Economies and Market Madness - in 2021 (#72)

The economic outlook for 2021 is one of cautious optimism, as the world emerges from the unprecedented devastation of 2020 which left economies tattered, and financial markets gyrating between depression-era fear and endless-stimulus exuberance, driven alternatively by the fearsome impact of the 2020 pandemic, and the countering, unprecedented massive rounds of economic and financial ‘Stimulus’, climbing to unprecedented heights as if it was the biggest economic boom times.

The year 2020 will go down as one of the greatest anomalies of modern times. Not only did the world try to deal with the unbelievable spectacle of a certifiable lunatic in the White House, with Donald J. Trump as President of an unravelling United States, but it also confronted the sudden appearance of a highly contagious virus out of China which spread like wildfire throughout the world and triggered the biggest health and economic crisis in memory.

The global economies came to a sudden stop as if they had run into a wall, as governments scrambled to slow and stop the global spread of the Corona Virus pandemic by practically curbing all normal activity.

Almost a year on, the Corona Virus is far from conquered, and is still spreading and mutating as governments and people try and cope with greater disruption to their daily life and work than the great wars. To date, globally, over 106 Million have been infected and over 2.3 Million have died, and these numbers are probably materially conservative as governments have tried to minimize their difficulties in controlling the viral spread, and its health and economic toll on their populations.

The US of course has been the worst government in dealing with the pandemic, becoming the poster child of denial and disfunction under Trump. Now that thankfully Trump is no longer at the helm persistently driving the American behemoth repeatedly and purposely into the rocks of dysfunction, nationally and internationally, as some determined Russian asset suddenly put in charge of America, the new administration of President Joe Biden is finally bringing some order, planning and some semblance of proficient execution to the tackling of the pandemic, and the subsequent economic recovery.

While everything else is in a general state of shambles due to the ongoing pandemic, the assets markets have been odd man out, the starkly glaring exception to the general depression and downturns. After the very steep drop off in March of 2020, the stock markets rebounded equally steeply and kept going to new records setting highs throughout the remainder of 2020 and into 2021.

In one way, the dizzyingly soaring financial markets are perfectly understandable in spite of the underlying weakness of the economies, as the Federal Reserve (the Fed) and the other Central Banks around the world, have unleashed unprecedented amount of liquidity and stimulus into the financial markets to preserve the ‘wealth effect’ generated over the past decade by multiple and sustained rounds of ‘Quantitative Easing’ - particularly from the emergency intervention in response to the near global financial systems collapse, originating in the US, from the 2008 sub-prime financial crisis.

When this current Corona Virus pandemic induced crisis hit at the beginning of 2020, the Fed reacted swiftly and boldly (having had relatively recent experience from the 2008 crisis) and injected previously unheard-of sums of ‘Stimulus’ into the markets to keep them from staying down and deflated after their steep fall in March, due to the shock of the global economies being shut down to varying degrees. In concert with other Central Banks around the world, the Fed pumped enormous amounts of 'Stimulus' into the markets to make them recover in a V-shaped rebound, and subsequently, to keep them afloat at all cost; in the words of the Fed Chair, Jerome Powell - doing ‘whatever it takes’.

This ongoing stimulus action is over and above the general drive by major Central Banks to push the interest rates down to zero, or as in the case of the Bank of Japan and the European Central Bank, into negative territory, to further support the dangerously damaged and stalling economies.

The net result has been heavily supported economies that are stumbling along for a year with seriously impaired operations and earnings, except of course for some internet-based businesses that the pandemic actually boosted, but for most businesses, big and small, it has be a trial by fire which many have permanently succumbed too. Now most businesses are desperately waiting for the end of the pandemic, now that multiple vaccines are being deployed in an effort to bring the spread of the pandemic to manageable levels and to achieve negligible numbers in fatalities.

In spite of the slow and spotty rollout of the vaccination programs around the world, some form of return to normality is anticipated (more like hoped for) by late summer or fall of this year. But this seriously impaired economic state-of-affairs is not at all reflected by the record-setting stock markets of today, and the more recent speculative manias that have been swamping them in waves of frenzied trading in cryptocurrencies and in shares of otherwise weak and damaged companies.

