting up the second longest bull market in history over which the Dow jumped 4.5 times, before shedding nearly 30% of its value since February.
Throughout this period I’ve become alarmed by the scale of excess debt in the global economy, about the impact of ‘Crapitalism’ continued Central Bank dole mispricing risk and creating an everywhere bubble. It is why I wrote The Pivot in 2017 detailing the increased fragility caused by waves of quantitative easing and negative rates. That culminated in suggesting that the most dangerous doctrine carried forward from the 20th century is Keynesian economics. It is what is being deployed again. How this plays out across the uncertainty surrounding taming the pandemic contains the hidden keys to understanding this multi-faceted and complex crisis.
Last year I wrote about the minor Autumn heart attack in the US Repo market which reignited Fed QE operations that reached over half a trillion by the time the pandemic hit. The Repo is the front line of the interbank market, it was gumming up, intraday borrowing rates ballooning.
Throughout 2019 for those not lulled by groupthink, the signals were flashing inbound recession all you had to do was listen to the bond market where the curve was flattening and inverting. Back at the ranch, looking past Trump’s bluster the US economy was slowing fast, down to 2.3% from 2.9% the year before and well below the White House forecast. US consumer spending was weakening, meanwhile Germany was limping in at 0.6%, Japan was in recession and the global economy produced its lowest growth since 2009.
To be clear what I’m saying is that this black swan event hits at a lousy time. No one knows the playbook because there is a gap, the missing invention needed to stop or tame the pandemic. What we are left with is what we do know about how it might play out as global authorities’ toy with the elasticity of money, lighting a fresh fire under paper currencies. To help digestion I’ve clustered this into short points that you can adjust as events unfold. Nothing here is written in stone. I’m just making the best out of what is available to an enquiring mind.
- There are three phases, medical, financial markets and real economy with three different timelines and extreme stresses rolling through the world in a series of interconnected waves over the next few years. We are at the initial phase characterised by the pandemic onset and the first countermeasures. The deluge from the fractures will follow. Capitulation will mark the bottom before recovery.
- There is no going back to the old economy, to BAU, this is going to be deeper and longer than before. Gone is the escape valve of emigration for Ireland. This is different. Relatively speaking Ireland is not in too bad shape, we don’t have a bubble, unlike Australia.
- As before the cohesion of the Eurozone as a currency will be tested to the extreme as will the EU itself. Britain is very exposed exiting the EU betting on superior trade deals from countries in economic crises globally, her currency resting on wafer thin gold reserves.
- There will be a crisis in Government Credit markets where the weak will be priced against. Vulnerable countries will go burst as funds flow to the strongest. Many economies, with dollar denominated debt face into a vicious feedback loop as the world seeks dollars and Treasuries. Historic IMF rescues will unfold and will include largescale deployment of the IMF currency, Special Drawing Rights (SDR) when domestic Central Banks become overwhelmed and currencies implode. Expect at least one OECD country to be bailed out.
- Saving record breakthroughs from the world’s leading virologists and massive vaccination, Governments will throw in the towel reasoning their own survival as an organism depends on restarting economies before the damage becomes carnage. This is already implicit in the brutal Hobsons choice facing Governments in the race between science and that crossover point.
- Not everything can be saved. Central Banks and Government debt has limits. The Fed is effectively the market for the whole lot; Corporate Bonds, US Treasuries, Muni-Bonds and Cash Funds. The ECB is now underpinning Corporate Credit on top of the banking system and Government debt. But underneath lies the highly vulnerable jobs rich employers locked out of these market supports, reliant on flows from big corporates and hugely at risk to a slowdown in the velocity of money circulation. This is freezing fast.
- Mass worker relief cannot be sustained beyond a few months especially as tax receipts collapse and countries scramble for further credit but the big fracture line is at the broad backbone of economies, the employers, SMEs, unquoted companies, the self-employed whose revenues have collapsed, whose cash is disintegrating and who will go bankrupt in a deluge shortly. Bank forbearance is limited, triage will be applied. Already Irish SMEs have outstanding receivables of c.€20bn according to ISME, much of it won’t get paid because the debtors are also hoarding cash. This ends in a tsunami of bankruptcy and court bottlenecks unless there is a massive liquidity programme for businesses, an auto-enrolment for protective cover from creditors, a Government creditor guarantee scheme and a gradual work out to high velocity money circulation.
