There is still pain to come. There are a large number of investors - both institutional want-to-be’s (like JP Morgan) who buy the stimulus and are thinking there are easy returns to be made after such a large “correction”, and retail buyers who are fearful their retirement savings have been shattered who are willing to shake the dice. They can’t quite believe what’s happened, don’t compute the scale of the economic shock, and won’t face up to a changed world till they take more pain.
A number of good analysts suggest the chances of a swift recovery are better than the bleak headlines suggest. They quote issues like obvious market opportunities will swiftly attract smart money – which is true, and the natural resilience of capitalist economies in the face of economic catastrophe – which was once true.
I hope they are right, but I wonder about human economic behaviour – which tends not to have read Rational Expectations economic text-books. What tends to happen is at the individual agent level, where they seek to maximise personal gain by arbitraging distortions like government bailouts and free money in unexpected ways.
Not every entrepreneur will use a government guaranteed loan to tide over their business – some may use them to wreck the competition, enrich themselves, invest in risk, or act in a thousand other ways. Market distortions and interventions have unintended consequences which ultimately prove negative – a lesson governements and central banks have been trying to ignore for the last decade of monetary distortion and experimentation.
(If you don’t believe me, explain why thousands of corporates spent the last decade buying back their stock instead of investing in new productive capacity and new product innovation?)
Get ready for a long-haul of increasingly dire economic news. A month - at least - of Lockdown helplessness, as corporates and individuals scramble for cash, struggle to obtain funds and face unmeetable demands for rent, mortgages, and to pay off debts. It’s going to be brutal.
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