Self Isolation Day 15

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March 17th 2020

We are witnessing the collapse of the global system right before our eyes. A multitude of countries have closed their borders. A multitude of cities have gone into lockdown. A multitude of stock and bond markets are imploding. Countries are telling citizens to fly home. Airports to be shut down in weeks (probably sooner). Is this THE big one? Yes, I think it is. At least the start of it anyway. The idea being put forward that this is only temporary, or worse, that things will rebound stronger than ever is deluded hopium of the highest order.

In the UK we are well behind the curve, let alone from flattening it. Last night BoJo, in the first of my predicted U-turns, cut British leisure/entertainment providers off at the knees. Whilst not ordering closures he nonetheless suspended the provision of emergency services to venues. Cinemas and museums are all set to close. This has left them in an insurance no man's land. Kate Nicholls chief executive of UK hospitality said;

The government has effectively shut the hospitality industry without any support, and this announcement will lead to thousands of businesses closing their doors for good, and hundreds of thousands of job losses.
An ill informed people are now being urged to stay home, well unless they need to go for a walk that is..

London streets are now looking as empty as in the film 28 Days Later

Patrick Vallance, the government's Chief Scientific Adviser, has had to admit the number of cases has spiraled faster than expected. Has he never heard of the exponential function? Today the government are bringing in emergency laws for police to detain the infected and force schools to keep open. Yes, you read that right, force schools to stay open. We are apparently being put on a "wartime footing", the war in question is not the First World War. We are certainly a country of lions being led by donkeys.

The FTSE 100 had another appalling day yesterday. At one point trading fell below 5,000, the first time in eight and a half years. It's dropped in total by 33% over the last month. Worst hit was TUI (TUI AG) a tourist company with a 32% drop following its announcement it was cancelling its operations. It looks set to have another bad day. Not far behind was International Consolidated Airlines Group S.A ((IAG) which fell by 23% after saying it was cutting capacity by 75%. Easyjet (EZJ) fell by 19%. Today Moodys has cut their credit status to two above junk bond status. As the global system collapses they will be demanding a bail out and sooner rather than later.

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Liquidity Meltdown

The situation, behind the scenes, is that the world's central banks are fighting to prevent a complete meltdown in world liquidity markets. Currently, as Nomi Prins has demonstrated in her book Collusion, they are doing this in a concerted effort. This is a global system and none of these markets are independent of each other. Of course the most important is the US because the dollar is the world's reserve currency. Which is why following the enormous rate cut and stimulus package (QE5?) announced by the Federal Reserve on Sunday night, the Bank of England and others were called upon to ensure dollar credit lines remained open.

Yesterday, Andrew Bailey took up position as the new Governor of the Bank of England (BOE). Bailey was previously at the BOE in 2007-09 and was instrumental in saving Northern Rock, following the first bank run in this country since 1866 according to Wikipedia. He was also a key player in Britain's response to the Greek debt crisis of recent years. He began by pledging to take more action whenever needed, leading to wide expectation that interest rates will be cut to 0.01%. None of this seemed to affect the FTSE 100 yesterday though. Perhaps in a realisation that the banks have little left in ammunition. Bailey insisted there was more space available for monetary easing. In other words we are going to print more money out of thin air for future generations to pay.

In the mainstream press you will see the reasons for interest rate cuts and stimulus is to help combat the impact of the virus, provide reassurance, and make lending to business and households cheaper. The real reason is to curb the implosion of the debt markets. The entire system has gorged itself on cheap credit and has moved way beyond any sustainable model. The corporate sector has replaced operating profits with fake stock buybacks financed by practically free money. Just today, as Boeing teeters on the verge of bankruptcy, the Federal Reserve has announced its creating a Commercial Paper Funding Facility. A vehicle basically to buy up short term debt. Will this see the DOW raise its head over the 20,000 parapet?

Frank Rumpenhorst/AFP/Getty Images

Following the bank bailouts of 2008 governments have been busy monetising their debt. Pumping money into the system by any number of backdoor channels, justified as saving the system. Japan has been doing it for decades. Now with bond yields having fallen so low will anyone buy treasury bonds but the governments themselves? Ultimately, government's need rock bottom interest rates to afford servicing the interest on their debt. Affordability is closely linked to GDP. The Coronavirus has not only been the catalyst for this crisis, but its impact on GDP is going to hamper the people's ability to pay back the money owed. According to Goldman Sachs we are now officially in a global recession. watch it turn into a depression.

Capital Economics have revised their GDP forecast for the UK predicting a fall of nbetween 10 and 20%. It predicts the government will have to act as a backstop for banks. What about a bailout for people? It's been left u pto Jim O'Neill a former Tory Treasury Minister to raise the spectre of helicopter money. He has called for a "people's quantative easing". Speaking to BBC radio 4 he said;

Virtually none of those things [responses to the 2008 crisis], particularly cutting interest rates, are going to have the slightest bit of impact...
You need to give them some kind of income transfer, whether it be business or individuals, in order to get them at least through two months of these tough measures.

Another sector being hit by the crisis is the bookmakers. I wonder if in the absence of sporting events, they will start taking bets on the number of Coronavirus cases? Of course I wouldn't advocate it, after all those figures are well fixed.

UK cases from yesterday still not released. Deaths as of yesterday morning 55. Experts at guessing say 55,000 people may have the virus.