Albert Edwards at SocGen was yesterday quite rightly in my view suggesting that the obvious next step for policymakers is to try some form of helicopter money. I’ve been boring investors at any number of events about this for years about this self-evident next step. It seems to me to be beyond obvious that although central banks do have lots of levers to pull – and Eric Lonergan over at M&G is hugely articulate on this – the most effective mechanism now is a cheque in the post to consumers.
BUT there are other consequences to these policy steps.
The first is that it seems to me that the pressure to keep renewing this mandate at the next crisis will be intense. That will need to be discounted in investor’s minds and I can’t help but think that during the non-emergency interludes, we might see interest rates drift higher again as central banks try and create some room for maneuver – as the US Federal Reserve has tried to do. We might even be closing in, much sooner than I expected, to an end to the era of low rates for longer hypothesis which I have embraced wholeheartedly for many years. My sense is that the virus is about to force a rethink on that Low Rates Longer QE thesis in the next few years. As Edwards quite rightly says, these measures haven’t been terrifically effective at trickle-down wealth generation.
The other knock-on effect might be some hard thinking about how we create that wealth. Investment commentator Richard Duncan has also been banging away at a thesis that the next huge monetary leap must be to work out ways to improve the productive potential of national economies. His scheme is to invest in renewable power – which I think is an excellent idea – but if we use this bout of monetary incontinence simply as a form of welfare sponge, to absorb and mitigate personal and real capital loss, then we have lost an opportunity. Capitalism needs to figure out a way of boosting productivity growth and although creative destruction, post-crisis has some use, it won’t be enough.
My other passing self-evident truth is that when it comes to dealing with the virus, Asia has looked much more impressive and more disciplined. The US has looked a shambles, uncoordinated and frankly behind the curve, while Europe has seemed hopelessly uncoordinated. If I were a bearish predator prowling on the boundaries of Europe, I would thus conclude that Europe in crisis is about as unified as the Holy Roman Empire (which to be fair wasn’t actually entirely uncoordinated). I think we can guarantee that if said bear was to prod a bit of the European empire we’d see vastly different, uncoordinated actions. From an investor perspective, everything I have seen has made me more convinced than ever that an Eastward shift in asset allocations is absolutely essential. As always, the challenge is working out how to invest in Asia.
Yesterday I kicked off with an attempt to round up investment ideas from frontline managers.
Over the next few weeks, I’ll try and collate the best ideas. Today I have a shortlist of stock ideas for the stay at home thesis by SocGen Europe analysts. It looks like a good starting point for a crisis portfolio.
I’m also going to try and keep an eye on the increasing number of ‘dislocation’ pricing examples popping up everywhere in the markets i.e stuff that is clearly mispriced.
Today I have two examples, the first from inestimable Jeremy Grime who closely watches the UK financials sector. His observation….
“As the mortgage holiday is extended to buy to let Paragon Banking Group retail bonds 6% 2024 trade at 62p, giving 100% cash return over 4 years if it survives. A little out of tune with the equity price indicating market dislocation starting.”
Looking at the infrastructure, using data through to 18th March I’d also point to JPMorgan Global Core Real Assets fund, ticker JARA, which the last time I looked was trading at 76.8p, a 20% discount to NAV and a price decline (from 19 February) of 26%. I get that the fund is invested in lots of real economic assets such as shipping that might be hit by the crisis but this looks a big old discount.
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