Recessions are like fingerprints – None are the same
09 Jun 2020
The world is not in good shape, but don’t tell the markets, they always look ahead.
We are going to have a recession and possibly in a depression (no technical definition). For Australian’s recessions either conjure up no memories at all or the “recession we had to have” and for most, the mention of depression brings memories of horrible suffering and poverty for many years.
However, all recessions are different in their causes, how much activity drops and how long they last. They occur at a different points in time (can you really compare the Great Depression to anything now when the world is so different), have different technologies available, debt positions, communications, governments, popular ideologies, economic policies, etc……there is no play book or scientific experiments that can determine what path they will follow.
What we can say is the Covid19 recession / depression is unique. It is self-imposed by the government for non-economic reasons and is expected to end once the restrictions are eased.
If a business has no profit for one year and then recovers to where it was a year later, the value does not drop anywhere near 30%+. That is now how the market is reacting with the reassurance that they are backed by policy makers.
We have seen massive government and Central Bank support to stop otherwise solvent businesses from going under, but with all the stimulus still in place, there is still so much we do not know. In particular, in the small business end of the economy, when it comes time to start paying rent, wages and loans, will they be able to – or will they get into trouble once the repayment moratorium ends? Will companies need to cut costs to survive? Do all those people on Jobkeeper really have a job to come back to? Are there millions of young people desperate to get out and spend? Will people’s behaviour change and how will this play out?
Australia has kept the Lucky Country rolling along, and we are not just talking about the world beating health result. Brazil iron ore has taken a plunge again as iron ore plants are shut down by Covid19, and you do not get an $60 billion error in your favour very often. Nice to have that up the sleeve if you need it.
It also makes it hard for us to have an understanding of what is going on when we hear that the amount of employees on Jobkeeper (which requires a big fall in revenue for the business they work for) has fallen by almost half, so businesses are in much better shape that first feared.
At this stage we have no idea where spot fires or bigger problems may arise. Accordingly with a shock of this magnitude, we will be looking for some market weakness to buy into.
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