Stock Markets Flying – The Economies Gasping (#70)

Since the 2008 financial crash, the US economy, and more than less, of the global economies, were on an almost unbroken though at times unsteady upward trend, helped actively all the way by lower than normal interest rates and regular injections of monetary stimulus from their various Central Banks. This long Central Bank assisted economic climb was accompanied by record setting, one of the longest bull markets in history, at least in the US, which all came to a very abrupt end in the first quarter of this year due to the global Corona Virus Pandemic.

In response to the catastrophic collapse in the economies and the stock markets, as major countries put their populations in various degrees of lock downs to stem the spread of the virus, the Central Banks took unprecedented steps by dropping interest rates close to zero (some countries, negative rates), and unleashed massive monetary stimulus along with government fiscal programs to mitigate the economic devastation to national economies, and to individuals.

The financial effort by governments, and their Central Banks, has been absolutely unprecedented, to mitigate the damage from halting normal life as we all have known it. But the Corona Virus is still spreading around the globe, and until vaccines and drugs are proved to stop it, the damage and uncertainty to life and economies will continue around the World.

What has been out of step with the times have been the soaring stock markets which traditionally should reflect the fundamentals of the underlying economies, but instead seem to be entirely detached from any of the current economic realities. There is only one overarching reason for this. It is the stated stance of governments and more importantly their Central Banks, with their unambiguous mission of doing ‘whatever it takes’ to shore up people, economies, and assets markets (stocks, bonds, real estate) at whatever the cost, to keep everything going, the best they can, to save and restart their national economies.

These extraordinarily heavy interventions in the economies and the financial markets, with initial support and stimulus packages amounting to $6 Trillion ($4 Trillion in the Fed’s lending to the financial markets, and $2 Trillion in direct aid to individuals and businesses) have provided a safety net to the general population, and rocket fuel to the stock markets. The ‘whatever it takes’ promise is anticipated to mean the stimulus packages, including the Fed’s interventions in the financial markets, could top $12 Trillion, before the pandemic dust settles.

In the US, the economy we focus on as it is the most influential globally, the Fed’s incredibly aggressive moves to mitigate the severe damage to the economy, and in particular halt the free fall of the financial markets, in the US, and globally, are almost entirely responsible for the currently soaring stock markets even as the economy gasps for breath, to hang on and survive the still raging pandemic.

To all those who may insist that other factors are at play to boost the stock markets, such as the very strong showing of technology companies such as Facebook, Apple, Amazon, Netflix and Alphabet (the FANGs), we say, if the Fed was to even hint at withdrawing direct support to the financial markets at this time, they would almost certainly and immediately collapse.

Without the unreserved support of the Fed and the other major Central Banks, there would be no roaring, soaring markets. The recovery and rally of the stock markets are the direct consequence of the Fed’s (and other Central Banks) policy to keep the asset prices up by massive infusions of liquidity in the markets, while government programs seek to support the economy. And therefore, the economies are running on an entirely different track separate from the stock markets, and will continue to do so for the foreseeable future.

The question is, can the Fed and the Central Banks sustain the rebounding financial assets markets indefinitely while the economies remain mired in a deep Recession, at best, or a Depression at worst? The answer is ‘maybe’, but we certainly would not bet on it.

When it comes to the US economic numbers, a lot of dramatic figures get thrown around now-a-days as all numbers in this post-pandemic economy are dramatic whether they are relating to the contraction of activities due to shutdowns, or more importantly, to the struggling recovery.

The US Gross Domestic Product (GDP) was slammed backward into one of the greatest economic contractions in history. In the second quarter of 2020 the US economy was expected to shrink by up to 30% on an annualized basis. For the year 2020, it is widely expected that the US economy will have contracted by 6% to 8% from its pre-pandemic days.

As can be expected from such a violent economic contraction, unemployment numbers soared as the working public was by and large told to stay home. Unemployment claims soared by about 20 Million as the shuttered economy shed jobs. Over the past months as attempts at reopening have accelerated, those unemployment claims have dropped somewhat, but by the end of June, more than 18 Million Americans were still on unemployment.

Around the World the economic conditions are more or less the same.

Where a major difference has become apparent is in the handling of the pandemic by the US as compared to most other countries, especially the advanced ones. While the US has badly bungled the managing of the pandemic, the other advanced countries have done a better job in ‘flattening the curve’, and in some countries like New Zealand, practically flattening the virus.

Nevertheless, the much anticipated rebound of economic activity, the infamous ‘V’ shaped recovery, is now shown to be a wishful fantasy, as the pandemic is far from controlled globally and is on an unmitigated rampage throughout most of the US. This ongoing spread of the virus makes any planned recovery practically impossible, as is being demonstrated in the US, Europe, and in fact globally. This means, the pandemic induced global economic recession (or worse) is going to be far more prolonged than at first anticipated.

There is the hope that a vaccine is developed in the near future, against the odds, which will be effective enough to stem the spread of the virus, and eventually eliminate it. But that hope is a bit like the former hope of the ‘V’ shaped recovery, bucking the odds of all previous experience.

Considering the global effort that is being put in the fast-track development and testing of the vaccine in a number of major countries, and the resources being thrown at the effort, it may be that an effective vaccine is available in the not too distant future, at least in some countries. Still until it is widely available to all corners of the Earth, and everyone is inoculated, the threat of the virus will linger and continue to impact social and economic activity everywhere.

So a prolonged and uneven economic recovery seems more certain than not, which means the ability of governments and Central Banks to restore economic activity to pre-pandemic levels is almost impossible. And that is apart from the changes to economic activity this pandemic has already made apparent, like the impact on retail business, the boost towards on-line transactions, and the stay-at-home-to-work possibilities. And, as long as there are areas in the World where the virus is still infecting people, global travel will remain restricted, affecting tourism, general business and investments.

Now, if an effective (and safe) vaccine is not developed in the near term but takes more of the normal time frame for such vaccines, of 18 to 24 months minimum, or longer, then the deep Recession that is now being felt, along with the ending of government programs and the dilution of the Fed’s and the Central Banks’ efforts, will surely morph towards a full blown economic Depression and a prolonged stock market decline, more in line with the 1929 to 1932 drop that cut the markets almost 83% from the previous highs.

With the greater capacity of all Central Banks and all governments to act in concert with one another now, as compared to the 1930s, the drop may be mitigated, but that is by no means certain as other factors may come into play, like the animosities and distrust between the West and China, and the record debt already burdening the World economies, which will greatly hamper some weaker economies’ ability to react appropriately, regardless of their need.

So far, the global economic reality is really dire. The pandemic is still surging and the World’s most powerful economy, the US, is the most deeply mired in it. Additionally, the most powerful and the second most powerful economies are now at logger heads with each other in a battle for economic dominance that will make the recovery around the World even more uncertain. But one thing is certain, the economy and the stock markets are going to remain detached. The status of economies are going to be largely and ultimately tied to the development of an effective near-term vaccine, and the stock markets are going to continue to be entirely dependent on the ongoing active interventions of the Federal Reserve and the Central Banks.


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