Investment Bulletins
By Charles Gillams on 24/05/20 | Overview

I received a surprise e-mail from Sadiq Khan, Mayor of London this week, which both amused me and also gave some interesting hints about UK fiscal policy going forward. As one of the great puzzles just now, is how on earth will they pay for all this, and the implications for investments and investors.

Property tax, rents, and housing in London - the existing structure
The changes, which are already agreed, amount to a much-needed fiscal restructuring – and it has brought old political enemies to the same end (in public at least), under the common ground of fighting a virus.

The London (and I suspect a few other similar cities) problem, is that it has been built on concentrating as many people as possible into a "Golden Mile” (or two) in order to maximise business property tax income, while trying to disperse the resulting public service expenditure, a long way from the wealthy tax creating commercial base.

The method is familiar: you provide an ever-wider network of subsidised travel to fling the occupants of the lucrative offices as far away as practicable. There is no merit in high earners occupying the closer in areas, they demand decent services, central government scoops up all the income tax receipts anyway and then, bizarrely, has also stopped any local residential property tax increases for almost half a century.

So, the per capita property tax income from residents of London has been almost frozen (in real terms) since the late 1970’s, despite sky rocketing house prices. Typically, this is done in the forlorn hope that grateful residents will then vote for the government, something they have since declined to do in ever greater numbers. Low property taxes just let grateful landlords charge higher rents, particularly in a system of heavily restricted borrowing to low or insecure wage households. It also incentivises overcrowding by local authorities; if you can’t charge more, you must get more consumers, a principle which applies to housing tax income, just like anything else.

The COVID-19 fiscal impact on existing population and rating structures
So, all of that has been ticking over: low residential property tax, cheap travel, cheap public sector housing, poor and remarkably expensive public services, but the parts all interlock in an oddly stable way. Then along comes COVID-19. Or rather along comes an order from central government to freeze all economic activity. Which in general does not matter, blowing up income tax and corporation tax receipts, is of no real concern to Mr. Khan.

But that is the interesting bit, it is a game of prisoners’ dilemma, and suddenly the power has been shifted. It is now in the interests of both the political prisoners to conspire, not against each other, but against the voters, helped by the convenient and illogically lengthy autocratic postponement of local elections. What both Mr. Khan and his sworn enemy and predecessor, Boris Johnson should have done, in terms of fessing up, can now be done quickly, cleanly, mercilessly, without blame, and under a viral screen.

You see the cheap tube fares bit had somehow also become politically essential. Plus, for reasons that remain murky, the big underground expansion project Crossrail, which was about to open under Boris, but never quite made it, is now costing a fortune while (still) sitting idle.

Why a low fares policy designed to cram people onto an already overcrowded network "made sense” always eluded me, but there it was.

The result of the lockdown is Transport for London, the funding authority, which was already struggling and needed subsidies from the rest of the nation, is now suddenly running out of cash, because ticket sales have collapsed. Now the old playbook would have been emergency loans or an explicit central government takeover. But no, interestingly not this time. Instead sensible revenue raising measures were implemented, and oddly pretty well all of them at once.

Did they raise fares steeply? Well no, that would mean encouraging fewer people to snuggle into their neighbour’s fetid armpit, while being poked in the back of the knee by an oversized piece of luggage, while breathing air that remained locked in the filthy deep tunnels for weeks at a time.

Creating Congestion Income
No, instead the "rescue” launched an overdue (but at this point a bit illogical) attack on car drivers. But what struck me was how fiscally rational it was. The problem with the congestion charge and, well congestion, was it has had a minimal long-term impact.

Indeed, the effective ending of diesel car production, the rise of electric cars and in between massive increases in fuel efficiency, plus turning over most traffic chokepoints to cycle use, had done a lot of the work already; these current changes are frankly unlikely to have much impact on pollution.

No, they had two clear targets, firstly to drive more traffic onto the insolvent tube (and bus) network, regardless of those systems’ health risks. A startlingly hard-headed approach. The second aim was fiscal, as with all taxes: far too many people have ended up not paying the full whack.

And that is the really interesting part.

Slightly worryingly major congestion charging loopholes will still remain. One is for taxis (still open), although Ubers did get hit by Khan a year ago, in another highly political step. So that exemption was partially closed. The other is for Diplomatic Plates, I guess the Foreign Office backed them off that step, because Trump (£12m and rising) and other foreign states (over £100m) are just too poor to cough up.

