When I wrote my earlier article last week, the US Fed funds rate was 1% and I accurately predicted they are going to 0 sooner than we think. Even I didn't expect that to happen within the next 6 hours. The Fed jumped in and reduced the rates to zero in one go (Hasn't happened in history) and relaunched QE. Not only that - 1.5 trillion stimulus program and a daily 1 trillion repo. The stock market completely ignored this. In fact the fall in that week was the biggest fall for a week since 2008 - when the financial crisis was at its peak. It managed to recover more than 20% this week.
The COVID-19 pandemic is sweeping the world big-time. Human tragedy is beyond the definition of sadness. The threat from COVID-19 really looks like a lifetime event for many of us. Natural calamities like these are unavoidable as nature dictates them. Looking at the economical angle - it looks lot bleaker.We will focus on the economic aspects alone here.
The layoffs have started in the US. The initial job less claims was more than 3.2 million. The All time high of that number is 660,000. The million number - is unheard of in history. Once the pandemic fear recedes, these jobs will definitely return but not all of them would. That is the worry. The GDP is also set to contract because of the virus. There are dire predictions floating around like negative 24%. We just have to wait as it unfolds. Singapore initial estimates on first quarter GDP is a negative 10% which is little more than what was witnessed during the financial crisis of 08.
The world has seen this many times - public property being privatized and private property being nationalized. This happens when existing economic models get transitioned. Mikhail Gorbachev in 1984, privatized what were government managed industries for decades. Private player rushed to buy it. However It did not stop the collapse of the Soviet Union. It was just a transition from one form of economic model that was failing to an alternative model which is perceived to be "working". Bottom line - It is just a transition from one form of society to another form of society because of the obvious signs of lack of productivity in existing human labor. What is happening in the US today of nationalization of loss-making private entities, is no different from what Gorbachev did in 1984 for USSR except that it is exact reversal.
Many things were common
The US government does not want the stock market to go down. It is well aware, if the stock market goes down, private companies would fail. With all the pension funds, global investment money into the US market - it will send all the fund values spiraling down. This will lead to mass exit of capital from the US market. Ben Bernanke very famously told during the 2008 economic crisis - the reason for ZIRP and QEs was to create the "wealth effect". When the markets go down in confidence and sells off - this wealth effect is lost causing a downward spiral.
The truth is no matter what they do, they cannot alter the trend of the market in anyway. If it goes higher - they can make it go little over., if it goes lower - they can slow it down. That is all they can do. Trend cannot be reversed.
The last thing that is holding the US economy together is the VALUE of the US dollar. The dollar index (DXY) is floating around the 100 mark. It was around the 95 handle just couple of weeks ago. The sell-off in the market has triggered a liquidation, and there is a natural need for the dollar as most financials are denominated in dollars. With the "Cash is King" mentality setting in, that money is going to look for alternative investments. If the US stock market continues to go down - the cash will not go there. With the Covid-19 situation getting worse by the day across the globe including the US, the cash is not going into risky assets. Eventually it needs to chase an investment - this could possibly be gold. When that ride happens - it would signal the demise of the dollar. When dollar loses confidence and goes to say the 70 handle (we were there in 2011 post financial crisis) - we are going to see a sea change in the movement of big money across the globe. With the currency risk not hedged by investment from Europe, Japan and Asian investment firms in the last decade there is going to be serious losses for them as their local currency gain value against the dollar. For example, Switzerland Sovereign fund is one of the top 10 investors in apple shares. Apple shares have tanked 25% in the last month. The fund has gone down by a quarter. If the dollar falls and the local currency (Swiss Francs) appreciates against dollar, the loss accelerates because of the currency exchange. With a stable or appreciating dollar the investment is better off and it is beneficial. But the fund cannot withstand a dollar depreciation scenario. Ideally huge investment funds, hedge their investment against currency risks, but the last decade of easy money policy has left them too complacent to follow it. When these loses happening, the global rush outside of the dollar will happen causing more problems for the US markets.
Even though the political establishments can blame the coronavirus for the current state., people who were aware of the bad economic policies of the past decade can easily see, that the virus is just a trigger. The Covid-19 situation will be gone 4-5 months from now. We are seeing Wuhan already returning to normal. As the virus situation recedes what is left is - the huge debt and the economy in its terminal state. The 1.2 Trillion stimulus programs will try to keep the economy afloat, but what happens if they don't work. Inflation will go beyond 3%. Once that is consistently higher, the existing bonds that yield less than 3% are going to be clobbered. Fed will buy it to create a market - but it won't work.
The rest of the world particularly the Asian economies will recover sooner as they are in a better place than the US.
Merely printing money for economic boom never works. If that was the case - every country in the world that can print its own money and can avoid economic set backs. US dollar being a global currency does not give the nation a right to print their way out. Money is just a medium of exchange for productive goods and productive labor. Without the underlying productive entity - the money itself is of no use. Sending $1200 check to all its citizens cannot work. At the peak of the financial crisis, Bush sent these stimulus checks. That did not stop the collapse of Lehman Brothers in September of 08 and the subsequent financial crisis. Similarly this check would also vanish in memory. Believe me - every country wants to send its citizen a check, but there is a small problem with that - no country can afford that.
US government is the biggest debtor in the history of this world. It's plan to bail out other smaller players would have worked in 2008., and will not work this time. The bottom might come out of the US dollar causing general currency issues. With all fiat money in play - all currencies of the world will lose confidence. We are going back to the gold standard.
Lenin very famously told - The best way to destroy the capitalist system is to debauch the currency. The capitalistic west will eventually realize that and it just might be too late.
