We need to talk about this

As the Covid-19 death rate falls, and we start to creep back towards some sort of normality, there are still many important issues which don’t seem to be part of the wider public debate. 

o   The indirect health impact of the lockdown measures: all those people with tumours and chest pains and abscesses who just aren’t being seen or treated.   Like everything else associated with this virus, the data is scarce, patchy and caveated, but there does seem to be a part of the “excess death” rate (the amount by which deaths exceed the seasonal average) that is not attributable to Covid-19. 

Anecdotally from doctor friends, with different specialities, I’m hearing of dental emergencies of the sort that are normally seen in remote communities in the developing world, people too frightened to go to the GP with symptoms of heart attack, ignored leg infections that could lead to amputation.  I don’t know what the answer is, how to best balance the need to stop the virus spreading with the wider health needs that are exactly the same as before, but it would be useful to see some sort of fact-based debate, and perhaps a nuanced message that gives people some idea of how to balance all the risks to their long term health, not just the virus.

o   How much personal freedom are we prepared to give up to conquer the virus?  In South Korea they use not only temperature scanners in the streets, but facial recognition technology to immediately quarantine all those with suspected infection.   On the basis of figures from the European Centre for Disease Control, South Korea’s death rate is 0.0005% of the population, compared with 0.055% for the UK (Note 1).  Assuming there’s some degree of connection between the degree of surveillance and the death rate, which option is best for our society?   Most likely not the South Korean one, but it would be good to discuss it. 

o   Just how will governments worldwide unravel the massive fiscal and monetary stimulus they are using to tackle the pandemic?  Can they inflate their way out?  Will they raise taxes?  Are the proponents of Modern Monetary Theory correct, and it simply doesn’t matter? 

o   To what extent are governments going to bail out insolvent companies with public money?  And if they do, what form will that take?  Which companies and sectors will they back?  Will it be through the form of loans, that have to be paid off, or an equity stake, or just free money? 

o   What are the changes we need to make to our way of life and our way of business to prevent All This from happening again?  When another atypical pneumonia starts up, how prepared are we to immediately isolate, to close our borders and to renege on contracts? 

We have some massive unknowns to cope with, both financially and as societies, much more complex than taking the decision to lock down most of the world to slow the spread of the virus.  In many cases, we need to be brave enough to say we just don’t know. 

We have no idea how the unravelling of the stimulus will work out.  We have no idea how many small businesses will close for ever, how many jobs will be lost, whether we will ever go back to the cinema, or if anybody over 75 will be brave enough to get onto a plane or cruise ship.  Will there be a vaccine?  Will the virus, like flu, change a little bit every year so we need a succession of new vaccines?  Or will it turn out to be the case that masses of people are just not affected by it, have already been exposed, and have not even noticed?  Will we become a two-tier society, with the young and healthy leading normal lives, while the elderly and unwell live in permanent semi-seclusion?

On 22nd May, HMRC published a report on tax and NIC receipts (Note2), noting that tax receipts were down for the month of April by £25.9 billion, about 4% of the annual tax receipts.  Apart from the large number, what was also striking was that they simply didn’t know (and how could they?) “how much of the observed fall in tax receipts relates to changes to the timing of payments and how much relates to changes in the underlying economic activity.”

Let me be clear: I’m not pessimistic.  There are many possible good outcomes.  There are opportunities, we will adapt, we will find new ways of thriving, whatever the virus throws at us.  We will all become smarter at working out our personal levels of risk, and adjusting accordingly.   It’s even possible that we will keep our lockdown resolutions about leading simpler, less stressful lives.

We are undoubtedly living in times of increased uncertainty.  One of the key tasks of financial management is not simply trying to get the best returns, but comparing the risk of loss to the potential chance of gain, and taking account of the client’s own ability to withstand losses, and willingness to suffer those losses.

It is quite possible that we have seen the bottom of the Covid-related slump in investment markets.  However, the great unknowns still carry significant risks which could cause markets to fall again. For some investors, who can afford to lose money and are happy to take risks in the pursuit of higher gains, now could be the time to jump in with fresh cash.  But for people who don’t want to lose money, particularly those investing new cash right now, the risks may well outweigh any possible gains.

This article does not constitute advice, and no action or lack of action should be taken as a result of what is written.  You are strongly advised to consult your financial adviser or a solicitor before taking any action relating to the matters discussed in this article. The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested.  Past performance is not a reliable indicator of future performance.

Sources:

1: https://www.ecdc.europa.eu/en/publications-data/download-todays-data-geographic-distribution-covid-19-cases-worldwide

2: Office for National Statistics HMRC Tax and NIC receipts May 2020

A billion here ...