But the rest got slammed shut with zeal, gone is the residents’ discount, which gave local voters a major reduction. Gone is the discount for registering and paying automatically, a rather smaller discount, but they are all being chopped at once. Gone too is the weekend exemption, a naked demonstration that this is all about money, not pollution.

Gone too is any chance of waiting till the charge ends, it now goes on to 10.00 at night from an admittedly too early 6.00. While the daily rate shoots up to £15, for the majority of autopay users, almost a 50% rise.   

Now all of that is of course "temporary” and covered in oodles of greenwash, but as a fiscal coup it is refreshingly complete. Of course, the daily rate should already be twice that by now, it should cover a wider area, commercial users driving high daily mileages in the zone, should pay a ton more and please don’t start me on tour buses. But it is a good start.

The commercial vehicle issue is instead being tackled by "non-tariff” barriers squarely aimed at Eastern European hauliers, a classic protectionist device, deployed by a Remainer. But that’s another story.

What else got whipped in under COVID cover?
Oh, free child (under 16) travel on the Tube is now scrapped, as is peak hour use of the over 60 free fare schemes. Two groups of people politicians have had an arms race to favour above all others. Gone in a flash. As for fares, well those do rise, but by the amusing (but totemic) amount of 1% over inflation, so that fundamental nonsense remains. Do you think Crossrail costs know about negligible inflation, do they ever? At least when Crossrail finally opens, it will be easier to get to Heathrow, as if that is going to matter anytime soon.

The point is it is not just China that will use the COVID excuse to rationalise awkward things and old concessions. If this lot gets through, that unfair London Council Tax freeze will probably go too. The abolition of retail business rates for a full year, enacted much earlier in the virus crisis, signalled a radical overhaul of property tax. You do not disable all existing systems for a year, to tackle a four-month emergency. You do so if you intend to replace them entirely.

Straws in the wind.
There has been a lot of frankly counterproductive kite flying on raising income tax to pay for the virus, which in going directly against a freshly minted "Read my lips, no new taxes” pledge seems (still) to be political suicide. If demand is on the floor, scare stories to dampen it further, seem unwise.

But it is also not hard to list the go to tax targets now, TfL has shown how aggressive the fiscal repression will be, and we anticipate that it will be designed to attack known loopholes in a concerted fashion: pensions, self-employment, capital gains, council tax, duty free, and many squalid little, over complicated, tax exemptions, are all now likely targets, and done in a classic "broad front” offensive. Hit everything at once, hit it early in a political term, to maximise impact as they can’t all be defended.

The traditional "your bribe is bigger than my bribe” and baubles for marginal Parliamentary seats are all going to get hit hard, if the letter to me from Khan, is anything to go by.

Sadly, that will not be enough, but it gets a lot of the dirty fiscal work done, and it may buy a bit of time with markets too. A bit of normality from the Treasury would help sterling.

But the mix of BREXIT and an irresponsible Chancellor destroying the economy in a panic and a weak willed Prime Minister unable to face restarting the economy, for fear of a media attack, still suggests we will be like Greece is today, in five years’ time: an efficient, if slightly demoralised, depopulated populous, teeth gritted, endlessly digging their foolish leaders out of a self-created, self-indulgent debt chasm.

But you have to start somewhere, so thank you Mr Khan, for at least acquiescing.
By Ciaran Mulhall on 17/05/20 | Overview

We continue to observe Covid-19 and its effects on both the macro-economic and financial markets through the prism of a natural disaster – one that has led to a sudden stop in global macro-economic activity. This is not a typical recession if such a thing exists (we do not agree with the comparisons to either the Great Depression or the 2008 global financial crisis). There remains much that we just do not know in terms of how the global economy will absorb and adapt to this new world.

From an investment point of view there are reasons for both caution and optimism.

Our investment process has been grappling with two scenarios –

Just a bear market rally, then?

Scenario 1: is that the rally we have seen in broad risk assets (form the March 23rd low) is just a bear market rally (similar to the Nov 08 to Jan 09 period) that will eventually be given back and we will then trade new lows. This seems to be the general view of third-party market commentators and some of the major Investment Banks. The logic behind this approach is that markets have massively underestimated both the depth and length of the sudden stop in macro-economic activity and there will come a point that the light bulb goes off, markets realise their error and down we will go again.

