World, Where to Now – Boldly into No-Man’s Land (#74)

In fits and starts, the World is recovering from the greatest global catastrophe of modern times.

The COVID-19 virus not only brought the Corona Virus pandemic, with significant health risks and fatalities across the world (to-date, over 130 Million infected, and over 3 Million deaths), but it also abruptly stopped the global economy in its tracks, as if it had hit a brick wall, and financial markets nose-dived in March of 2020 (to recover only with massive rescue measures).

The governments of the world, blindsided by the pandemic and its devastating effects on their populations and economies, scrambled to try to cope with the unprecedented fall-outs and emergencies, and in trying to deal with it all, they had to turn their monetary and fiscal taps to wide-open, flooding the crashed asset markets with liquidity to refloat them, and providing emergency rescue packages to their businesses, families and individuals, to prevent them from permanently sinking into oblivion (at least those governments who could afford to do so).

To a large extent, most governments were successful in mitigating the disaster, as markets recovered and then soared to new heights, and businesses, and families, and individuals were rescued from sinking into insolvency, for the most part. While there is a long way to go to return to pre-pandemic normality, the world is seemingly on the slow painful path to recovery, hampered only by the recurring resurgences of the COVID-19 virus, and its growing number of mutations and variants, which are more infectious and have more serious outcomes than the original Corona Virus.

These resurgences have necessitated repeated lock-downs which have been a serious impediment to full-on social and economic recovery. Now as the various vaccines get administered throughout the world, albeit rather erratically, the light at the end of the tunnel is indisputably visible with its accompanying optimism, in spite of the recurring surges of infections with more dangerous variants, and spotty openings of economies. As governments remained committed to providing unprecedented support, and to urgent vaccination programs, general optimism has grown.

The great effort and unprecedented financial rescue has burdened almost all governments with massive debt, which is growing at an alarming rate as the stimulus and support programs continue and in a lot of cases accelerate, as they are doing in the United States under President Joe Biden.

To assist their respective governments in supporting their people and their economies, the central banks are keeping the interest rates down to historic lows, while they directly intervene in their financial markets to keep asset prices up (retaining the long-fostered wealth-effect) and provide on-going liquidity to prevent any tightening in their national, and the general global financial systems. In this continuing effort, the US’s Federal Reserve of course leads the way, and sets the tone. With this flood of printed money and the resultant growing mountain of debt comes increasing risk, as all economic, fiscal, and monetary rules are blown past, and the national and global economies are swept along into unknown territories and hereto no-man’s land of massive perpetual stimulus, with no real end in sight.

There is no known ‘end-game’ to this perpetual Quantitative Easing (QE) and the zero-interest rate environment, and the flooded financial markets that are driving excesses through equities, real estate, and most other ‘assets’ investment, and everything else normally classified as speculative and risky.

These recent trends are of such speculative nature, and of such frenzy, that end-times of market manias are being feared by those who study the history of speculative manias and cycles in investments. Such high level of almost universal exuberance into speculative assets, historically, has marked the beginning of the end of the boom cycle that has entered into a dangerous bubble territory.

The vast amounts of currencies being printed by the Federal Reserve and the other major central banks around the world, to rescue the heavily damaged economies, are also raising concerns about the steady erosion of fiat currency values, particularly of the US dollar, as the US takes on unprecedented debt, and the Federal Reserve prints unprecedented amounts of money to lend to the government, and to sustain sky-high asset markets, to retain the wealth effect program it embarked upon decades ago, and to maintain confidence of the consumers in general.

While everything is being perpetually sustained, and the pain caused by the damage of the pandemic being contained, through mandates and cheques from the governments, the confidence of the public and businesses is generally high and the damaged is somewhat checked. As the public gets vaccinated and the economies recover, the government programs will start to taper off and the residual damage and change wrought by the pandemic will start to be felt.

Additionally, as the current flood of the money tapers off and expectations of extraordinary returns from speculative activities start to disappear, as money and the ‘greater fool’ become increasingly scarce, the reality of saner valuations will return, and with it the probable end of this extraordinary financial cycle.

These are truly extraordinary times.

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