We the People Reach a Breaking Point

May 18, 2020

After three months of lockups, distancing and failure by scientists and politicians, there is reason for market optimism. The “people” are back in town, and are not gonna take it any more. 

The photo above is from a scene in that great film, Network, from 1976. Looking back today, the film turns out to have been more than prophetic. We are now living in the times the film depicts, when journalism and news is all about making money and manipulating truth. For youngsters who take TV news for granted, I recommend you rent the film and watch it closely. It will help you understand what has come to be known as the travesty of global network news. We can add social media to this cesspool of deception and corruption and, yes, data collection.

In Network, Peter Finch plays the role of a television newscaster gone rogue, threatening to kill himself on live TV. Meanwhile, his network bosses consider ways to use his suicide as a reality show, to increase ratings. Finch tries to engage his viewers in various forms of anarchy, to the horror of network executives who prefer ratings and advertising revenues to truth, highlighting the horror that television news has become.

Those preferring a two-minute trailer to an entire film, can check out this link:

The Coronavirus is a good example of how misinformation and poor intelligence can change our world overnight. Between scientists who come up short on math and statistics, and politicians who rely on misinformation to control the masses, it’s little surprise we are facing the kind of financial meltdown one normally associates with nuclear wars and Biblical disasters. With the assistance of our friends, the Chinese government, we have closed down our world, and have destroyed our economies. And all of this without much thinking about the consequences.  

I enjoyed the assessment by the famous financial guru Nassim Taleb, who is known for his warnings about so-called ‘black swans,’ or unexpected events that arrive to dismantle markets. Hilariously, Taleb calls the Coronavirus the ‘white swan,’ because it could have been predicted, and because governments should have been much better prepared for such an event. And Taleb is spot-on. Consider that our medical professionals were unprepared at best, and in the case of New York and New Jersey, and in parts of the UK, Italy and Spain, clueless. Officials doing the modelling and statistics at London's Imperial College should be fired, and brought before a public tribunal on charges of global malfeasance. The damage these men and women of science have wrought is incalculable. These days, an academic with a 10-dollar calculator can cause more damage than any terrorist organization could inflict.

If you're listening to the news, by most accounts Greece did a fine job of closing down the country earlier than most, locking down the country only days after Donald Trump stopped flights from Asia. A friend in Athens tied to the government told me the reasoning, which goes something like this. “We watched what was happening in Italy, and then in New York, and realized immediately our hospital system could never handle anything close to this kind of emergency.” 

As my friend explained, Greece locked down immediately not because it was well prepared, but because officials had no other choice. They couldn’t afford to overwhelm an already dysfunctional pubic hospital system; the Prime Minister made the right decision at the right time, and the people worked together to keep most of us safe.  

To move from the virus to the capital markets, here’s how we see things shaping up.

First, it’s important to note that the Federal Reserve and the US Treasury are breaking new ground, trying valiantly to maintain a floor under the markets. They are backstopping government and corporate bonds, and experimenting with new ways to smooth the functioning of markets. The same goes for Europe, although as usual, Europe is looking to the US for the big firepower and expertise. There are no new ideas in Europe when it comes to finance, period. If things stabilize in the US, they are sure to improve in Europe and in parts of Asia. But all eyes are on the US now. A failure there will translate to much more damage to come in Europe.

Second, as the chart below shows, the US stock markets have recovered some 50% from their earlier losses. This 50% retracement level is a glass ceiling; markets tend to bump up against this same level several times before either dropping again to new lows, or breaking through into new highs.

Naturally, the question arises, “What could cause this ceiling to shatter, and for markets to break upwards toward their old highs again?” 

 Here are a few possibilities.

1)     The virus burns out, and the numbers start to show much lower morbidity rates; also, we might discover many more people exposed and carrying antibodies. In other words, things are found to be much better than reported even a month ago. If we find many more of us are infected with the virus, but carrying it a a-symptomatically, this augers well.

2)    Scientists discover a vaccine. Don’t hold your breath on this one. We still don’t have vaccines for HIV, or SARS or Ebola, or for many of the less deadly flu variants circulating. It appears the best idea is to social distance, to allow the virus to infect many of us, but lightly enough that we can build resistance for the future, and not too much so we need to check ourselves into a hospital.

3)    The politicians open up our economies again—led by the facts, but mainly forced by the people. In the US, it is now clear that politicians opposing Donald Trump are dragging things out to hurt the economy and his chances for re-election in November. There is no question they would prefer to destroy the economy than watch Trump in office another four years. But it is unlikely 'the people' will allow this to continue for much longer. Indeed, if economies remain closed, citizens will revolt, and the tide will turn against the political class even more than it has already, with the potential of forcing many established politicians from office. Every day that goes by finds more unemployed workers and shuttered businesses. The people won't stand for it much longer.

Our prognosis for the markets is better than it was even a few weeks ago, because people are taking more responsibility for their own futures rather than depending on government. We are looking for a convincing shift that shatters the aforementioned glass ceiling, and allows freedom of movement and employment once again. Because economies run on expectations and behavior, the markets will guide us.

If the shut-down continues, let's make like Peter Finch in that great film Network, go to our windows, open up the shutters and yell to the authorities below, “We’re as mad as hell, and we’re not gonna take it any more.”

I suspect we will see the markets rally again, stronger and sooner than anyone imagines, as hope replaces desperation, and community replaces any individual effort. Those gaping black holes in our economies will begin to fill in again.

We have learned much together, and our world will never be quite the same...only better.