Or have markets just ‘bought some time’ to decide on how best to react?

Scenario 2: is more nuanced – it may be that while some pockets of risk have probably taken a too optimistic view and while there is still significant uncertainty in the macroeconomic outlook, the interventions on both the fiscal and monetary side, have bought us time to see if health developments can allow the global economy to reopen. To take a view on the likelihood of this you need to have a clear view on where the global health developments stand and we would be optimistic (compared to what we feared in March) that there are positive signs here.

While we are not health experts, we have plentiful access to resources that are experienced in this space. Equally it’s important not to underestimate the wall of money that has been thrown at the vaccine and therapeutics issue over the last five months.

We have found the Reuters resources in this space to be particularly good and might be worth a quick read.

As most of our investors will know we favour Scenario 2 more than Scenario 1.

This means while we are not chasing expensive assets today, our GTRF nevertheless remains in the "buy the dip” camp on specific ideas and themes that we favour. We remain flexible but we (after some thought and internal debate) have decided that a new low at this point is unlikely, particularly given the willingness of both Central Banks and national governments to rip up the rule book, when it comes to the policies and actions they can take. Indeed, something like the German Constitutional Court (the Bundesverfassungsgericht) decision last week, to the extent that it limits the power of the ECB to buy debt, we would consider on the margins bearish, for both the economic and market outlook.

While we certainly think there are pockets of risk assets that have rebounded too far (large US stocks particularly Tech, as an example) the likelihood that we have a further correlated, broad based, de-risking event (like March) is unlikely. What is more likely is that we see some give back from the recent rally (this could have started with this week’s sell off). This will allow the market to work through some of its overbought characteristics and allows us to pick up some assets circa 7-10% cheaper than current levels. It’s important to understand that with the VIX (equity volatility) still above 30, that this implies a 50/50 chance that the market is up or down 30% in the next twelve months and suggests typical weekly moves of just less than 3%.

That’s a lot of market "noise” to seek to invest with.
How China is regarded matters
Finally, to note a cause for concern, in the noticeable pivot by Trump towards a hostile view of China and the role it played in starting and handling the pandemic. This suggests that Trump has made a calculation that come November, he will not be running on the economy and by extension on his "great” trade deal with China.

Instead the election will still be about the virus and how his administration handled it – to that end any politically motivated sanctions, that Trump might impose on the Chinese, when the global economy is in such a fragile state, would cause us deep concern.

Meanwhile, the EU we note, continues in its ambivalence towards China – with eastern countries beholden to ‘Belt and Road’ projects, but the centre less than charmed by China’s recent press announcements.

Any deterioration in US/China relations could in our view both extend the size, and likely length, of the economic downturn, even in the face of positive medical developments in terms of a vaccine for the virus itself.
By Charles Gillams on 10/05/20 | Overview

This week we will speculate on the consequences, not economic but political, of the virus crisis, in the UK.
This assumes that economic activity is subject to a two quarter ‘stop frame’ that simply pauses the action - after which, at various speeds it all then resumes. That as far as I can tell is how the US stock market is treating it, as indeed are other developed markets that are (once more) just a pale echo of the US.
The VIX (volatility index) is not quite safe yet, but (at last) it dipped below thirty on Friday (still twice normal levels), which strongly suggests the market is now forming some kind of consensus.

Rationalising recent market indications 
I am troubled by two questions:  
Why is the US Tech sector acting so differently from everywhere else, when it has to sell into the same demand, the same end user, as every other sector? Along with, for a UK investor, asking why sterling is so weak, not just against the dollar, but also the Euro.
If these two features have an explanation, you invest one way, if they are an aberration you invest another. Our core belief is both are illogical dislocations, so let’s investigate why we could be wrong.
So, to start with, as noted before, political incumbents get a popularity bounce from extreme events, largely irrespective of how well or badly they handle them. On that basis Boris is looking safe, while Trump already trails "Sleepy Joe” Biden in the polls, which is itself quite an achievement, given all the airtime he has had.

