My Neighbor, the Markets and What’s Coming Next

When a doorstep chat leads to a economic revelation

I visited my neighbors recently, at a safe distance of course, to return a well wiped down games console my tween kids had borrowed off them for a while.

They are a lovely, outgoing young couple who only just bought the house at the end of last year from possibly the grumpiest people to have ever walked the planet, so the contrast in atmosphere between our properties is now very welcome.

During our two-metre chit chat, she revealed that she thought she was likely to be made redundant as soon as the U.K. government’s furlough scheme ended, which is currently scheduled for the end of October 2020 after a recent extension.

Like everyone else on the scheme (some 8.9 million people according to official government figures) she’d been receiving 80% of her pay, entirely funded by the U.K. government, to stay at home. She was in event management — an industry that naturally relies on the coming together of large groups of people — which had been utterly wiped out by the lockdown.

She feared, quite rightly as it turned out, that as soon as the furlough scheme ended, or even possibly before, she would be made redundant. It was only days later when that call came in, her whole team being offered voluntary redundancy if they agreed to leave immediately.

The furlough conundrum

For many of us, this scenario is no longer unusual, and certainly not isolated. During that same doorstep conversation, we compared notes about people we knew who were in similar positions, and the extreme measures others had gone to in order to pay the bills.

Between us, we knew of airline pilots now driving Tesco delivery trucks, a mortgage broker who was now also working in a supermarket, and London PR agency staff now working in fields being paid to bring in potatoes rather than schmooze with clients. Some had been furloughed for a while and then been let go, and others simply saw their companies crumple and fail completely.

Right now, these stories are just that — anecdotal retellings of individual positions where it’s quite likely we don’t know the whole picture. On their own they give an analyst context, but it’s not enough to draw conclusions unless those stories become more commonplace and swell in numbers across a large social group. We’re probably not there yet.

However, one thing is abundantly clear, anecdotally at least. It’s now an open secret that many companies are only existing because of the furlough scheme, and will stopping paying staff as soon as that scheme ends. In other words, when the money stops, so will the “employment,” such as it is at the moment.

If this really is true, this has implications on a scale we haven’t seen yet.

The bigger picture

Of course, those of us who have more than a passing interest in markets and the companies they include know that in many cases, the picture wasn’t as rosy it appeared in the first place anyway.

Over leveraging, running at huge losses to gain market share funded by rounds of capital investment and similar practices are now common place strategies, since they please markets in ways that doesn’t make much sense at a fundamental level.

The list of large companies that have already collapsed both in the U.K. and the rest of the world reads like a Who’s Who of former stock market darlings. First, it was those who were in poor positions to begin with, especially retail and food and drink sectors, then those directly wiped out by global lockdowns, such as travel and car hire firms.

This process has shed many hundreds of thousands of jobs, probably millions, with little prospect of them being replaced quickly.

The scariest aspect of this is that these job losses are hidden in a veritable tsunami of jobless claims that people now accept as normal anyway. The problem is that most of us dismiss this using the universal get-out-of-jail free card that is this:

“It’s because of COVID-19, it’ll be OK when we go back to normal.”

Because we’re in this weird place, it’s easy to justify statements like this. Markets soar on data that shows only a few more million people lost their jobs, information that in normal times would spark a fire sale of pretty much everything, everywhere. Economic stimulus is being confused with economic growth, and that is a very dangerous path.

Of course, many big companies have received bailouts from governments to guarantee their survival, a process this analyst remains cynical about unless it comes with very specific caveats from that same government on how it is used, which it almost never does.

How many times have we seen government money spent on stock buybacks and executive pay before the company itself gets the leftovers?

Some of those big companies are using the situation to force changes they have have been trying to make for years. In the U.K., for example, British Airways has been having a long and well-documented struggle to move its older (and, ironically) most loyal staff on preferential contracts to newer much less attractive ones which are cheaper for the company.

This is a move that has, understandably, created a lot of dissatisfaction in the company and a seemingly endless stream of strike action, probably costing more than simply leaving the contracts alone would have.

With the ubiquitous “COVID-19” clause, BA may finally have a wedge to get their way. Who will resist when the only alternative is unemployment in a market where it could be years before any sort of normality returns?

And will BA really be the only ones who do this? Would most workers agree they are likely to come out of this with a better, stronger, more lucrative contract than they went in? Or are they more likely to be asked to make further sacrifices “for the good” of the company?

Put it this way, are we really expecting every company to come out of mothballs, switch the lights on and carry on where we left off? If not, what’s that percentage going to be? 90%? 80%? Less?

And, of course, the lower that percentage, the higher the impact on that company’s supply chain, creating a multiplier effect and driving down productivity and earnings further, creating another knock-on effect.

The bottom line

I admit that I have allowed some cynicism to creep into this article, fueled by my subjective disbelief that markets are continuing to make new highs, or, even in the best case, refusing to acknowledge what’s bubbling under the surface.

Markets are generally future looking, but to think that future earnings will really bounce back to pre-crisis levels in the next year or so seems unlikely to me. “V-shaped” recovery? Oh, come on.

As humans, we do, of course, have the advantage of being incredibly resourceful as individuals if we need to be, but the fact remains that large-scale macroeconomic mop-ups take time — always years, often decades.

And, since we have already printed more money that we ever have before with the promise of much more to come, we are about to enter a period of significant readjustment in a way that we can’t even be sure about yet. Why would we?

We’ve never been here before, and the only large-scale pandemic in modern history, the Spanish Flu in 1918, was in a time when social infrastructure wasn’t as established or important as it is now, and we were using gold standard currencies, not printer friendly fiat.

Yet despite all of this, and although it may not seem to be the case, I am an eternal and unwavering optimist. I have absolutely no doubt we’ll ultimately come though the other side, whenever that may be, and move on as we have done from any crisis that has come before and in whatever form that takes.

My fear is only that the pain that must come first has not yet been properly recognized, let alone accounted for.

So, whilst my neighbor, and no doubt countless others (many of whom haven’t spotted it’s coming yet) scramble to secure whatever income they can in the form of a currency whose devaluation rate is increasing by the minute, I might suggest that any proposed investment in the markets at large right now be taken with a modicum of caution.

Or even a bucket load.

After all, this may well be one time when my young neighbor's anecdotal data reveals far more than any official top line numbers ever will.

There is a podcast version of this article with a little more detail available for free here:

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