Don’t panic, Captain Mainwaring!
My mother-in-law went to the local supermarket in her Marigolds and with a scarf wrapped around her mouth, a sensible precaution, except this is before the virus even arrived in Ireland. If you follow the media too avidly, you will be reading this while under the bed with the door locked.
Michael Levitt, the Stanford biochemist and Nobel laureate, told the Los Angeles Times, ‘What we need to control is the panic...we’re going to be fine.’ What usually happens is that ‘worry will exceed actual harm, and upheaval begins with complacency and turns into overreaction’.
Wild statistics are quoted in the tabloids about 250,000 possible deaths in the UK, while the original Imperial College researchers volunteered that this number was the most pessimistic number imaginable and not the most likely number. In Britain the normal death rate is 51,000 per month, the current COVID-19 death rate is likely to be a fraction of that. Bear in mind that Spanish flu killed around 50 million globally after the First World War.
While I am supremely unqualified to evaluate the spread of COVID-19, I have been a keen follower of financial, business and economic cycles for my 35-year-long career. March 2020 will be remembered as the month when all liquid asset values plummeted, sterling against the U.S. dollar, the stock markets by 30 per cent — taking them well into bear territory, oil down to $23 per barrel, less than a quarter that of five years ago, commodities fell too, aluminium is at $1,600 per tonne, down from $2,500 two years ago with production globally outstripping consumption by 6 million tonnes. Even ‘the safe haven’ gold fell from $1,700 to $1,400 per ounce before recovering to $1,600 as I write. These investment classes are leading indicators, anticipating trouble ahead. The major lagging indicator relevant to us are house prices, which I expect to fall for the next few years, already the share prices of Barratt, Persimmon etc. have halved.
What has been remarkable is that central bankers and governments have agreed to ‘spend what it takes’ to try and to ease the economic pain, at least to take us to the other side. The UK Chancellor has committed a £330 billion package and the US a $2-trillion dollar package. Europe has committed €750 billion, but that figure hides a lot of discord. Simply put, the economic engines of Germany, Austria, Belgium and the Netherlands don’t want to pour money into Italy and Spain who they believe are fiscally irresponsible. The UK has a relatively modest debt-to-GDP figure ratio of 78 per cent, whereas France and Italy are above 130 per cent, thus allowing us the generous furloughing scheme we now have. The markets have recovered somewhat as a result of this collective and powerful stimulus and are now hovering to see how the virus progresses and governments react. When will the economy rebound? We have a good case study in China, where the respected investment bank Macquarie reports coal consumption is back at to 95 per cent of its normal level and the country is largely back to full production. It seems likely that by June, restrictions in the UK and other Western countries will have eased substantially.
What is also clear now is that stock markets are cheap. Using the Shiller price to earnings ratio one can read that UK equities are at a 20-year low in terms of valuation, and the dividend yield on the FTSE All Share index is at a 40-year high. Of course we know there won’t be much in the way of profit this year and dividends are vanishing like snow off the hills. But 18 months ahead, when this year is but a horrible memory, most of our quality companies will be well on the mend.
But what will happen to all this government debt that has been built up? In my opinion, the answer I’m afraid is inflation, as per the two World Wars and their resultant debt mountain. What happens is that the person or organisation with money in the bank or owning government bonds will receive, say, 2 per cent interest and inflation will be 7 per cent, thus effectively reducing government debt by 5 per cent per year.
Taxes will rise — they are already at a high — and many of our more vulnerable companies will have failed. Russia and Saudi Arabia will have reached an agreement and the oil price will have recovered, but meanwhile I read that the low oil price will have delivered the world an equivalent of a trillion dollar tax cut courtesy of the oil- producing countries. It is quite possible that the lockdown will have a worse impact on lives in terms of lost jobs, stress-related deaths, interrupted