Fighting an unknowable enemy … in a dark room

The optimistic end to the trading week was, in a very real sense, a bet on the Fed bailing out The Street with whatever it took.

Two weeks ago, I suggested it was utterly pointless at that point to engage in sweeping statements, far less conclusive judgments, about the virus and its financial, investment and economic dynamics and consequences.

Not that it says much, but the two weeks have shown — and how. And that remains the case.

Indeed, this is even more pointedly the case, I would now suggest, in the light of Friday’s remarkable — remarkably “optimistic” — finish to the Down Under trading week. It was, in a very real sense, a bet on the Fed bailing out The Street with whatever it took.

Presumably, with a “little bit of help” — that’s to say, also, whatever it takes from a Wall Street-friendly President and Treasury Secretary.

We’ve been there before; certainly so far as the Fed and Wall Street-friendly T-Secs are concerned, in 2008. But I would caution pessimistic scepticism.

This is exactly like 2008, but it could not be more different.

The financial meltdown is similar enough, albeit without the same crude financial exotics and an essentially insolvent global banking system, excluding the Australian and Canadian banks and not much else.

Once again, we have — correction, now had — an overvalued market and an over-geared system.

Just waiting to be whacked.

The proximate — if, in the case of the very parochial US in general, and the yet even more insular area around lower Manhattan, belated — cause of the meltdown was uniquely and critically different though: the virus, of course.

The difference is all-important in trying to come to terms with how the year — perhaps even years, plural — might unfold. It is particularly, disturbingly, important in terms of the policy responses.

The GFC was “easy”. It was a financial event amenable to conventional policy responses: bailing out the banks, slashing interest rates and creating trillions of dollars of “free” money.

It subsequently morphed into an economic event — the worst global recession since the Great Depression of the 1930s, and which again triggered additional, conventional, Keynesian-style policy responses.

We can have a Piketty-style discussion over this being a disgraceful, not just bailing-out, but further enriching, of the rich – and on this (and only this), as my addition of the pejorative adjective might have suggested, I am on the side of the Frenchman.

We can have a more conventional discussion about policy choices and over-delivery; and even more the failure to unwind them when both markets and economies did recover.

So we started this “journey” with globally zero interest rates (the US, and probably us, will be back there any day soon) and massive government debt and deficits everywhere.

But they did “work”.

They are also utterly unsuited to fight either the virus or, even more, the way we react to the virus. The “we” is, of course, governments, business and all the rest of us, as especially consumers.

Or, how “we” are allowed to react. Or, are forced to react. Quite simply and obviously, the actions taken to fight the virus are directly negative for both the real economy and financial markets and investors.

We can see this from the globally big — President Donald Trump’s ban on European arrivals — to the locally small, such as the abandoning of the Australian Grand Prix.

They are negative in a way we have never experienced before — at least in the nearly 100 years of the post-Keynesian “enlightenment”. That makes them totally unpredictable.

This suggests to me the need to separate the dynamics and progress of the virus itself; the policy and business/consumer reactions (to both the virus and those policy reactions); and the global financial market inter-reaction with both policy and investor fear and loathing into their three analytical, and even just observational, silos.

That’s, first. Then you have to try to synthesise and unify them, to get some sense of how the year is developing and where it might be headed.

I can make no useful comment on the virus other than to note two rather conflicting macro points. We haven’t a clue — anywhere — of just how many people are infected; and therefore of both the rate of infection and its true severity.

This is demonstrated by such varied “pop-up” infections as Peter Dutton, Tom Hanks and assorted global politicians and/or their partners. The implication is that the actual infections must be a considerable multiple of the official number.

The counter macro point is that if — and it’s a very big if — both the numbers and rhetoric of China can be believed, the virus can be capped and capped at a relatively low level of infection (and death) — 80,000 in a population of 1.4 billion.

This, in turn, suggests two main things to me. It is an un-rebuttable argument for the most aggressive action: closing borders and intra-country lockdowns. But that is the sort of action that will likely send us into recession.

And I mean a real recession, not the fake two successive quarters of negative growth version, although that will be part of it.

Economic policy should be aimed at alleviating the impacts of the anti-virus measures, because capping the virus is the only path to getting out of the economic mire, as much as the health mire. The mini-budget did that — I hope, we shall see — pretty well, in my judgment.

The idea that governments and central banks should give any sort of priority to supporting the share market is not simply stupid — and, in my view, offensive — it would be ineffective for as long as the virus fear and loathing persists.

Yes, there is an absolute responsibility on the Reserve Bank of Australia and its peers to underpin both system liquidity and solvency. But that’s it.

China got us into this. It will be very interesting to see if China leads us out of it. Both in capping the virus and restarting the global economy.