Good Morning,

The ECB’s press conference was a let down in the eyes of the market, as it came with all the doom and gloom of just how bad the impact on the economy could be, but with little of the upside of ‘this is what we’re going to do to help’. What they have done is make lending to banks even cheaper, with the new long term lending to banks priced at minus 1 percent, meaning the banks would be mad not to take them up on the offer – though lending that money isn’t universally state backed, so banks still carry the risk of borrowing it and not knowing what to do with it.
Ms Lagarde also tried to reassure markets that their bond buying capacity was deep enough to keep everything under control – it isn’t though, because spreads between German government debt and Italian government debt is now nearly 2.5%, which isn’t exactly the level playing field the Euro dream was built on. As the FT points out, the market feels it is able to test the ECB on this point, because they haven’t explicitly said ‘this is the rate that 10 year government bonds across Europe should be and we will keep buying them until it gets there’. If it did that, then they might even find it costs them less in the long run, because which fund manager wants to play poker with someone that can print their own money?

Trump’s taking his position on China a step further, by planning to block investment by a US government pension fund into Chinese equities. The Thrift savings plan is due to invest around $50bn of its funds internationally, which would include an allocation to China. Trump wants this blocked on national security grounds. He claimed yesterday that he had evidence that the virus started in a Chinese lab but wasn’t allowed to say more. Trump also said “I don’t want to cast any dispersions [sic] I just will tell you that China would like to see Sleepy Joe Biden. China doesn’t want to see me re-elected”.

The New York trading session had a bit of a rollercoaster through all this tough talk on China – there was even talk of senators planning a ‘selective default’ on China’s US bond holdings – though Larry Kudlow was put on TV pretty quickly to quash that rumour. Stock markets also took a dim view on Amazon, who have said that they might even lose money in the second quarter as their bumper profits from the massive uptick in volumes will be spent in getting the business able to manage coronavirus for the long term. They’ve purchased 100 million facemasks, installed thermal cameras and are getting staff to undergo mandatory temperature checks as well as developing testing capabilities in house. All sounds pretty smart and long sighted to us.

Meanwhile the Nancy Pelosi has said that local governments in the US could need as much as a trillion dollars over the next few years to keep them solvent. Much like councils in the UK and elsewhere in the world, local governments have seen their additional income streams collapse with the lockdown whilst their expenditure has stayed at least the same if not increased, as people clock overtime to cover sick colleagues. The alternative in the US is to let the states go bankrupt, which is a polarising idea – unsurprisingly, Trump’s up for it – mostly because although it might ‘solve’ their creditor issues, the bond markets would throw their toys out of the pram and the costs of issuing debt for solvent states would go through the roof.
The likelihood is that bailout monies will find their way to the states and local governments, but in return for reforms and controls that may or may not be effective, but at least will give the Federal government a sense that they didn’t just write a cheque and endorse poor management. Tracy Gordon of the Urban Institute made an astute quote in the Washington Post “when hurricanes hit, people don’t usually ask what kind of financial decisions were made in the past, but the problem here is the hurricane hit 50 states, so it’s harder to muster a response”

The finisher for today is some solid gold we got from listening to Scott Galloway’s podcast this morning. He shared an idea on a long term plan to help manage coronavirus, transfer a bit of wealth back down the chain and also deliver some partisanship in future leaders: A ‘Corona Corps’ of 18-24 year olds could be mobilised to be able to help fight the spread of the virus by playing a heavily supportive role to key services, both at home and abroad – cheap labour with tech skills, low risk to health in that age demographic and time on their hands waiting for their futures to start –  The corps could be mobilised quickly and these people would receive a salary and a future grant, based on household income, which would then be used to pay for further education, or they could stay on and build their knowledge in the key fields that they’ve been working in, greatly reducing their future student debt, which is a huge burden to millions of Americans.
Another the long term success of this might be that these young adults grow up to be more cooperative than they otherwise would have been – the Harry Truman era of politics where people got along was thought to be largely down to them having served together in WWII and therefore putting their collective lives ahead of their politics – the estimated costs associated with doing this would be around $50bn, based on 500,000 volunteers serving for two years. That’s approximately 2% of the bailout monies, or as ‘Prof. G’ puts it “for an additional 2% we can purchase a warranty that significantly reduces the need or likelihood of another multi-trillion dollar stimulus package” brought about by a second wave of the virus in the autumn if it’s not nipped in the bud now.  Lastly, searches for ‘gap year’ have risen by around 70% in March, so there’s plenty of interest in something to do whilst all this is going on. Almost sounds too good to be true.

Most markets are closed today for a public holiday. Those that remain open might find themselves a bit light on players and therefore more prone to volatility.

Be well


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