An unprecedented World - Thinking Out Loud

It’s important to remember that the drastic difference between the two recessions is that the Great Recession of 2007-2009 was largely a result of financial imbalance that started primarily in the housing sector and greed of men. This one is from an external medical factor, the coronavirus disease (COVID-19), man-made or otherwise and the inaction / poor judgement calls of governments and political leaderships of the respective country.

The amounts of fiscal and monetary stimulus poured into containment for this current crisis are in the trillions and the desired result remains to be seen. There are however, side effects and just to highlight a few;- these includes social behaviours displacement and nature of people for YES, crisis brings out the best sides and also the worst sides of man, widening gaps of equity markets with the weakening fundamentals, attributing to the new liquidity and of course, impact on climate change. The unemployment rates for this crisis are almost certainly higher than the reported numbers, since the data doesn’t take into account workers unable to file claims and those who were laid off but are no longer active looking for work. A third of Americans didn’t pay their rent or mortgage in May 2020 and a lot of the people who were able to afford housing costs in April couldn't make the same payments in May. Even China is shifting gears and rolling out ‘flood-like’ stimulus to support economic growth and keep unemployment numbers low now. That should be a very good indication of what’s to come in the near and mid term.

At current level Today, America's stock market is behaving as if Coronavirus didn’t happened. Greenbacks, unemployment payroll numbers amongst the different states, sustainability, inflation, fiscal deficit numbers, are all out of the window. There is a very dangerous gap between America’s stock market and the actual economy. 30% - 50% wide and it’s behaving like the country has fully recovered when everything points to a beginning of very bad times. The disconnect between underlying economic conditions and surging equity markets, at a time when the ultimate economic cure (a Covid-19 vaccine) is still some ways off, is largely because of the Federal Reserve (USD$7T with more to come). The most powerful central bank in all the land has cut rates within a quarter percentage point of zero and pledged to do whatever it takes to ensure that an eventual economic recovery is robust. The Fed has expanded its asset purchases beyond Treasuries to include investment-grade debt, municipal bonds, ETFs and junk bonds, helping to stabilize credit markets and lay a softer landing for the coronavirus-ravaged economy. Secondly, equities seem to be the only game in town. There are no other place for these cash balances to go than chasing equities and bonds in the world as the need for precautionary savings subsides over time. While cash is king, assets that are not generating income are not good too.

Last but not the least, we must be aware of the economic bubble. This rally has happened in a bubble where the economy had to be shut down but the Federal Reserve and the federal government provided an unprecedented backstop. This is election year and Trump’s anchor has always been the economic strengths under him. Of course, ‘war’ with China is always on his cards too. Anyways, as state governments attempt to reopen and the limitations of that backstop are evident, a lot of valuations will be called into question. The current high equity prices also seem to be dismissing the seismic shift that’s happened to the economy, pricing in a V-shaped recovery where the angle of the V is approaching 0 degrees and things are reverting back to how they were in no time. The new landscape will likely also feature something to which Wall Street is especially averse: higher taxes. The Treasury is borrowing a record $3 trillion this month to pay for the stimulus programs launched to stabilize the economy. And there could be more programs to come if Republicans and Democrats can agree. I’m seeing red.

Long before the pandemic hit, e-commerce was already displacing retail, robots were replacing warehouse workers and an erosion of labour’s bargaining power was putting downward pressure on service-sector wages. With digitisation, improved transportation and logistics infrastructures, there is no real needs to pay high rentals in big cities. Corporations and people were already moving away from New York City into nearby New Jersey and communting to work. Quite frankly, the mortgage market was never really fixed after 2008 and it's now breaking down again. I believe that the post-crisis world will be more indebted, less trustful society, less global and more digital. People will need to contend with higher taxation, financial repression and moderately higher inflation, along with populism and protectionism, while navigating the transitions from global to local supply chains and from physical to digital.

Let us never forget this fundamental truth: the Country / State has no source of money other than money which people earn themselves and/or to mine Mother Earth for natural resources such as oil, coal, rare earth etc. If they wishes to spend more it can do so only by borrowing your savings or by taxing you more or by digging more. It is no good thinking that someone else will pay – that “someone else” is you. There is no such thing as public money; there is only taxpayers’ money.