9 Jul 2020

In isolation, Q2 was quite good for stock markets. But in the context of what happened in Q1, we are still in the mire with our Wellington boot just out of reach of our hovering, stockinged foot. The FTSE 100 rose by 9% but is still down 17% year on year. The FTSE 250 recovered by 14% in Q2 (having been down 31% in Q1) but is -12% year-on-year. As usual, the All-Share was between the two. It seems fair to say that we are no wiser about the probable economic outcome of the pandemic though we can see that there is a consensus that central banks can print any amount of money on the single condition that they don’t admit that that is what they are doing. In the US it is more explicit because it is more acceptable to say that anything large is too big to fail when it would involve the loss of large numbers of jobs. Even if you are not seeking re-election as President, it is hard to argue against that. The response to Covid-19 is becoming highly political in the UK, despite there being no general election scheduled until 2024. Mass unemployment cannot be deferred indefinitely, even by money printing. Everyone must know this but no one wants to say it – governing politicians are terrified of hard truths unless they can be floated under a halo of brave sacrifice and oppositions bide their time until they can feign shocked surprise at how badly things turned out.   So we are left with a pretend future funded with pretend money.  Pretend money is far from being just a UK phenomenon.  The euro was infamously pretend money before the financial crash. Greece, Italy etc thought that they could borrow extravagantly but cheaply because their euro liabilities were implicitly guaranteed by the ECB. Kyle Bass, who, in around 2008, took long positions in German Bunds matched against shorts of Greek government bonds, called it the greatest asymmetric trade of all time.  Eight years ago this week, Bunds yielded 1.5% and their Greek equivalents 26%. The spread between the two was 24.5% having been around 0.5% when Bass took his position....