So, I speculate, what could take out Boris?
Or perhaps, why is sterling so sickly as against the Euro? To an extent they feel like the same question. I think it is accepted neither Boris (nor Trump) has done well with this disaster. They have by accident or design made their governments all about themselves; it appears they have spent more time on courting the media and dethroning possible rivals, than doing anything useful. Indeed, both are rather scornful of the nuts and bolts of management, moving beyond benign neglect to a posture of the chirpy iconoclast, even during a pandemic.
They have also both shown a certain contempt for their own parties, by riding to power on populist dissent, rather than a slow careful ascent, like Joe Biden. Neither Boris nor Trump demonstrate any patience or interest in the detail. Both have found crushing the party structure and rules actually pretty easy, if a bit noisy. I mention all this mainly just to ask who will have their backs, when the blades next get locked up, rather than locked down. I sense they may have allies then, but not friends.
Boris looks pretty safe now; the influx of new MP’s and the largely faceless rotation of the rookie cabinet show no evident power bases. The Remoaners are shattered too.
Yet, and yet, the markets really do not like it.
This is indicated by sterling being so weak against the derided mash up of the Euro Bloc. The EU has rather too many insolvent member states, which are desperately trying to scrub a myriad of slates clean, while Merkel gently drifts into retirement. So, to us sterling’s weakness against the Euro feels like an amber light.
Well what then is the threat? The handling of health issues may (and does) cause anger.
As the excellent Private Eye coverage shows, we really blew it. I tend to ignore the BBC’s sycophantic coverage, as it tries to haul itself back from getting its reporting of Brexit rather horribly wrong. The high COVID-19 death rates, the length of lock down, social cracks, and the hideous inequality of mortality are all clear. Comparisons with Germany or indeed South Korea are quite brutal.
For all that I am sure a Public Inquiry, headed by some neutral insider will provide a worthy list of desirable minor actions in a few years’ time, it will also nicely shut down any real analysis, as the Inquiry wallows along into history.

Is Taxation where it will all unravel?
No, the lethal blade will more likely be how the terrible axe of taxation falls on the people who can least afford it. That cannot be avoided, as sterling can’t survive alone; our debt levels are soaring towards Italian ones. Italy ultimately has the Bundesbank behind its currency, we have no one.
It will have to be solved through broad rises in consumption taxation, to ever raise enough funds to matter, which is the nub. We have grown used to someone else getting hit on tax, to endless stealth taxes, but that no longer works, most of those rabbits have left the hat, long ago. That in turn means a lot of broken electoral promises, that will not go down well with those new MP’s, for a start. It takes time to get used to practicing the deceit of politics.
Such punitive taxation will no doubt have some idiot tag like a solidarity fund, along with false promises of its temporary nature, like the last VAT increase, and no doubt some garbage about anti-avoidance, to allow for its confiscational nature.
Yet I still sense even that alone won’t threaten this government.
But then add in a messy Brexit, and a wearying sense that the Tories have held power for too long, to pin all the administrative failures and evasion in the public sector on their predecessors.
My sense is it still won’t matter, Boris will survive, but I can certainly sketch a scenario where all this looks a bit sticky in a year or so’s time, when the ice will feel less thick beneath his ebullient skates.
Would you buy sterling at these levels?
Or perhaps flip it, why would you buy sterling at these levels? Well it looks cheap, you have to say, but as we know it can always get cheaper. You certainly would not buy it for the yield, but perhaps for the political stability? Well yes, despite the above, possibly true.
But in both the health issues and then the consequent budgetary splurge, Boris has melted much of the prior support for the currency, which was so (briefly) visible after the last election. The pre-virus budget looked pretty reckless, the steps since are often not well targeted.
Why does Tesco need a half billion-pound cut in business rates for a full year? A lot of the stimulus is dressed as loans too, but quite clearly ain’t, it is a handout, to some quite shaky outfits. More national pretend and extend, but markets at least see through that. No clear plan exists to mop up the inevitable excess labour; the fiscal policy is instead hinged on ever higher minimum wages, a slightly odd position just now.
So, the Government has avoided immediate disaster, but the longer they delay a return to work, the more, like the business rate holiday, their sights look set on 2021, not 2020, the bigger the support cost grows. It is easy enough to jump off a cliff: it is landing safely at the bottom that is tough.
I have not mentioned an irrelevant opposition: there are no meaningful elections before 2024, not even the European ones that sank Theresa May. No, any threat is from the markets and government incompetence, but both seem just a little more real than three months ago.
That the US stock market and the dollar are apparently not bothered by a sharp swing to the left, which will become rather more evident when Biden picks a running mate (quite important given his age), says a lot.
Yet you can hardly buy US stocks on astronomic valuations, without asking what the likely regulatory environment is over the next decade. While to answer that, as if a simple continuation of the benign period they have just enjoyed will continue, is illogical, it would take a leap of faith in Trump’s durability, which is unsupported by current evidence.
Other markets and assets catching up with the US, is therefore still our core expectation, along with a belief that sterling is currently low enough.
As ever, to hold that view we need to challenge the opposite explanation. For now, we remain content with our stance, but like all investors, we should keep asking if that fits with the latest evidence, or if not, what the explanation is for any divergence.
By Ciaran Mulhall on 03/05/20 | Overview