The COVID-19 pandemic is sweeping the world big-time. Human tragedy is beyond the definition of sadness. The threat from COVID-19 really looks like a lifetime event for many of us. Natural calamities like these are unavoidable as nature dictates them. Looking at the economical angle - it looks lot bleaker.We will focus on the economic aspects alone here.
The world economy was so vulnerable in the build up to this crisis, it just happened to be the coronavirus that exposed the underlying mal-investments of the last decade.
The layoffs have started in the US. The initial job less claims was more than 3.2 million. The All time high of that number is 660,000. The million number - is unheard of in history. Once the pandemic fear recedes, these jobs will definitely return but not all of them would. That is the worry. The GDP is also set to contract because of the virus. There are dire predictions floating around like negative 24%. We just have to wait as it unfolds. Singapore initial estimates on first quarter GDP is a negative 10% which is little more than what was witnessed during the financial crisis of 08.
The world has seen this many times - public property being privatized and private property being nationalized. This happens when existing economic models get transitioned. Mikhail Gorbachev in 1984, privatized what were government managed industries for decades. Private player rushed to buy it. However It did not stop the collapse of the Soviet Union. It was just a transition from one form of economic model that was failing to an alternative model which is perceived to be "working". Bottom line - It is just a transition from one form of society to another form of society because of the obvious signs of lack of productivity in existing human labor. What is happening in the US today of nationalization of loss-making private entities, is no different from what Gorbachev did in 1984 for USSR except that it is exact reversal.
Many things were common
- Heavily indebted Federal government
- Decreased labor productivity - service sector industry focused economic model finally ran out of steam, proved by the fact that more women in labor force than men and a LOT of part-time jobs and not enough full time jobs
- Majority of the population with no savings
- Lack of confidence in government entities
The US government does not want the stock market to go down. It is well aware, if the stock market goes down, private companies would fail. With all the pension funds, global investment money into the US market - it will send all the fund values spiraling down. This will lead to mass exit of capital from the US market. Ben Bernanke very famously told during the 2008 economic crisis - the reason for ZIRP and QEs was to create the "wealth effect". When the markets go down in confidence and sells off - this wealth effect is lost causing a downward spiral.
The truth is no matter what they do, they cannot alter the trend of the market in anyway. If it goes higher - they can make it go little over., if it goes lower - they can slow it down. That is all they can do. Trend cannot be reversed.
The last thing that is holding the US economy together is the VALUE of the US dollar. The dollar index (DXY) is floating around the 100 mark. It was around the 95 handle just couple of weeks ago. The sell-off in the market has triggered a liquidation, and there is a natural need for the dollar as most financials are denominated in dollars. With the "Cash is King" mentality setting in, that money is going to look for alternative investments. If the US stock market continues to go down - the cash will not go there. With the Covid-19 situation getting worse by the day across the globe including the US, the cash is not going into risky assets. Eventually it needs to chase an investment - this could possibly be gold. When that ride happens - it would signal the demise of the dollar. When dollar loses confidence and goes to say the 70 handle (we were there in 2011 post financial crisis) - we are going to see a sea change in the movement of big money across the globe. With the currency risk not hedged by investment from Europe, Japan and Asian investment firms in the last decade there is going to be serious losses for them as their local currency gain value against the dollar. For example, Switzerland Sovereign fund is one of the top 10 investors in apple shares. Apple shares have tanked 25% in the last month. The fund has gone down by a quarter. If the dollar falls and the local currency (Swiss Francs) appreciates against dollar, the loss accelerates because of the currency exchange. With a stable or appreciating dollar the investment is better off and it is beneficial. But the fund cannot withstand a dollar depreciation scenario. Ideally huge investment funds, hedge their investment against currency risks, but the last decade of easy money policy has left them too complacent to follow it. When these loses happening, the global rush outside of the dollar will happen causing more problems for the US markets.
Even though the political establishments can blame the coronavirus for the current state., people who were aware of the bad economic policies of the past decade can easily see, that the virus is just a trigger. The Covid-19 situation will be gone 4-5 months from now. We are seeing Wuhan already returning to normal. As the virus situation recedes what is left is - the huge debt and the economy in its terminal state. The 1.2 Trillion stimulus programs will try to keep the economy afloat, but what happens if they don't work. Inflation will go beyond 3%. Once that is consistently higher, the existing bonds that yield less than 3% are going to be clobbered. Fed will buy it to create a market - but it won't work.
The rest of the world particularly the Asian economies will recover sooner as they are in a better place than the US.
Merely printing money for economic boom never works. If that was the case - every country in the world that can print its own money and can avoid economic set backs. US dollar being a global currency does not give the nation a right to print their way out. Money is just a medium of exchange for productive goods and productive labor. Without the underlying productive entity - the money itself is of no use. Sending $1200 check to all its citizens cannot work. At the peak of the financial crisis, Bush sent these stimulus checks. That did not stop the collapse of Lehman Brothers in September of 08 and the subsequent financial crisis. Similarly this check would also vanish in memory. Believe me - every country wants to send its citizen a check, but there is a small problem with that - no country can afford that.
US government is the biggest debtor in the history of this world. It's plan to bail out other smaller players would have worked in 2008., and will not work this time. The bottom might come out of the US dollar causing general currency issues. With all fiat money in play - all currencies of the world will lose confidence. We are going back to the gold standard.
Lenin very famously told - The best way to destroy the capitalist system is to debauch the currency. The capitalistic west will eventually realize that and it just might be too late.
No comments:
Post a Comment