Visions At the Gates of Pandemonium: Covid-19, Market Woes, FDR, Eloi, and Crumbling World Order

Are you still worrying whether or not we’re headed for a recession? Don’t. We’re there, and the long-term effects of this one are going to be seismic in scale. Your choices are to stop reading and go stock up on canned foods and toilet paper or join me in figuring out how to beat this thing so future generations don’t hate us as much as our children do right now. 

How do we tell for a fact we’re in a recession now? First of all, it's time; virus or no virus, we live in the economic system that needs to visit rehab every few years, and the next recession is long overdue. Some prominent economic thinkers believe that the 2008 disaster never actually ended but through endless variations of QE morphed into a colossal self-reinforcing recurring crisis. As a result of never-ending helicopter money being dumped on the hot plate of “free market,”  hyper liquidity is now an abundant fuel source for all kinds of asset/credit/finance bubbles that seem like they’d been lifted from the late-twenties rule book. Secondly, we missed the opportunity to react to Covid-19 early in the going, and by the time the virus sneaked out of China and the world had to face the sinister possibility of a pandemic, it was already too late. The markets damn-near blew up and the fears of a worldwide financial calamity were realised. 

Today the risks brought on by the virus and a host of other factors it exacerbated have been assessed and priced across all sectors of the global economy. We can safely acknowledge that a deep global recession is now a foregone conclusion.

Does that mean that the current market drawdown is the final curtain to the world of finance as we know it (after all we have here all the juicy bits of a Hollywood blockbuster, the kind where a global pandemic leads to a complete collapse of civilization capped by a zombie apocalypse)? It kinda does, but let's not get too ridiculous. It will get extremely messy, though. There are signals of the trying times ahead and the structural impact from the unfolding crisis will most assuredly last. The challenge is to come up with a viable scenario for the recovery and restructuring of the global economy in a way that would make future bubbles pop as quietly as possible.

Let's agree from the start that there's not a single indicator that captures accurately the magnitude of the situation, and if somebody tells you that by looking at GDP forecasts, labour market participation numbers or the price of gold "before and after" we can predict the end of days, stop listening. Even when the virus trajectory becomes somewhat predictable and the effectiveness of containment efforts seem to beef up consumer confidence and stabilise market reactions, there's still going to be a serious economic impact across all asset classes. Again, there's something systematically wrong with the way the global economy functions and Covid-19 is another hat tip from the Great Beyond. Let's politely nod back and embrace it as an opportunity to look at possible recovery patterns not only short term but hopefully glean valuable insights into the path we are doomed to walk for the observed future.

What's Happening With Markets?

Oh, it’s brutal, but you already know that. Valuations of safe assets have spiked sharply (bringing availability to near zero), with the term premium on long government bonds plummeting to near record lows. In the US, we're talking (so far) negative 116 basis points indicating the high price investors are willing to pay for the safety of government debt that doesn’t seem too safe any more. At the same time, massive efforts on the part of Central banks (securities purchases, lending facilities, swap lines, etc.) designed to revitalise the bond market seem to be of no avail. As Financial Times’ Robin Wigglesworth puts it, “When financial markets were rattled across the board last week, some investors and analysts thought they knew where to point the finger. ‘The risk parity kraken has finally been unleashed,’ one tweeted.” But the sight of “safe” funds sliding by double-digits sent everybody into a panicked frenzy. “That is quite a fall, continues Wigglesworth, for a strategy designed to function well in almost any market environment by seeking to find a perfect balance of different asset classes such as stocks and bonds. Some analysts say such funds are not just succumbing to the wider turmoil but exacerbating it - especially the freakish sight of both supposedly defensive government bonds and risky equities selling off at the same time.”

As for the valuations of risk assets, which weren't impacted by the virus uniformly, surprisingly the credit spreads have risen very little, suggesting a relatively smooth sailing for credit markets historically riddled with funding problems at times like these (more helicopter money, please!). Equity valuations have markedly fallen from recent highs, but remain elevated compared to historical lows. On the opposite side, volatility has signalled the greatest strain, implying a rocky road ahead comparable with major curves of the past 30 years, outside of the 2008 crisis.