Bull in a China Shop
Most people have a favourite move or tactic that they fall back on when confronted with a tricky situation. The President of the United States is no exception. As the coronavirus crisis carries on and dissatisfaction within the US mounts, it seems as if Donald Trump is reverting to a familiar game plan. The pivot towards attributing more and more blame to China gained pace this week – while this may or may not be an astute move from a domestic political perspective, it is probably not something that financial markets will take particularly well.

Global risk markets gave back large gains to finish down on the week, as it became clearer on Thursday that Trump was prepared to sacrifice his much heralded trade deal with China for the opportunity to pin the blame for the virus squarely at a Communist state’s door. Faced with a difficult situation in managing public health and the economy, it seems as if the president has pulled a familiar rabbit out of his bag of tricks, by threatening China with financial repercussions.

The trade war saga of 2018-2019 had a happy ending from his perspective. Not only did he get the Federal Reserve to lower interest rates, that he had been pining for, but the equity market (his preferred barometer for assessing his handling of the economy) ended last year near all-time highs.
So it’s perhaps little wonder that whatever the true circumstances of the virus’s genesis, his administration is now threatening punitive measures against China, the country of origin. Thursday saw some mention of a targeted default on Treasury bonds held by China, but thankfully that trial balloon was quickly shot down – not before the long end of the US interest rate curve had a little bit of a wobble (with rates shifting higher). However, where there’s smoke you will often find fire, and more stories have since emerged about retaliatory tariffs or possibly blocking pension-fund access to investing in China.

Markets have never enjoyed the "escalation” phase of Chinese-American tensions, and this time is likely to be no exception.

The offshore yuan unsurprisingly weakened by the most in a single session since March, and just like that, risk assets are suddenly trading on the back foot again.

Enough of the rally already?
It’s very much a "narrative-driven” market just now, so it’s useful to interpret price action in the light of any new information. As soon as the China headlines hit on Thursday, just before noon, market darling Tesla (itself heavily involved with China) started selling off and never looked back. After the Thursday close, there was easily enough qualified optimism in bellwether tech earnings announcements, to justify some positive spin. Instead, the market reaction was to sell again.
Equally the flow into "value” based stocks seen over the proceeding five days also began to reverse. Although the Russell 2000 (US small and mid-cap stocks) did still manage to finish the week up by 2%, despite having dropped 8% after hitting Wednesday highs, just after the monthly Federal Reserve meeting closed. But after the strong start to the week, it was a bitter end.

Particularly for those readers who follow ‘market technicals’ –it was more disappointing that most major markets had either broken out or looked about to on Wednesday evening. It was not to be, the last two days of trading saw us end the week firmly back in the trading range seen for most of April. Experience tells us that "false” break outs like these, can lead to larger reversal moves.

As our investors will know – having navigated both February and March to produce a positive outcome, we hedged our long portfolio back in mid-April.

While we took some resulting performance pain into the month end, we continue to believe, while it is unlikely that we will retest the March lows, at least there is some chance that we head back towards the bottom of the April trading range – which would be a further 7-10% from downside from here, for most risk assets.
By Charles Gillams on 26/04/20 | Overview

The world has moved on and the immediate health implications of the pandemic are no longer an area of conjecture, they are what they are. Even if exactly what that is remains a little murky now, especially in how populations and administrations have responded, it will become increasingly clear over time.  All of it is countable data, sitting behind us in some form. 

The social and economic implications going forward, and in time their political consequences however, are still all to play for.

And we lived beneath the waves
As investors we face a very split and uncertain market. The incredibly cheap stocks to buy on the dip have been snapped up. Portfolios that were stuck for acceptable entry points to coveted holdings are at last being rationalised. There are some that expect a second chance at those purchases; we generally don’t see that, even if markets falter again, those premier companies, will hold up better.

