The cavalry are coming. The global pandemic is going to be sorted out by a motley crew of central bankers and finance ministers. At noon today, it’s the G7 to the rescue.
Markets rebounded strongly yesterday. It’s not because coronavirus is cured, obviously. It’s because markets had fallen hard all last week and they tend to have a bounce when that happens.
You probably don’t remember it, because you were too terrified to look at your portfolio during the whole period (actually, that would have been sensible), but some of the biggest rebounds on record came during 2008. It was just hard to pay attention amid all the massive plunges.
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Ignore the big bounce – it doesn’t mean anything
As the always helpful John Authers pointed out on Bloomberg this morning, the S&P 500 had its third-best day in the last ten years yesterday. However, the best day for the S&P 500 since the war came on October 13, 2008. Lehman Brothers had collapsed merely days beforehand. The S&P gained 11.6%. As Authers notes, “anyone who bought at the end of that day still had to endure another 27% selloff before the index finally hit rock bottom five months later.” In short, big bounces mean very little in this context.
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What’s probably more interesting, as Authers also points out, is that amid the promise by G7 finance ministers (ie, the big economies’ collective chancellors of the exchequers, in British terms) and central bankers to have a chinwag today, the dollar fell.
The US dollar has been very strong – worryingly strong – for quite some time now. And yet at a time when you’d expect it to be in demand (for its "safe haven” status), it has started to slip back.
That’s partly down to carry trades reversing. But it’s also no doubt due to hopes that the Fed will get ahead of all the other central banks now, by cutting more aggressively and acting more vigorously (the rest are used to following the leader on this front).
So what can they do?
Central banks aren’t a good influence but they can move markets
Anyone who has read MoneyWeek or Money Morning for a while will know that, philosophically speaking, we're not fans of central bankers.
The core problem is that – contrary to their ostensible function – they are there to prevent busts, but they are happy to allow the booms that lead to said busts. If the market falls, they’re almost always poised to take action. If the market rises, they don’t care.
Believe it or not, that’s not actually what they’re meant to do. They’re meant to target inflation, not the level of financial markets. But in practice, I challenge anyone – bar the most blinkered, oblivious economist – to make the case that central banks are entirely agnostic about asset prices.
As a result of this, they create rampant levels of moral hazard. This means that the market consistently misplaces risk, which leads to the misallocation of capital and the resulting wastage of resources.
If you are wondering about our productivity problems and the sticky issue of wealth inequality, then central banks – who don’t tend to feature in the mainstream explanations – have a lot to answer for.
This is all a prelude to making the point that – despite widespread cynicism over the amount of “ammo” central bankers have, and snarky comments about their ability to tackle viruses – it is perfectly possible for central banks, particularly if governments are on board, to make a difference to asset prices.
They can’t cure coronavirus – of course they can’t! – but if you throw enough money at markets then they will go up.
You might make the very good point that certain companies and industries will suffer despite all this. Central banks can’t force people back to work, or force people to shop, or force factories to open. And you’d be absolutely right.
But if you have a government that is determined to avoid anyone going bust and disrupting the bull market, then it’s also perfectly possible for them to underwrite all but the dodgiest companies (and they can do those too, if they feel like it).
I mean, what’s to stop the US government from declaring shale producers a vital industry to national security and backstopping their junk bonds in some way (as they look to be the most vulnerable sector at the moment)?
To be clear, I’m not saying that this is what will happen. And yes it would make a mockery of the idea of capitalism, free markets, and efficient resource allocation. But we’re already so far down that road, we’ve already waded so far across that river, that we might as well keep going to the other side because it’d be more trouble to turn back. (At least, that’s the Macbeth-inspired view that I’m sure our political leaders take.)
I’m just saying – anything is possible.
What does all of that mean for you? Long story short, nothing beyond our usual view – stick to your plan. Stick to stuff that isn’t overvalued and thus less vulnerable to nasty surprises. And own some gold for when the money printing begins.
