In 2008 a financial shock became a shock to the real economy. This time, an external shock is now causing cash flow and financial problems for the real economy. However, in many respects the remedies are the same and monetary authorities and governments now seem to be realising that.
Last week Trump looked rattled and Christine Lagarde, ECB Chairwoman, put her foot in her mouth. This week governments and financial actors around the world put in a much more assured performance and there are three groupings of responses, which bear mentioning and monitoring:
The first response is the response to the virus. This week both the US and the UK moved from mitigation to suppression and the promise of a massive increase in testing. This was announced on Monday as fears arose that mitigation alone would still result in an eight-fold higher peak demand on critical care over and above the available surge capacity in both the US and the UK. Clearly this is a massive negative for demand and markets subsequently collapsed but it conveyed the message which markets ultimately wanted to hear, which is that governments are getting real about the virus. It would not be a surprise to see US infection numbers explode in the coming days but one should attribute that less to an increase in the infection rate and more to an increase in testing. This is because it is likely that many more Americans are infected than the current official number of only 14,250.
The second response is the response by monetary authorities. This week was much more assured from all involved. The response was kicked-off on Sunday night with an easing and asset purchase announcement by the Fed. This was followed up by a very aggressive announcement from the ECB mid-week, including the fact that the ECB would buy corporate bonds. Further announcements for the Fed were forthcoming during the week with the aim of easing stresses in markets.
The third response is the fiscal response from governments around the world. Many governments, including the UK and the US, have either approved packages or are in the process of approving rescue packages. Many analysts expect global GDP in the second quarter to be terrible but at least governments around the world are looking to respond in force to help soften the blow for the ordinary person.
So Where Does That Leave Us?
Back in October 2008, Warren Buffett penned a famed op-ed for the New York Times, announcing that he was buying stocks and urging others to do the same. However, his timing was not perfect and markets went on to make new lows but by the end of 2009 he was sitting on profits. We are in no way claiming to be as good as him and we acknowledge that in terms of market stature we come to his knees but we have been buying stocks this week. Although this might not be the bottom, since it is very difficult to know these things with any degree of certainty, we are happy to be buying some equities at these cheaper valuations.
However, there are some green shoots:
First, China is probably already bottoming and investors will start to see how badly infections are picking up there as the country goes back to work but what if infections do not shoot through the roof? That would be positive.
Second, a reputable study has been published, which appears to demonstrate that at least in China high temperature might reduce the transmission of COVID-19.
Third, here in the UK investors have had news that the government is close to developing an antibodies test. This is very important since the famous paper from Imperial University in London suggests on page 4 “that re-infection with the same strain of seasonal circulating coronavirus is highly unlikely in the same or following season”. This means that if you have had the virus you can go back to work even more safely and get the economy going again.
Fourth, it is clear that the pharmaceutical industry is working overtime to try to find a cure or if not a cure then something which will help alleviate the worst symptoms of the virus
