No Time To Die

Submitted by Michael Every of Rabobank

No Time To Die.

That seems to be the message from the equity markets, which have followed a strong US lead (S&P +4.2%) into the green. Does the rest of the world really benefit from the possibility of Joe Biden running against Donald Trump for the presidency in November though? I ask, as that is being touted as the proximate cause of the rally. (On which note, as I quipped to a friend and then immediately heard echoed on ABC’s “The View” in earnest, will Mike Bloomberg potentially be replacing Steven Mnuchin in 2021?) The rally certainly can’t have been based on anything actually going on around us apart from that.

If you want the perfect encapsulation of how our comfortable, services-based Western economy–whose elite haven’t suffered a real crisis (I mean one where people die on a large scale) in three generations–is being hit by Covid-19, consider that the latest Bond movie is seeing its release date pushed back by months because nobody is going to see it in April – and not just because of its title (…or because of traditional Hollywood reasons like it being as bad as ‘Spectre’, which would be a ‘Quantum of Solace’.)

If even Bond, James Bond is being pushed back by months, why not every other movie? Is anyone going to go to cinemas, theatres, pubs, restaurants, parties, festivals, hotels, conventions, sports events, etc., if this virus continues to spread? Of course, many events are still going ahead for now: SXSW in Texas, for example, or the Olympics,…apparently. Little green bits of paper take priority over little green viruses, despite the risk that this provides perfect conditions for Covid-19 to spread, and public-health havoc this will wreak. Yet some are being more proactive. Nobody in Italy will be seeing any movies for a while as all theatres are shut down, along with schools, and universities likely to follow. The elderly also being advised to stay inside.

Regardless, most of the West and the world continue to lag far behind the aggressive virus-containment tactics that China has employed, and the results are obvious.: case numbers and fatalities are growing exponentially, even with limited testing. Germany’s finance minister says this is “a global pandemic”, saving the WHO the work. In the US we now have 11 deaths, up from 1, and a state of emergency declared in New York, Washington, and Florida. No internal travel restrictions are being imposed though even as – so hope the person you sit next to at SXSW doesn’t come from one of those states.

As we published yesterday, at this stage the economic damage is done. Either governments close things down at great cost, as in China and Korea, or they don’t – and the virus and public panic close things down anyway. In the UK the Flybe airline has just collapsed – and like virus victims, this will only spread across the whole services sector.

As we also stressed, we are about to see a whole flurry of new virus-fighting policies, from the conventional to the unconventional to the ‘unconversational’ in response. Indeed, besides the 50bp cut from the Fed, we also got a 50bp cut from the BoC – but that is conventional and of almost no practical use right now. More to come regardless though.

We have seen fiscal stimulus packages in Malaysia and Korea, and the Chinese press talk about the potential for the mother of all stimulus packages (“despite the side-effects”) that would be larger than the USD574bn seen in 2008-09, although whether this means in USD terms of as a percentage of GDP is unclear. In the US we have seen USD7.8bn virus spending package passed, and in the UK statutory sick-pay changes have been introduced for those self-quarantining, although the self-employed are still out of luck.

The IMF is also announcing a USD50bn virus-fighting loan fund, which will be interest free and countries do not need to have an existing facility to tap it. This does not come with the usual IMF caveats about privatising SOEs, slashing subsidies, and cutting state spending on healthcare and pensions. Imagine how strong global growth might be if this kind of largesse was available when the IMF wasn’t afraid of dying.

On the unconventional side the Fed is obviously still doing ludicrous level of reverse repo, which shows that even despite slashing rates, there is massive market demand for USD liquidity, which central banks are obviously going to have to plug.

The ‘unconversational’ has already arrived too as the incoming BoE governor, who starts work 16 March, states that UK SMEs are at risk and that the Bank will need to step forward to support their supply chains: “We are going to have to move very quickly to do that,” he added. So the BoE has moved on from its original task of providing cheap funds to the British government during wars against France; from its expanded task of stoking the economy; from its follow-up role of keeping inflation at desired levels; and from its expanded mandate of financial stability, meaning bailing out the system during crises. Now is to directly support millions of British SMEs’ supply chains too?

It isn’t that this isn’t the right thing to do, because the alternative is a swathe of businesses closing, and a depression: to which surely any central bank not wishing to replay 1929 is going to say “No Time To Die”. The larger issue is how this can be done – and quickly. Loans to corner shops and family restaurants and small workshops and self-employed window cleaners will be channelled how exactly? On whose authority? By which bureaucracy? On what scale? On what terms? And how does one prevent fraud? Then how is one paid back? The implications are either that central planning banking is going to a whole new level; or that this cannot be done in developed markets, and hence we need to brace for the imminent economic fallout.

If so even Biden, Joe Biden won’t be able to save us with a gadget. It will be time for Ms. Funnymoney.

Put that together and it still says lower bond yields than we see now; lower stocks, presuming these are not also added to the list of central bank bailouts, which they might be; and wild FX swings ahead, which are most likely to end up with USD bobbing up again after first being pushed down.