Both of these speculative manias, in cryptocurrencies and in beaten down shares, are somewhat reminiscent of historic periods of speculative manias in diverse assets such as 17th Century Dutch Tulips, 1920s Florida Swamp Lands, the Stock Markets of the Roaring Twenties, the Tech Bubble of 2000, and the Sub-prime Mortgage mania of 2007/2008 etc. These current speculative frenzies may not be in the same league as the storied manias of the past, but they will leave their own mark in these historic times.

All speculative manias normally end in sudden and sustained deflation, when reality finally breaks through the temporary collective-greed-fueled-insanity that grips people, young and old, which always leaves late-comers to these frenzies holding the bag, and general wealth destruction in their wakes.

Now each time such speculative activity takes place, the refrain ‘this time it’s different’, rings loud and long until it is no longer different, and another example of human greed and gullibility is etched in investment markets’ history books. Eventually sensible valuations will matter again, but exactly when no one can answer with any certainty, as the world is certainly deep in financial and economic unchartered territory. Having said all that, this time is different in some very important ways.

Never in human history have we experienced money being lent out in such vast amounts, at near zero, zero, and negative interest rates (mostly in advanced economies, and those are the markets we are talking about here). In Developing Countries, the interest rates are generally higher, although probably a lot lower than in normal times.

Nevertheless, these are extraordinary times, particularly when it comes to the cost of money. So, there is an extraordinary amount of cash available around the world, for those that qualify, and a lot do, at ridiculously low costs. Such historic low cost of monies is bound to drive up asset prices pretty much across the board. It also triggers bidding wars in stocks, real estate, art, etc., and feeds pure speculation in the asset markets. And until such a time as the cost of money rises to more ‘rational levels’, and that could be a while if the Fed’s statements and intentions hold true, until then, one could reasonably expect to see greater demand than normal for all types of ‘investable assets’, and as a result higher price in all of them.

The other factor, specifically, that is driving the stock markets upwards to what seems like new daily records is the direct support of the Fed through its current, exceptionally supportive monetary policy. In spite of the obvious and significant risks that years of inflating market bubbles present, the Fed has determined that it just can not afford to let the stock markets deflate to reflect the present economic reality. A significant and sustained stock market drop would add immensely to the wealth destruction that such a great disruption as the global pandemic of 2020 would normally cause in the US and across the globe, which quite possibly would have triggered the next Great Depression.

The universal consensus among governments and their Central Bankers is that under no circumstances is that to be allowed to happen. Hence, the ‘whatever it takes’ attitude by governments and Central Banks to keep everything afloat through direct support, as long as possible.

This is not to say that the exceptional government and Federal Reserve and Central Banks interventions have permanently staved off any possibility of market crashes or economic recessions and depressions, no, but it is to say that their combined and robust interventions have certainly deferred financial and economic reckoning that a pandemic induced global shut down of such scale would have warranted.

Now, with maximum fiscal and monetary stimuluses from all major governments and their Central Banks, and the lowest interest rates in history, the asset markets have soared and set new records.

The shutdowns themselves have also resulted in radically changed home and work environments. People around the World have been forced to stay home as their workplaces shut down fully or partially. For a lot of people that has meant moderate to extreme financial hardships. Depending on the country they were in, it also could have meant government assistance to a degree where they were receiving more money than when they were working. That, coupled with the fear and uncertainty of the times, made people cautious in their spending (not to mention lockdowns forcibly constrained spending anyway); nevertheless, one of the outcomes was a significant increase in people’s personal savings.

The additional savings coupled with the extra free time at home has resulted in a lot of non-professionals getting interested in the investment markets, in a combination of ‘something to do’, and the lure of making fast money, at a time when practically all asset classes seem to be increasing in price.

With the news headlines trumpeting ever new heights and records of the various indices, the lure of ‘fast money’ took hold, and the younger, tech savvy retail investors decided to directly play the markets, cutting out the brokerage firms, and investing or speculating through ‘no fee’, easy to navigate, on-line platforms such as Robin Hood. The result was an onslaught of retail investors piling into volatile assets like the cryptocurrencies and beaten down stocks of companies like GameStop, AMC and commodities like silver. The early successes generated the predictable excited chatter in person and on social media, which in turn drew an ever-growing number of charged-up new investors eager to make quick fortunes in fast moving, speculative, volatile market plays. Even as some of those plays made fast fortunes for some, and broke many more, the field of speculative and the more thoughtful investing has drawn a vast number of new retail investors, with time and money in hand, keen to invest directly and test their skills and luck in the high-flying markets of today.

