This morning a coalition of central banks in the most influential countries in financial market terms has announced a huge package of liquidity support and lower interest rates, yet markets have opened with sharp falls.
This is for much the same reason as when I wrote my blog entitled ‘Fed mis-step?’. The dramatic scale of the assistance package prompts market participants to think that the situation is utterly desperate.
On the other hand, at times like this where there is overwhelming systemic risk, fixed income assets start to lose value rather than offer their usual diversification characteristics, because no-one wants to buy anything. That creates a liquidity crisis, which is rather like throwing a tool bag of spanners into the global financial system. So the authorities have to try and avoid that and their actions today are consistent with that threat.
My current assessment, which of course evolves as the world reacts to the potential progress of the virus, is that equity valuations will keep falling until there is evidence that the drastic preventative measures have worked.
That means that share valuations will likely be the most ‘over-sold’ they have been in my lifetime at some point and if the virus recedes, investors with cash will need to act quickly to pick up bargains.
It has to be remembered that it is the potential threat of a massive pandemic that is driving negative sentiment – the actual number of cases is very small relative to population and the number of deaths is minuscule as a proportion of populations – at the moment. So if the illness caused by the virus is more or less contained within the resources available, which will vary from place to place, the eventual relief will be massive.
Of course, this virus may be the start of a long term fundamental change in human activity. Consumerism has become the opium of the people, succeeding religion in Marx’s aphorism and capitalism is now about 70% driven by consumption. If that falls away permanently, a recession would be truly structural and last a long time.
Such major structural changes are in fact normal – think of how the world differs from that of the Victorian era, the interwar years or even the 1960’s. The current cycle of economic restructuring and resource sharing began in the 1980s in my judgement.
One could propose that global financial systems are in the end always regulated by social or human issues and that the returns to capital had been lately pushed to out of proportion levels relative to other stakeholders, like ordinary people and the environment. That is not to propose that there is better way of managing economic resources than capitalism – just that the balance of interests has been due for a correction for a while.
