The liquidity bazookas being unveiled around the world by governments and their central banks are being put into place to try to avoid an avalanche of business failures. By backstopping the whole global economy from the lockdowns against the coronavirus we are entering a whole new ball game of an everything everywhere bailout.
In the modern world of just in time supply chains, razor thin margins and huge leverage, there is simply no room for the world going offline for 14-90 days.
Central bank policy is not designed to cope with such a situation but we will soon find out if the technocrats in charge of global money supply have the necessary Zen to smooth out this extreme bump in the road.
The basic idea with the kind of financial maneuvers is this. Imagine a vault with all the money in the world locked up in it. There is a fire and all the money burns. So now all the money is now gone. Everyone is broke, there is no money to pay for food or for that matter anything, so without this money, the world will end. But wait, the central bank runs the money printing press and makes a delivery replacing all the burnt money and puts in a sprinkler system. What now? Nothing has changed, a little money was spent on paper and ink, so the world goes on as if nothing happened.
Locking down a large proportion of the productive members of society will remove a percentage of GDP forever but it is only a pinprick in comparison with the assets that drive that GDP. If no companies go bust then they will make up for that loss and over time the negative effects will wash out. The governments and central banks are trying to make this happen.
Now a major fear will be a rebirth of high inflation. The global economies will be getting an injection of cash and if it creates demand without a supply increase to match, that will lead to inflation. Many old timers will be thinking of this. It could happen.
However, what if demand is not stimulated by this new money and instead demand remains suppressed? Then the new money will drop into savings or deleveraging and there will be deflation. You can’t make people spend, they have to feel good and safe to spend and that will take time. People and companies are just as likely to stash the cash than to splash it.
So QE everywhere on everything will create an incredibly difficult challenge for the powers that be. They will have to do an incredibly difficult balancing and, what is more, juggling act.
The more likely outcome is recession and deflation with a shocked populace spending months recalibrating their expectations and refusing to come out and spend.
This is not what parts of the market thinks. It sees inflation and that is showing itself in bitcoin (BTC), which spiked immediately the Federal Reserve made its intent to buy all and almost any bonds to the moon. Bitcoin is a tiny asset and extremely sensitive to issue effecting “haven” and “flight capital” so once again it is a signal un-muddied by intervention and regulation.
The China quarantine story is long over for BTC and now it is the QE story that will be driving the price and fears that inflation is bound to rear its ugly head. Gold will move, too, but slower. There is so much more gold than bitcoin. Inflation fears are endemic among lots of old powerful investors who knew the 1970s and it is natural for them to imagine inflation following every economic disaster. They will gravitate to gold and silver, too. Inflation might come, but it won’t be a chronic issue anytime soon. Supply will be more flexible than demand and keep it at bay in the short term. China is likely to get its production capacity back long before demand resumes in the West.
With governments everywhere ready to bridge the gap in the finances of their populations and corporations, it is down to how long the quarantines will last and how much GDP will be lost. The debt to GDP of all countries is going to balloon and it will be that result that will be a key long-term outcome of this disaster. Tacking 20%-30% debt to GDP onto countries’ finances will create interesting situations in a couple of years but how that pans out is hard to guess right now.
What people want to know though is where is the bottom of the market. The answer is we are closer to the bottom than the top and possibly within 20% if you want to be righteously pessimistic.
However, the Nasdaq is far from its bottom, which is strange and for me a wild card suggesting we need to look out for a small chance of a once in a lifetime final capitulation. The way forward is therefore to either wait for a couple of months until the caravan of shocks has passed, or simply buy a little every now and again when you see a stock so cheap you absolutely cannot resist buying a few. Averaging in is the most sensible way to proceed.
I am averaging in and have perhaps been buying too greedily. Even so, 25% back into stocks doesn’t feel too aggressive…Yet.
It remains the ultimate stock market truism that you can’t sell at the top or buy at the bottom but in the end we must try.
Chambers won Journalist of the Year in the Business Market Commentary category in the State Street U.K. Institutional Press Awards in 2018.