- Irish banks don’t back brave, the three-month mortgage relief scheme isn’t a holiday, to label it as such is propaganda and an offence under the Central Bank code on advertising. The scheme capitalises the three months on to the debt. That is all. It ought to have been auto-enrolment with an opt out, but Irish banks insisted on creating an underwriting bottleneck which they knew they could not resource, if you cannot figure out why you don’t yet grasp this part of the Irish Deep State and how it functions as a self-protecting organism.
- The first pandemic phase is likely to last 3-4 months from its origin before control of the curve can be determined and is a function of the speed, efficacy and leadership demonstrated by national health and Government institutions and acceptance by each public. It then becomes about controlling for secondary waves with the therapeutics in rushed development.
- Therapeutic drug breakthroughs will help to oppose the worst effects of Covid-19, but vaccines are much further away. The delay will have grim outcomes for tourism, airlines, sports and other mass gathering events, those who survive will mop up, including Governments who nationalise flag carriers
- National health systems are likely to temporarily collapse where leadership actions have not been sufficient or where weaker countries simply lack health resources, leading to war time emergency settings and risks to democracy from fascism and from dictatorships.
- Markets, as forward-pricing organisms and which sold off dramatically in March, will keep whipsawing in reaction to negative and positive developments. Although these have the capacity to surge off heavily oversold levels as soon as the apex of the curve is deemed in sight, there is scope for big further legs down to capitulation points well below present levels as feedback loops in financial systems create unexpected outcomes.
- The very severe and sharp stop in large parts of the economy is likely to see economic activity plummet by a fifth over Q1 and Q2 2020 with the potential to drag into H2. At best 2021 will see sluggish growth, at worst further deflation. Each deflationary test will be met by an air fleet of Keynesian, counter cyclical monetary and fiscal carpet bombing.
- Unemployment will rise sharply to swamp a fifth of workforces and despite social welfare buffers and fiscal programmes such as tax suspensions, utility holidays and loan suspensions, consumer savings will deplete to service core lifestyle costs. This will lead to a severe weakening of consumer spending power on the other side until savings are replenished
- There will be negative price expectations due to the fall in demand for discretionary items. This will affect many prices, including property. The decline in oil prices is a consumer buffer, but hurtful to hydrocarbon producing economies and to national tax revenues.
- The overhang on the economy will eventually lead to price adjustments in the property sector which will not escape without damage to activity, valuations, rents and turnover.
- Although the experience of the GFC will influence policy speed, the shake out will be more severe. There will be a crisis in Corporate Debt rollover across much of the corporate bond market, only partially ameliorated by Central Banks supporting commercial paper.
- Overleveraged Corporates and Institutions without the cash buffers to withstand the cliff fall in economic activity, especially in consumer discretionary, retail, transport, airlines, hospitality, etc., will become casualties. This means a slew of distressed sales, bankruptcies, administrations and takeovers as the weak are consumed by the strong and flagships get nationalised where there is market failure.
- Developed economies who’ve entered the GPC with housing and bank debt bubbles are particularly at risk.
- The Banking system, despite liquidity operations becomes unsafe leading to problems at Inter-Bank level and will require fresh emergency QE operations to prevent gumming up.
- Not all Banks will escape, the spike in non-performing loans will hit weaker balance sheets a blow that will lead to defaults and contagion and, if not rapidly contained, led to banks shutting for a spell during restructuring.
- Only banks deemed of Systemic Importance will be socialised, others will be subject to bondholder and deposit holder haircuts.
- Depositor Guarantee schemes in the extremis (e.g. Cyprus 2012) will be breached.
- Social unrest is inevitable especially where social safety nets such as welfare, stamps and food lines are deemed insufficient.
- The medical, financial and economic emergency created by the GPC will pass. A new economy will be birthed, one with much bigger Government.
- There will be more, not less, global coordination learning the lessons that pandemics and climate do not respect economic nationalism or the borders whether physical or trade.
