Saturday, May 09, 2020

What's up with the markets?

I’ve outlined separately why I think the economic recovery will be more protracted and painful than many in government and finance seem prepared to accept. The stock markets need not however match the same fundamental curves. 

The US indices in particular crave a narrative to follow. This is usually a bullish one. There’s nearly always a bearish alternative, but it’s a minority view under most circumstances. 

The novel coronavirus pandemic generates all sorts of narratives, many of which are incompatible. The end result is a swirl of uncertainty. Markets do not function well with overbrimming unknowns, any more than they do when panic is a majority position. 

The men in suits driving the market appear to have decided not to chase after every psychological twist and turn; indeed they have in effect chosen to discount 2020 completely in a somewhat childlike, not happening, not happening, kind of way. Instead they are looking further ahead than usual to next year’s potential for growth. 

The advantage is that no matter what happens, the eventual recovery after lockdown will bring accelerated bump in output of a genuinely unusual kind, which will be no doubt be spun as truly exciting, especially as the financial markets will have effectively blanked out the memory of this year’s contractions. 

Investors may also be anticipating a period of profitability as companies return to full revenues before they have finished re-hiring back some of the workers they earlier shed. 

A spring back in GDP will possibly also be accompanied by a process of ‘creative destruction’, in effect a clearing out of the rubbish and an accompanying boost for the stronger, innovative parts of the economy and for the egos of speculators*.

This all makes sense, but...

1) Most obviously perhaps, if they are ‘pricing in’ a robust rebound starting towards the end of this year, the wiggle-room between now and next January will tend to be in a downward direction. 

2) Over the past week it has become clear that the national peak in the US and the New York peak were not in fact the same thing. 

Trump believed himself to be on the back nine before he actually was, and the realisation of his true predicament is not bringing out the better aspects of his character. 

It should be obvious by now that POTUS is no leader, of the nation or indeed of the world, but instead a follower of the more ignorant and deranged elements of his ‘base’. The potential this has for augmenting the damage already being done by Covid-19 should not be underestimated. 

3) The market is never as rational as the men in suits would have you believe. The V-shaped recovery story was first pushed by politicians and central bankers as a necessary tool for building consensus around social distancing and then far stricter policy measures. 

The ideological component to the model has been retained as it flows down into the big investors and corporate America. There is now almost no aspect of American life that isn't contaminated by cultural-political biases. 

Nevertheless, this particular piece of political mythology has some bipartisan value. Several Democratic state governors now find themselves on the epidemiological altiplano with a core group of voters who are extremely vulnerable to both the disease and the poverty which may result from containing it. 

They are going to find it vexatiously hard to release their populations from lockdown on public health grounds alone, so ready-made, upbeat economic soothsaying kits will come in handy for the left-of-centre as well.  

4) I find it genuinely hard to believe that either main party will make it through the lead-up to the November election up north without further damaging relations with China. 

And should there come a moment where Trump has a nasty presentiment of impending defeat, expect him to start acting like Hitler in his Berlin bunker. 

Knowledgeable, well-meaning officials on both sides may want the trade deal to happen, but it’s their bosses who will ultimately decide its fate, and one of them may be in the grip of a self-destructive urge. 

5) There is a well-observed phenomenon that generals start each new war by fighting the last one. This involves a more or less serious misapprehension of the new threat. 

Recap: The last war was fought after banks took on more and more risk as it was being camouflaged as something less hazardous and fed into the wider financial system. It was an attritional conflict that was 'won' by bailing out the big guys in a manner that often left the little guys high and dry. 

The big guys appear to be going into the warzone now with a comfy confidence that they can expect the same treatment this time round, and that the key enemy menace of 2008 (crunchy credit) has been averted because the state institutions have deployed their existing box of tricks — and have frankly really rather gone to town with them, perhaps a little precipitately. 

Germany has committed a full 30% of GDP to financially cushioning its economy, with the UK at 19% and the US at far. 

All this borrowing does not seem to have been accompanied by a promise to win the peace once more with the pain of austerity. 

My comprehension of economics is stuck at A-level, but I do understand that there's risk of unpleasant blow-back from all this, such as inflation and perhaps even negative interest rates. And I do believe that governments are yet to fully understand the global implications of what has happened. 

6) Lastly, there is one key element underlying the surge back from the March lows which should be a cause for concern and has little to do with prognosticating the strength of the general recovery — whole chunks of the market have been experiencing a mini tech bubble, not unlike the early noughties. The NASDAQ is now actually up for 2020 and the S&P is significantly bolstered by tech giants like Amazon, who have seen their stocks rise steeply. 

Sure, some of these firms will benefit from the new normal, but you cannot really have it both ways — a quick return to the old normal and an exciting, tech-driven, new normal. 

And within this bubble there’s an even more speculative and slightly loopy biotech rush taking shape, with any companies even vaguely involved in the hunt for a vaccine or relevant therapies seeing their valuations soar. Most of these will face a day of reckoning down the line, and it won't be pretty. 

* I'd be lying if I didn't admit to the desire for a bit of creative destruction here in La Antigua. 

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