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Quotidian Investments Monthly Commentary – June 2020

July 2, 2020

On 30th June 2020 the FTSE100 index closed the month at 6169.70, a rise of 1.53% in the month of June and it now stands at down -18.20% for the 2020 calendar year to date.

By comparison the Quotidian Fund’s valuation at the 30th June shows an uplift of 4.65% for the month of June itself and the Fund is now up 29.70% for the 2020 year thus far. We are therefore 49.37% ahead of the FTSE100 at this point in the 2020 year; a pleasing position to be in but, rest assured, there is no complacency here.

In the UK, the Bank of England has injected £300 billion into the economy since March yet UK inflation has fallen from 0.80% to 0.50%. A simplistic definition of inflation describes it as being caused by “too much money chasing too few goods”. This downward trend therefore seems to fly in the face of economic logic but the oil price crash in the early part of 2020 together with weak demand for goods and services as a result of lockdown restrictions seems to have kept inflation in check despite the huge inflow of newly printed money. It remains to be seen how demand responds as business emerges from lockdown and what the knock-on effect to inflation is then.

In Europe, the existential financial crisis the EU now faces as a result of the Covid pandemic colliding with its incoherent fiscal policies has forced this protectionist trading bloc towards an acceptance that the only way to save the euro (and indeed the entire communist-inspired, anti-democratic structure itself) is to pool existing debt and agree to unification of debt for future liabilities too.

Germany, with its long history of financial prudence (since the hyperinflation currency crisis it suffered in the early 1920’s anyway) has always found this a bitter pill to swallow and has resisted with all its might.

However, faced with the largest economic crisis in its history (and now barely clinging to economic and fiscal reality) the EU’s leaders have belatedly been trying to agree a rescue fund of 750 billion euros as a means of keeping this creaking and politically outdated show on the road. Simultaneously (and having lost the UK’s substantial contribution to their coffers) they are attempting to agree a budget of 1.1 trillion euros for its next 7 year financial cycle.

The bizarre conundrum here is that the EU desperately needs to stimulate consumer spending as the means of kick-starting economic growth yet, at the same time it needs to agree and impose substantial new tax-raising powers to cover the cost of its salvage operation largesse and its imprudent plans for future spending. Of course, by taking spending power out of the consumer’s pocket means lower discretionary spending which thus defeats the main objective of the exercise. Good luck with solving that one painlessly (it only hurts when you laugh).

In North America, figures released in mid-June showed that US retail sales posted a record monthly rise in May. Official data confirmed a 17.7% rise (far better than expectations) and comprehensively beating the previous record monthly rise of 6.77% in October 2001. So much for all the doom and gloom nonsense emanating from the usual suspects in the grey and murky world of financial analysts.

Better than expected US industrial production numbers in May added further gloss to this optimistic tone. Will these positive numbers be a precursor to the upcoming corporate results season on the near horizon?

As we enter the second half of the year we are moving ever closer to seeing the financial effects of the global lockdown restrictions imposed by governments around the world in their efforts to control the impact of Covid-19.

The inexorable rise of politically-biased fake news is making it increasingly difficult to find reliable, quality information, especially in the USA during this presidential election year. When official evidence can be found it invariably disproves the prevalent ‘project fear’ narrative. Scaremongering in the US media about a second wave of Covid-19 is largely a political device intended simply, in advance of the forthcoming election, to throw more mud at Donald Trump and criticise his suggested mishandling of the coronavirus epidemic. Of course, Trump doesn’t help himself (or us) with his penchant for issuing late night retaliatory tweets which inevitably detract from our search for illumination.

These bogus fairy tales typically lack any supporting evidence and are woven with imprecise adjectives which express unattributed ‘concerns’, ‘worries’ and ‘fears’. Emotive language of this sort is usually a sure sign of straw-clutching intended only to mislead and create a sense of panic.

One example of trustworthy information that came to hand just last week is a useful indication of unvarnished reality. The State of Texas has been named as one area that, if one believes the relentlessly negative narrative, is apparently overwhelmed by a second wave of Covid cases. However, official figures clearly show that Texas (with a total population of 29 million people) has suffered just 2324 deaths since coronavirus first struck. Is that really a reason to panic?

The big reveal will shortly be upon us in terms of the second-quarter financial results season when companies the world over will be releasing their sales and profit/loss figures for the lockdown period as well as divulging their prospects for the future. We will now see the truth of the old cliché; everyone can look good and bella figura when the tide is in but, when it goes out, we can then clearly see who has been skinny-dipping.

Yields on bank deposits and investment in gilts remain pathetically low and, adjusted for inflation, are in fact negative.

In tandem with the financial incontinence of central banks around the world (motivated by governments who are prone to opt for short term, blinkered solutions to long-term problems as a means of deflecting or deferring blame for the pig’s breakfast they have thus far made of financial management and fiscal control) the effect has been to drive investors into equity markets in search of positive returns.

Central banks around the world continue to pump trillions of dollars, euros or pounds (or their local currencies) into the global economy and that flood of fiscal and monetary stimulus appears to have been taken as the green light for investors to buy equities with gay abandon, seemingly regardless of valuation.

As this situation continues, and whilst many a blind eye is being turned to sensibly evaluating investment risk, we seek to take advantage of that scenario but we are intensely conscious that, at some point, the piper will have to be paid. We therefore continue to check the soundness of our holdings on a daily basis.

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