If one were to ask about this phenomenon of older, experienced market savvy investors, most would say that this type of behavior normally points to the classic ‘topping patterns’ of the markets. Thus, amongst the more experienced professional investors market bullishness driven by the old axiom, ‘Never fight the Fed’ is tempered by the knowledge that markets totally detached from the underlying economic reality and fired by frenzied speculative trading, and the accompanying ‘irrational exuberance’ from retail investors, usually ends badly. So, the professional investors are almost all strongly ‘hedged’ against an unexpected sudden and steep correction in the financial markets, even while being invested.

This year, as the pandemic is wrestled into some form of submission in the coming months, and President Joe Biden’s ‘Bold’ $1.9 Trillion ‘American Rescue Plan’ is rolled out (if it is passed in its entirety), along with the continuing low interest rates and the monetary support from the Fed, the expectations are that 2021 should experience a strong rebound in economic activity from relief in the return towards ‘normalcy’, and pent-up demand, resulting in fairly significant GDP growth and recovery.

The primary question of course is, how much a return to normalcy is possible after the ‘end’ to the pandemic. Well, it is the general consensus amongst economists, experts, and financial and business professionals, that everything is not going to go back to the normality we all once knew prior to the 2020 pandemic. Some things in the world and in our lives have changed forever.

Certainly, the work environment has changed forever. A significant part of the business and workplace environment is changed, as the ability to work from home is now an established fact for a lot of people and businesses. That fact is going to have a major impact on commercial real estate and office space going forward. As will the various aspects of the daily commute - to and from the office on public transport, choice and type of vehicles people will decide to buy and keep, fuel consumption patterns, and support services will be affected, as will the dynamics of home size and location. Workplace contractual relationships may change as companies and employers could want to change the terms of the ‘Employment Agreements’, and make their former employees independent contractors, and conversely, the employees themselves may want to become more independent and offer their services, from home, to a number of employers instead of being tied to just one.

The world of shopping has already changed significantly from in-person shopping to on-line shopping, and that trend will probably persist and continue grow over time. Existing technologies will adjust, and new technologies will be developed to accommodate the above mentioned and other changes in societal behavior. This will also lead to a drive towards greater automation in the workplace through the continued and perhaps the accelerated development of Artificial Intelligence (AI) and robotics, as the reality that machines are impervious to viruses and other human ailments takes on greater significance in the post pandemic world.

There is the threat that this virus, with its rapid ongoing mutations, may linger and may become a part of life going forward with annual and varied vaccinations as a requirement. There is also the distinct possibility that additional viruses, perhaps more dangerous ones may show, resulting in greater disruptions and crises in the future. These and other threats will drive society and businesses to look to AI and automation to step-in, in the place of humans, to keep our world and our lives going.

Many of these pandemic induced changes will create new economic opportunities, with new and different demands being met with new goods and services, new and modified methodologies, and new technologies, even while a lot of the existing businesses succumb to the radical changes that have taken place already. Many people and businesses are only surviving at the moment because of direct financial support from governments and Central Banks. Once that help starts to tail-off, the resulting hardship will create a drag on the hard-fought and expensive nascent economic recovery. These aspects of uncertainty will impact consumer confidence and hence the economic recovery longer term, even as the optimism from the curtailment of the pandemic boost enthusiastic activity in all spheres. In the shorter term however, with Joe Biden’s administration setting the bar on the size of relief packages to the struggling populations of the countries, it is probably safe to say that 2021 will be a year of recovery.

As the Fed and most other major Central Banks are still strongly committed to full-on ‘Quantitative Easing’ in the financial markets, it is also probably safe to say that the assets markets will remain buoyant and downright exuberant, in spite of their seemingly current dangerous levels, and their detachment from all rational rules of traditional valuations, as the hordes of new investors along with the market professionals revel in the availability, and the making of cheap and easy money. Such exuberance in the markets, back-stopped by the Fed and the Central Banks, means that for the most part it is ’risk-on’, and ‘full speed ahead and damn the torpedoes’. That exact market sentiment, for the old timers, makes for very dangerous times.