Markets are looking a bit peaky again this morning. Why? You can probably blame the US.
The UK and most of Europe – even Germany – is getting close to pulling out all the stops to throw as much money at this problem as it takes (and more). The US was expected to follow suit. But just as with the financial crisis, politics is holding things up.
The government is throwing everything it can at this – the US will follow
On Friday, in the UK, chancellor Rishi Sunak made the radical declaration that the government will pay 80% of the wages of staff who would otherwise be laid off by businesses.
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That’s quite incredible and we’ll devote more time to it in this week’s MoneyWeek (we’re going to be ramping up our small business coverage during this period as I’m guessing a lot of you are going to need it – if you don’t subscribe already you can get your first six issues free here, which is plenty of time to work out whether you find us useful or not).
Meanwhile, Germany – notoriously tight-fisted or fiscally prudent, depending on your point of view – has said that it will take on €130bn in new debt and create a €500bn bailout fund, throwing said fiscal caution to the winds. In total, this rescue package will amount to about 10% of German GDP.
If Germany is planning to spend whatever it takes, you can be sure that means the rest of Europe (the ones who haven’t already) will leap at the chance.
Long story short, governments generally are throwing all that they can at this thing.
However, as always, the most important player in all this is the US. And just as happened in 2008, the US is getting a bit bogged down in the politics. That’s because everyone wants a little bit of the bailout.
Everyone has a special interest group to protect and everyone has some sort of principled reason for standing against whatever goes through Congress until their special interest group is handed a little bit of the pie.
The US has a stimulus package which is meant to be worth $2trn sitting waiting to go through. The risk, as far as Democrats go, is that there is too much “no questions asked” money going on bailing out big businesses (an objection I’d almost always have sympathy with).
The main moves are as follows: small businesses get loans so they can keep workers on; US households get direct payments worth $3,000 for a family of four; and there will be as much as $500bn for big companies, plus another $50bn for airlines.
The Democrats want this to be more transparent than it is and they also want restrictions on share buybacks and CEO pay packages.
Anyway, odds are it’ll get pushed through some time today – playing politics is one thing but if this doesn’t get pushed through people are going to get fed up and start blaming whichever party can be painted as the blockers.
What does this mean for markets?
So what does all of this mean for markets?
A couple of things are clear. One, we’re getting close to the point where the authorities will be underwriting the vast majority of businesses for the duration of the lockdown crisis. There will still be a lot of people and firms who fall through the cracks, but the mass bankruptcy scenario is starting to recede.
Two, I agree with John Authers of Bloomberg when he argues that the “moment of maximum panic is close at hand.”
People are now talking about some absolutely horrendous outcomes – 30% unemployment in the US, plus a jump in weekly jobless claims to three million this week (that’s up from below 300,000 last week and close to 200,000 for the last two years or so).
Those might not be exaggerations but they can’t get a lot worse than that. If this stuff is being talked about loudly then you know that the market is getting closer to getting ahead of the bad news rather than constantly playing catch up.
However, you then have what you might call the “long, slow grind lower” phase that follows the point of maximum panic. There is less of a sense of collective horror, but the news still continues to get worse and worse.
We also still have the very real risk that something is going to blow up in markets, mainly the corporate debt bubble. I’m thinking and assuming that this can and will be underwritten by the Federal Reserve and its partner central banks around the globe – but Jerome Powell is going to be running around like one of those plumbers in an old cartoon, plugging leaks left, right and centre.
What’s my point? Don’t be in a rush to buy or to sell. Take your time. Build a watch list or review the one you currently have. Look at who will survive and thrive, look at who is going to struggle, and consider who might be struggling now but is likely to benefit greatly when the lockdown period is over (and it will end at some point – China is getting back to work, despite the risks of second waves of infection).
We’ll have a lot more on this in the next issue of MoneyWeek magazine. Get your first six issues free here.
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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