Daphne’s grandfather was injured in the final year of the Great War – but it was the Spanish Flu that finished him off months after hostilities ended.
By the time Scott Fitzgerald wrote his famous letter from his quarantine in Juan Les Pins in 1920 social isolation was in full swing and people were being told to hoard a month’s worth of supplies: “Zelda and I have stocked up on red wine, whiskey, rum, vermouth, absinthe, white wine, sherry, gin and lord, if we need it, brandy. Please pray for us.”
Neighbours in Antibes tell me that, exactly a hundred years later, tumbleweed is once again rolling down the streets of the Cote D’Azur just as holiday season should be getting into full swing.
Plus ca change.
What is different is the political response this time around. Back then there was no stimulus programme. No interest rate cuts. No furloughing and no cries for bail-outs. What a lot we expect from our governments in the 21st century. And how quickly we surrender our liberty in the name of the new religion – personal safety.
It’s a concept Frank Brock wouldn’t have understood as he used the expertise in the family fireworks firm to devise a series of inventions that helped the war effort before dying in hand to hand combat during a raid on a U-boat base in Zeebrugge in 1918. You can read the full story of his James Bond-like life in Gunpowder and Glory.
Fast forward a century and let’s try to make some sense of what’s happening and see if we can determine the winners and losers in what will be a New Economy.
Winner #1 – financial traders
When I interviewed Siam Kidd for an upcoming episode of Money, Me & Covid19, he rather sheepishly admitted that ‘it’s at times like this that you make your big profits’. He’s been shorting the major indices and the oil price so volatility is his friend.
Loser # 1 – those relying on dividends
As big name companies come under massive financial pressure the two earliest victims will be share buybacks (yippee) and dividend payments (boo hiss). The former have been used for years as a way of ramping up debt to reduce the shares in circulation and apparently increase earnings per share. This triggers bonuses in the C-suite but does nothing for enterprise value. It’s one of the biggest failings of ‘managerial’ capitalism as opposed to ‘entrepreneurial capitalism’.
Dividends, on the other hand, are the secret sauce of stock market investing and have contributed more than anything to the long term returns for small investors. Many retirees have bought household name companies like Shell, BP and Marks & Spencer specifically to benefit from regular dividends. They will be one of the unheard voices forced to draw their horns in even further as the loss of these dividends begins to bite.
Winner # 2 – those companies in the hand-out sweet spot
When civil servants and politicians make arbitrary decisions under pressure, there are going to be winners and losers. Some businesses are now enjoying a quarter with no VAT bill, no business rates, a mortgage holiday and their staff costs 80% covered under the furlough scheme. I’m not saying they are without pain, but it’s further than any government has ever gone to cushion the impact of a sudden downturn.
Loser #2 – Company directors and the recently self-employed
If you’re the director of a company, you cannot furlough yourself. If you mainly pay yourself in dividends, the government says they can’t distinguish those from M&S dividends so there’s no compensation. You could always apply for a Business Interruption Loan – a month into the scheme just 2,500 loans have been approved from around 400,000 applications. Not only have our friends, the big banks, been as slow and bureaucratic as ever, they originally asked for 100% personal guarantees even though the loans were 80% backed by the government.
If you’re a freelancer with less than three years accounts you also fall outside the safety net. This unfortunate group has already been targeted with the outrageous 20 year back-dating of the Loan Charge and was about to be slammed by further regulation that will all but ensure companies stop hiring independent contractors. Those latest changes have been delayed a year, but the situation for many freelancers is bleak.
Winner # 3 – precious metals
OK a little bit controversial and maybe a little premature, but everything I’m seeing suggests that the only way the government will cope with its new level of debt is to inflate it away. Either that or an Argentina style default because there’s no way it will be capable of being repaid in the normal course of events. Gold bullion is the obvious way to play this risk – most experts say we should have 5-15% of our net worth in the yellow metal. A more speculative way of playing this would be to bet on silver, with the gold/silver ratio being well out of whack with its historic average. The more expensive gold gets, the cheaper silver becomes in relative terms. Mind you, silver has a habit of not doing what you want it to so this is definitely a longer term play for patient capital. (Am I allowed to use that term after last year’s Woodford related events?)
Loser # 3 – stocks and bonds
It may be a statement of the bleedin’ obvious, but the long bull run in the stock markets is finally over. What does worry me is how many people think it’s now safe to jump back in as if all the bad news is already in the price. Siam Kidd described this as a ‘classic relief rally’ and believes we are a long way from the bottom. With economic statistics looking more like the 1920s, it’s worth recalling that the 1929 Wall Street Crash saw a 75% plus fall from top to bottom followed by a 29 year recovery to its former level in real terms. We’re barely half way to that level of fall at the moment so caveat emptor if you’re tempted to reinvest.
The crashing of the bond market is a medium term call rather than an immediate one. At first we might see further price increases and yield decreases in a ‘flight to safety’. But bonds have been in a 40 year bull market and I simply can’t see it continuing after this latest round of money printing and bond buying. The Fed is already buying corporate bonds and it can only be a matter of time before they turn to stocks and shares. Last week I quoted Professor Russell Napier’s view that ‘this is the last time in my life when I will have to speak about deflation. We are heading for 30-40 years of inflation’. Rising inflation means rising interest rates which means falling bond prices.
You might want to check the asset allocation in your pension and investment funds to see how exposed you are to further falls in stocks and bonds. And be careful if you use a High Street financial advisor as they may have switched you out of shares and into bonds as a ‘safety measure’.
These are unprecedented times and you need to be ready to take unprecedented action to protect your wealth.
More to come I’m sure.