Markets continued to trade at elevated levels this week, despite some of the worst economic data on record. Even as investors look forward to the re-opening of the economy in some countries, it is becoming clearer that a return to ‘normaility’ is still some way off. This has also raised the question of what normality is, because a return to the pre-virus world would be a return to economic weakness – many large economies had slowed substantially by the end of last year – to overinflated asset prices and to rapidly growing debts.
Coming out of lockdown, companies, households and governments will have significantly more debt or significantly less cash than before they went in, the unemployment rate will undoubtedly be much higher and, after a big rally off the March lows, stock markets (especially in the US) are not significantly lower and will be much more expensive when decimated earnings are priced in.
What has changed is the amount of money being poured into the financial system by governments and central banks in an attempt to fight the economic cycle, as though the longest economic expansion on record could simply continue forever. So far, the Fed has promised to spend or guarantee about $3 trillion whilst central banks such as the Bank of England and the Bank of Japan have effectively promised to monetise government spending, no matter how much it comes to.
That is just in the first few weeks of this crisis so we shouldn’t be surprised if the final cost of bailing out just about everyone comes to a total that is many orders of magnitude greater than what we’ve had so far. We are truly in uncharted territory, no one has ever attempted financial support on this scale and it remains to be seen if it works and what the side effects are.
Richard McCreery is an investment adviser with over 20 years experience, based in the South of France. www.rmwm.jimdo.comRegulated in France by the Association Nationale des Conseils Financiers (ANACOFI), registration N° E004136. ORIAS member 13000050