The consensus appears to be that the market panic is over.
That seems pretty obviously true. It doesn’t mean there won’t be another panic in the future, but that downward spasm of fear has passed for now.
The question is: what happens next? Does this get worse before it gets better? Or are markets already looking forward to a bright future in 2021?
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The bull case for investors right now is that the rapid actions taken by central banks and governments have managed to forestall the worst of the coronavirus pandemic.
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The financial system is underwritten. The economy will freeze but then rebound. And the virus itself will peak, the economy will reopen relatively quickly, and there won’t be a second or third wave that means we have to shut down again.
Oh, and there won’t be any big geopolitical fallings out (which for me is the ultimate wildcard here).
On the bull side, I can’t comment on the pandemic statistics because I don’t know any more than you do, and in fact I probably don’t keep as close an eye on that data as many of you. (Watching the daily death rate seems unhelpful when I have no real context to put it in.)
But cases do seem to be easing off in both the hardest hit parts of Europe and even in parts of the US. So optimism might be the right approach – who knows?
As for geopolitics, that’s a story for another day. I do struggle to see a world in which this makes China-US relationships better rather than worse. And the tensions over the oil market also suggest that nations are jockeying for power in a way that simply doesn’t happen when one is blatantly dominant. We’ll park that to talk about some other time.
Money can definitely help
On the narrower things that markets tend to focus on, there is no question that some of the measures announced by central banks and governments to support the global economy through the coronavirus pandemic are working.
Here’s a good example with a great statistic for you: towards the end of last month, the Federal Reserve, America’s central bank, said that it would start buying investment grade corporate debt in secondary markets for the first time.
You know what happened after that? The final week of March saw 49 investment grade companies issue $107bn worth of corporate bonds. As Howard Marks of Oaktree Capital points out, that was the single largest week for investment grade corporate bond issuance on record (it’s worth reading his whole memo by the way).
That’s quite an extraordinary statistic, particularly when you consider that companies weren’t exactly short of debt in the first place. You also have to imagine that ratings agencies are now under pressure to be wary of creating “fallen angels” – companies that fall from being investment grade to junk.
A raft of such downgrades was viewed as the potential trigger for a catastrophic sell-off in the bond market. Now? I don’t think that’s going to be as much of an issue.
That shows you the difference the Fed can make. Money can get through to companies when it’s on offer.
The problem – as ever – is that the bigger you are, the closer you are to the money.
If you are a big company, you can now effectively borrow money direct from the Fed, which is probably the single most lenient lender in the entire world (because in reality, it has no capital at risk, because it can always print more if it needs to).
But if you are a smaller company, you still have to borrow money from the usual places – typically the bank. The bank isn’t like the Fed. Banks, at least in theory, still have to be picky about where they lend their money.
And despite the full-throated encouragement of the authorities to be free and easy about it, old habits die hard. Do you want to lend money to a restaurant business when every potential customer is shut indoors? Didn’t think so.
That’s going to put more pressure on governments across the world to help. If we genuinely hope to rebound from this, then governments need to act faster and more directly to help. The Swiss system appears to be the model – businesses can get a crisis loan of up to 10% of their annual revenue (to a maximum of half a million Swiss francs).
That loan is interest free and is provided by Swiss banks – but the loan is fully guaranteed by the Swiss government. It takes virtually no time to process, because the banks are happy enough, because they’re taking no risk.
It’s a good model for getting money to people quickly. It’s not necessarily a great model for ever seeing that money again, but we’re not worried about that right now.
Who’s going to pay for all this?
You’ll note what the common factor is here. If you want to get money to businesses fast in the middle of a recession, then you need a lender who doesn’t have to be too worried about business risk. The only lender who fits that description is the government.
Now usually, when I talk about the government, I say “the taxpayer”. That’s because it’s the taxpayer who pays for government spending.
I’m not saying it this time, because I don’t expect most of these interventions to be funded by tax.
Some of the companies will be able to pay the loans off; lots of them won’t be. You can look at these as being like student loans (only with less of a psychological overhang).
So whatever happens, there's going to be a lot of bad debt. Who’ll pay for that?
Lots of people still seem to think it’ll be clawed back in the form of higher taxes. You do see the Treasury blanching slightly, and trying to make nods to this idea.
But if you think this will be politically feasible – to return to accusations of “austerity”, after a period in which people have been locked inside for months with a mortal peril hanging over their heads – then you have a very different view of how the world works to me.
So how will it be paid for? Andrew Bailey, the new boss of the Bank of England, came out in the Financial Times this weekend, and argued that the central bank isn’t actually printing money to pay off the government’s deficit. They’re just doing it to stabilise the markets.
They might be printing money now, but they can un-print it tomorrow. So it isn’t proper deficit financing.
Want to know how this'll be paid for? Bailey just denied it.
What are the consequences? Read MoneyWeek – we’ll be talking about this a lot in the months ahead. Get your first six issues free here (and you’ll get a free book thrown in as well!).