Politicians and journalists are tossing vast numbers around like confetti at the minute.  In a way, this helps us all deal with the uncertainties of the pandemic, as the numbers become increasingly unreal, part of the generalised surreality of the whole situation.  If the numbers are too big to comprehend, they start to seem too big to worry about. 

At some stage, though, we are going to have to deal with these numbers for real.  This is what a couple of them mean in concrete terms.

There are 60 seconds in a minute, 3,600 in an hour, 86,400 in a day, 31.5 million seconds in a year.

A billion seconds take 31.7 years to pass.  An average lifespan of 80 years would comprise 2.5 billion seconds.

In the month of April the UK public sector needed £63.5 billion to top up existing government income. (Note 1)    If we look at that number and use time to get a sense of scale, 63.5 billion seconds is 2,012 years. Going back 2,012 years, that takes us to 8 AD.  Going past the Plague and the Black Death and Chaucer, pausing at the Battle of Hastings to note we’ve only done one half of the journey, going back through the Dark Ages, as the Roman empire approaches its peak, to the time when Ovid was alive, and Britain was still Albion, laying a pound on the ground every second.

Put your finger on your pulse.  Tick tick it goes, solidly, at one beat every second.  There were 259,000 seconds in April.  The UK government needed to borrow or print more than £24,000 every single second.  Imagine that, with every heartbeat, 24,000 pound notes fluttering down from the sky.

To take a global view, in an April 2020 article by Gita Gopinath, the Chief Economist of the IMF, the cumulative loss of global output due to the pandemic is estimated at US$ 9 trillion, assuming that “the pandemic fades in the second half of 2020 and that policy actions taken around the world are effective in preventing widespread bankruptcies, extended job losses and system-wide financial strains”. (Note 2 )

It’s 239,000 miles from the earth to the moon.  That’s 15 billion inches.  9 trillion is 600 times that.  600 trips to the moon, tearing up a dollar bill every inch of the way to reflect the loss to the global economy.

As a US senator almost certainly didn’t say: “A billion here, a billion there.  Pretty soon you’re talking about real money.” (Note 3)

Sources:

1: Office for National Statistics UK public sector finances April 2020

2: https://blogs.imf.org/2020/04/14/the-great-lockdown-worst-economic-downturn-since-the-great-depression/

3: Widely but probably wrongly attributed to US Senator Everett Dirkson

We're not in Kansas anymore

What is going to happen to investment values, after the recent turmoil?  If only we knew; predicting short term market movements is incredibly difficult at the best of times, impossible nowadays.  Impossible?  Surely there are always analysts and algorithms, poised to outperform? 

I’m not so sure, and the reason is this chart.  It’s a snapshot of the FTSE 100 over the past 6 months, but it could as easily be the Dow Jones or the Deutsche Borse or even Nasdaq, which has performed far better thanks to its technology bias, but is still displaying the same spiky pattern in recent weeks,

Source: FT.com 14th May 2020 10:52

It recalls my only memorable geography lesson, when we used the contours on a map to draw cross-sections of landscapes.  We were preparing for a field trip to Ditchling Beacon, at the edge of the South Downs, and carefully plotted the rolling grassland, gradually rising, followed by the sharp falling away of the scarp.  We noted how the cross-section could tell us that the landscape was changing; that we should expect different uses of the land and different plants as we moved from one area to another.

That’s what this snapshot reminds me of.  The striking thing is no longer the sharp fall midway along, it’s that the landscape has changed completely.  Up until mid-February, we were in hilly uplands, rising and falling, with the odd valley to negotiate, and a few striking scenic viewpoints.  But now it’s as if we are in the Dolomites: jagged peaks, vertiginous drops, and no foothold or place to rest; with the constant possibility that what looked to be a solid outcrop will morph overnight into an unstable slope of shifting scree.

This, to me, is a picture of a market that is very short on information, and is responding, sometimes in a knee-jerk way, to individual snippets of news.  It’s not a market which has enough knowledge to be able to accurately analyse the fundamentals.  It’s a market which reacts to headlines – or to how it thinks other people will react to headlines.  It’s a market where there just isn’t enough information for values to be calculated properly.  In other words, it’s a market largely driven by speculation rather than long term investment thinking. 

That’s a market where it’s as risky to be a seller as a buyer.  One bit of good news – a rumour of a vaccine perhaps – could send markets soaring.  One bit of bad news – a rumour that the virus is mutating – and they could crash back down again.  It’s a market where a sharp and lucky day-trader can make a lot of money, but her counterpart can lose it all again the following day. 

What this picture says to me is that the best financial brains don’t know what’s going to happen next.  It’s not a market where long term investors should be making hasty changes of strategy.

This article does not constitute advice, and no action or lack of action should be taken as a result of what is written.  You are strongly advised to consult your financial adviser or a solicitor before taking any action relating to the matters discussed in this article. The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested.  Past performance is not a reliable indicator of future performance.