Do contact us, if you want another pair of eyes cast over your current positions, or worse you have not reacted to the changes yet. Investment is now becoming more nuanced.

Within the overall market position a number of patterns are emerging. As always in times of crisis, the dollar is very strong, while the small group of high tech leaders continue to attract investment flows.

At the same time, there remains a feeling that other nations and other businesses are becoming ‘also rans’. Although this too is strange, if you believe in the power of competition to unseat incumbents, or indeed that capital will always flow to where it is most productive.

Instead the winners just keep winning, a nice feeling, but weak on economic fundamentals; mean reversion happens at some point.  

So looking back nearly everything was under water in March, but it then split into the sunk stocks with weak margins, large workforces and with service based models that relied on economies of scale to pack customers in, often also associated with heavy debts and big fixed asset investments to utilise those large cash flows. So the classic torpedoed areas were transport, leisure, retail, hospitality, all of which now look pretty nasty. There are always special cases, but even those are more based on strong balance sheets than any fundamental belief that elements of those business models are not broken.

In which case the comforting assumption is the survivors will pick off the failures and grow stronger. I am not so sure; it looks as if there are a lot of stranded assets, cruise liners, airplanes, hotels, shopping malls, airports, which will be surplus to requirements for quite a while. Small is looking more beautiful. So perhaps leave those sectors to the speculators to pick out the gems amongst the rubble?

Then there are the second order impacts, notably in finance, where it is assumed that although demand will hold up for services and transactions will continue, that those areas with excess labour forces and assets, have already been lent far too much money, that will be impossible to recover.

We will see. But I expect quite a lot of bank funded assets to be in a prolonged workout again. By the same token, the strain on pension schemes will be intense in these sectors, as no cash flow, low investment returns and rising liabilities bite. Although overall loan quality will clearly suffer, current flows may well hold up or even accelerate. Nevertheless the case for vast over staffed bank estates, is looking thinner by the day.

You could class some areas of government spending in that analysis, the abrupt switch to job support and social care, will strip a number of other sectors of funding, as the accountants in The Treasury struggle to balance the books.

Yet short term at least the assumption is overall demand will hold up, indeed the desperate efforts of governments to pay people not to work, will lead to increased consumption and certain sectors, like healthcare will see a permanent upward shift in funding.
Although there too I welcome Keir Starmer’s willingness to ask what the ethnic divide outcomes say about urban healthcare (and Trevor Phillips, doing the same on behalf of the Conservatives).

As we live our lives of ease
But where then does long term demand go? Governments can’t fund employers for long to pay their staff to play computer games and drink to excess, (usage data is convincing), nice though that may be. At some point they presumably have to let the employment market attempt to clear. Which will not be fun, especially with the built in inflexibility of minimum wages in so many economies, along with welfare benefits deliberately set low to encourage workforce participation.

Where does all that end, if unemployment is well into double figures? If demand is absent, state intervention as we know from coal to cars, can only hold back the inevitable.

Full speed ahead?
Another strange assumption, visible in the stock prices of hosts of tech companies, is that they are immune from a cull of small businesses and mass unemployment. Again short term, they may be, and their margins are generally pretty good, but it is odd to see some tech companies (especially those reliant on advertising) pull back somewhat, but others seemingly going on up regardless. Surely at the end demand shock is the same for all of them?

As large numbers join the ranks of the unemployed, and as in time the business owners who have been bribed not to lay people off, recalibrate their future labour needs, the demand shock must pass through the entire system. How bad it is, we can’t tell, but there will be an increasing number of countries where money printing won’t work anymore.

Within the EU the implicit underwriting of indebted states will be tested again, and it seems unlikely that the old formula of austerity and ‘extend and pretend’ will suffice. Outside of the Euro smaller indebted states will again be vulnerable, which may well of course include sterling. While great swathes of Africa and Latin America are already forming an orderly queue for more debt write offs.

And our friends are all aboard
Now corporates and technicians are endlessly resourceful, many sectors can do pretty well on home working, while modern automated plants can change working systems to disperse operatives in time and space quite effectively. So it will all shake out, but I keep coming back to that large chunk of surplus labour and those surplus assets and how they can be repurposed without a substantial cut in their price.

If that asset surplus spreads to residential property too, in some areas, that could be fun.