- The GPC will accelerate the development of the virtual economy leading to a surge of technologies that will assist in driving productivity during the recovery
- The GPC will cause significant political and social change influencing the formation of Governments for a generation, the shape of which will be determined by the efficacy of the leadership shown by incumbents. There will a revival in community cohesion required to defeat the pandemic despite the challenges of social isolation.
- Global pandemic institutions will be formed and funded by Governments to prepare for the next events, much like the World Bank and IMF were formed out of WW II.
- After the deflationary shock created by the GPC, it is difficult to see how a prolonged phase of high inflation will not eventually emerge from money expansion and rising velocity which will test the fundamental value of fiat currencies. In this climate the value of currency becomes a casualty and gold a king.
How will Ireland Respond to a ‘U’ Shaped Crisis?
This crisis is unlikely to see a repeat of external creditor oversight but notwithstanding ECB supports for Irish bonds at close to zero rates, Ireland is limited to the scale at which the ECB will expand its balance sheet, competition from countries with greater needs such as Italy and general bond market pricing. Ireland looks to be entering the flood and fracture phase of the GPC with a centrist coalition.
There is nothing to suggest that the Irish establishment will respond much differently. The establishment will first shore itself up, limiting the impact of austerity measures to itself and its outer defences, an impulse that will be widely supported by RTE and academics on the State payroll. Public Sector pay and contracts will be ringfenced even if subject to wage cuts. There will be no reform of existing contracts, the overarching public good provisions in the Constitution already deployed in the crisis, will wither in this space because of Deep State power.
The crisis comes with the ongoing housing crisis which can only be met by finally tackling the gordian knot of the property market. Radical policies that rely on the public good argument will be deployed with less resistance.
There will be no auto-enrolment for pensions, not with employers weakened and the workforce shrunken. Climate change will take a back seat to economic revival, limiting the imprint of carbon taxes and related burdens for a few years. The big issue is the shape of the tax base, how to widen it to cover the blackhole created by the GPC. The inbound Government may have no choice but to ‘temporarily’ return to heavy lifting through the USC.
Private Pension assets are exposed to fresh appropriation if Government borrowing capacity gets squeezed. This is low hanging fruit, captive and politically expedient because it was done before and doesn’t impact the public payroll.
Wealth tax will become a big global issue, it is hoped this time that the unfolding Irish debate will cease using income as a measure of wealth and left wing parties cease dodging the plain fact that most domestic Irish wealth is in our homes and in the public sector pension scheme. After much heat I don’t think an asset-based wealth tax on the middle class will fly in Ireland, but property tax is here to stay.
There will be a refocus on the Apple Tax escrow for obvious reasons. The state is likely to change its position but in a nuanced manner quietly hoping that the EU wins its case.
Europe will face a fresh existential crisis, at issue will be what to do with Italy which entered the GPC with the second highest debt to GDP outside of Greece and an unreformed economy. The Eurozone as a currency will once again be tested especially as the EU erupts into vigorous debate about common bonds and control of national budgets including setting taxes.
A radical centrist response will be required to hold it together without losing further members. Macron is likely to lead. Unlike the GFC, this time the threat is universally shared even if the price is unequal due to differences in health responses and sovereign debt levels
What can you do?
The first thing is to psychologically prepare for what is coming, the moments when the oxygen masks fall. There is no quick fix. The safety nets from State debt, reliefs and the ECB, all of it has a limit. For the initial phase here are a dozen thoughts;
- Be careful where you hold your bank deposits, check for highest credit rating
- Look through Credit Unions to check on the credit rating of banks holding cash
- Look through Life Office and Pension cash holdings for G-SIBs (Global Systemically Important Banks)
- Be ready to hold cash at home to deal with any temporary limits on withdrawals
- Swap 10% -20% of liquid assets into gold and hold, get advice if you don’t know how
- If near or in retirement de-risk to top investment grade Inflation-linked Government Bonds
- If in excess cash be ready to buy good assets at the capitulation point
- Don’t take on any more debt, reduce or clear debt where you can
- Prepare a core family lifestyle budget to share with the family.
- Use the GPC to educate millennials, it is their first major reality check.
- Especially look to your own mental health and those around you, it is a very stressful time.
- Consider how you could build resilience, fitness, diet, meditation, yoga, classes, communities.
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