Research Publication – COVID-19 – Musical Chairs 2.0.

June 11th 2020: Radio Free Mobile updates its COVID-19 Webinar – Musical Chars to take account of developments in the pandemic, economy and technology sector since the beginning of April 2020. RFM subscribers will receive their copy by email.

The panic is over but the recovery is not here. The lack of a vaccine points to a very slow recovery over 2 years as virus control prevents a full return to normality. Against this backdrop, the technology sector will continue to fare better than most others but the debt position, money printing and the unrealistic stock market valuation create great risks for investors.

• Antibody testing’s Theranos problem: The nasal test reveals who has it while the antibody test reveals who has had it. This is a crucial distinction as a reliable and fast antibody test is needed for the economy to return to 100% capacity. Unfortunately, the only reliable test antibody requires a large blood sample taken from the arm meaning that convenient and rapid testing is not possible. Hence, with no vaccine in sight, restrictions will remain on the economy for the next 18 months at least.
• Recession or depression: The US economy managed to add 2.5m jobs during May against expectations of further heavy losses. This may have been a result of employers keeping staff in order to have their pandemic loans forgiven, but it is still an encouraging sign. RFM is hopeful that this signals a 1-2 year recession rather than a catastrophic depression.
• Demand: Despite the positive news on jobs, demand is very weak. Both consumer expenditure and personal credit fell very heavily during May indicating that while businesses may be opening up, consumers’ willingness to patronise them remains almost non-existent.
• Debt and Inflation: indicators continue to spike threatening the US dollar’s status as the world’s reserve currency. If the world starts to look elsewhere, the US could be in real trouble.
• Europe: the economic situation is not as nearly as bad as Germany has paid down 20% of the debt that it incurred in 2008. Hence there is some room for manoeuvre. However, the Southern countries are in very bad shape and willingness of the frugal North to bail them out is weak at best.
• The technology sector in Q1 2020: fared better than many expected as the world has turned to technology to deal with lockdowns and social distancing. Remote working and mission-critical systems have driven demand for the cloud while transactional and intelligence investments stalled. Smartphone demand is likely to decline by 10-20% in 2020 and digital advertising is now focused on direct response and social networking. Productivity hardware is likely to remain strong as remote working will remain in place as offices will not be running at 100%.
• Sharing economy: is in a terrible state as no one wants to share assets while COVID-19 remains a problem. Ride-hailing, house sharing, office sharing, and public transport are the worst hit with demand down 50% – 80% across the board. Assets, where no other human is required to be present, are likely to recover first (bike, scooter and car-sharing).
• The equity market: has divorced itself from economic reality. The price-earnings ratio of the S&P500 is now at 25.6x 2020 earnings which is close to the all-time high of 27.0x set at the height of the internet bubble 20 years ago. Even with the more optimistic recession rather than depression scenario, a PER of 12x – 15x is more realistic. The stock market represents asset price inflation induced by money printing and QE rather than value creation and is therefore at risk of a significant correction.