Governments are focused on keeping the health services running, on keeping the financial system liquid, on preventing large corporate failures, and hoping they can issue the debt to support all of that, at a time when corporate taxes will drop dramatically, as will payroll taxes and a fair number of big ticket transaction taxes too, which includes VAT.
For now, everyone of us has all we need, but I sense we are living on a yellow submarine, in a sea of green, but the tide may be about to go out. Markets in aggregate may be fairly valued or even cheap, but do be careful of benign hallucinations.

Both of our defensive models, the RJMG GTRF and the Monogram Momentum model are rather fond of cash just now. 
By Ciaran Mulhall on 19/04/20 | Overview

This week Ciaran Mulhall, who advises the RJMG Global Total Return Fund, takes a look at the reality behind the hype (and the hope) and is not greatly comforted.

"Having spoken to several investment colleagues over the last few weeks – those like me – who are directional agnostic, so that we can position our portfolio to benefit from both up and down moves in risk assets – have been somewhat grappling with the apparent consensus. The financial market turmoil that has been unleashed by the COVID-19 virus has challenged us to manage our portfolios independently of our personal hopes for a speedy medical breakthrough and the reopening of the global economy.

How likely is a Covid 19 vaccine?
Having been fully absorbed in the development of both the virus and the knock-on macroeconomic effects for nearly four months now – I can say for near certainty that the world will find both a successful antibody test and a vaccine. Too much is riding on this for us to fail – it is just a matter of time. But with that positive view held firmly front and centre, we must attempt to navigate the day to day developments from a dispassionate point of view.

Thursday evening saw equity futures surge on a twin dose of apparently good news: the publication (by President Trump) of a plan to "re-open America” and encouraging results on the efficacy of Gilead’s Remdesivir drug in combating the coronavirus.

I am of course not a scientist or medical practitioner, but I am pretty sure that a small sample study funded by Gilead with no control group and carefully screened participants, tells us very little about whether the drug is useful or not. It was notable that Thursday saw a large slug of hitherto out of the money Gilead call options expiring on Friday go through; whether that is pure coincidence is an exercise best left to the reader.

Chinks of Light

As for the plan to re-open the U.S. economy, it is certainly good to have a framework in place, indeed these types of plans have begun to emerge in Europe and allow the public at least to see what the future might look like in the coming weeks and months. But it seems premature to think that a widespread relaxation of restrictions (particularly in the US) is in sight, when the daily death toll has reached a new peak, and a key piece of the solution -- widespread, readily available testing, that delivers quick reliable results -- remains elusive in many parts of the globe and in particular in the US.

In the US a piecemeal release of constraints is likely to work best, given the immense scale of the country, and while it may well be a boost to sentiment if some rural constituencies are able to begin the path to normalization relatively soon, the reality is that many of the most economically important parts of the country will remain in lockdown for quite a bit longer. As we have always feared restarting economies will prove materially tougher than shutting them down.

The higher that equities climb today, the more room for disappointment there is tomorrow, if miracle treatments do not appear or the re-opening of the economies does not materialise as expected in mid-May.

Italian, French and UK experience of Covid-19
Italy has seen a downward trajectory in new cases for several weeks now, but the current number of new cases remains above where it was a month ago and it seems Giuseppe Conte (Italian Prime Minister) is very reluctant to loosen the lockdown even slightly. The political and personal pressure to save every life possible, is more potent than the incredible economic hardship facing his people.

The risk of an uncontained outbreak in Italy has been greatly lowered by a robust testing regime already in place. Italy has tested nearly 1.2m of its people (2% of the total population), well ahead of several other big nations, like France, the USA and the UK.

But while the lockdown started to avoid an exponential spread of  disease, in which it has succeeded, it has morphed into something more ambitious, and so it has become very hard for politicians to risk releasing the demon again. Politicians on fragile majorities, like Conte, have an unenviable balancing act to perform, between lost votes now, which could eject them from office quickly, and long term economic damage, which while harder to accommodate for society, will let them hold onto power for longer.  

From a directional point of view we at Solus Capital have become rather more cautious in terms of our market outlook – having done very well in February and March, reacting to what we saw in front of us – we now see a market that has run somewhat ahead of itself. We hope in some ways we are wrong and if we are we will react quickly to rectify the mistake, but we suspect the second half of April (much like the second half of February) will prove more challenging for market participants.
As ever stay safe and healthy in these difficult times.”

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