Summary

Gerard describes markets as not currently offering any rational narrative - positioning, liquidity and behavioural factors are driving them. Equities are increasingly pricing in a best-case scenario for the virus - Hubei template where we get on top of the curve and release economic constraints. This is as consensus forecasts are showing - a terrible second quarter, solid second half numbers and then recouping all the losses by the back of 2021. However, risks around this are slammed to the downside. First, what if it takes more than 3 months to suppress the virus? Second, if there is a re-infection, and third, whether policy measures will even be effective in keeping the economic patient alive. Gerard would not want to chase the market or short it, but as a base case believes we will see a significant sell-off again as the risks in the second half come in to view. Medium term implications - Gerard has always strongly believed that the next recession would see a shift from monetary led policy to a much more aggressive fiscal led policy. COVID-19 could be the catalyst for this transition. We could see sustained fiscal stimulus back stopped by Central Banks - the helicopter money scenario. These tools will bring down the era of secular stagnation. This will represent a sea change for investors that will switch several of the trends that have been persistent in markets over the last 20 to 30 years. The stagnation era resulted in declining interest rates, so we could expect to see interest rates rise in a new era. If rates trend up, equities are no longer juiced up. Could we finally see the end of the growth stocks and US outperformance trade?! All attractive attributes to sovereign bonds have disappeared - high returns, lower volatility and the diversification advantages. We have been through an exceptional period of inverse equity and bond correlation. It turns out that inflation drives these regimes. If inflation normalises, then the equity bond correlation will become positive, which will knock out strategies such as risk parity. Although this seismic shift could in the longer term introduce the risk of unacceptably high inflation, in the near term the much bigger risk is that of deflation. This shock is going to be deep enough to open-up excess capacity. Unacceptably high inflation would be a 2022-2024 story. There will be an interim period where there is good inflation. Gerard concluded by saying that MACRO IS BACK!

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