However, it’s important to keep in mind that conflating bear markets with recessions is wrong or at least shouldn't be done arbitrarily, especially given that financial markets' unruly behaviour is what causes trouble in the first place. In other words, plummeting equities (S&P500 down 15.0% and Nasdaq down 12.6% just last week) and other fairly calamitous market events ascribe serious disruptive potential to the virus, and those risks are real. But the fluctuations in asset valuations are a somewhat ambivalent indicator when history has already taught us many lessons that a direct connection between financial market sell-offs and the real economy should not be made.

What Sort of Recession Are We Looking At?

It’s a known fact that the more misleading the market indicators are (and they are by nature), the more real is the upcoming recession (oh, it's very real). The vulnerability of larger economies rises as growth slows and weaker economies are no longer able to absorb exogenous shocks. In part, we got ourselves a classic CapEx boom-bust cycle accompanied by major geopolitical turmoil derailing the expansion and causing the real economy to contract. We have a policy recession when central banks slash rates and force the economy into a liquidity trap like we've never seen before, dumping trillions into the bottomless markets. Of course, the conditioning and tighter intermediation are called upon to create an impression of order. The fiscal support the G7 finance ministers have pledged looks and feels very organic but the actual implementation of the loudly heralded mesures is an entirely different matter. And, as always, we've got financial imbalances that tend to build up with time and suddenly avalanche on us wrecking entire economies in days. Yet again, even with the multitude of financial news channels and hoards of commentators living off speculations, predictions, and prognoses, we still don’t know what exactly hit us. Is it the corporate credit bubble? We know that unlike subprime loans during the housing bubble, corporate credit doesn't fund the real economy. Why do it then, when we could reroute every dollar to help SMEs with cash flows, fund infrastructure projects, and conduct Covid-19 testing free of charge? Is it the subprime loans thing? Is it the stock market? Is it cash flow strains? Is it the "greed is good" paradigm? Is it freakin' China? Is it the current Governor of the Bank of England, Andrew Bailey, who says that "sterling’s rapid descent to below $1.19 on Wednesday, March 18 could not be explained easily"(yup, he wants to pump "unlimited money" into the British economy while melancholically thrashing Bitcoin)? Is it perhaps Texas Lieutenant Governor Dan Patrick who calls on his state’s senior citizens to “sacrifice” in the name of the economy, ignore the quarantine and go back to work? The reaction to Patrick’s remarks by Jeffrey Sachs, Columbia University Economics professor, is very telling: “I’m speechless. The ignorance and cruelty displayed by that is beyond almost anything I can recall in the American life.” 

Well, there’s no one-word answer on this one, but I have to say that as soon as Covid-19 entered our existence, the litmus test for general competency in the circles that run the world has been flaring up bright red like a bonfire of Christmas trees a week after the New Year’s. 

What Are We Going To Do About It (ideal world scenario)?

Now that I’ve depressed the hell out of you, let’s put on our Dumbledore hats and, for starters, try curbing the sheer insanity of the growth syndrome, which Bill Maher described so eloquently in 2016 - before Russiagate fried his brain. While remapping our habits within the psychological framework that feeds our consumerism, we could implement a number of practical measures to radically change the current alignment of forces in the financial sector. We could outlaw stock ownership for elected representatives and public officials in any context. Given that Jimmy Carter had to endure $1 million debt because his peanut farm had to be put in a blind trust for the duration of his presidency, it doesn’t seem that far-fetched. 

We could classify non-dividend-paying stocks as gambling instruments because capital gains are essentially monopoly money. We could require businesses by law to have to pay dividends and meticulously specify what constitutes a dividend so a penny popped off to investors just to shut them up could not be construed as a dividend payout. 

Let's keep that pointy hat on for a little longer and suggest a measure that would allow businesses in need of funds to issue as many shares as they want, but by law they can't release their shares into the open market until the company starts showing real profits and start paying out dividends so that its stock becomes a legitimate equity instrument with a monetary connection to profits. 

We could outlaw the appalling practice of stock buybacks or at least follow Mark Cuban's lead and prohibit businesses who received a single dollar of bailout money from buying back their stocks. The glaring example here would be Boeing who in the ideal world would cease to exist a long time ago with half of its top executives ending up in jail. But in our reality, Boeing - the largest US exporter - leads the collective effort on the part of the largest US airlines to squeeze $60 billion more in government subsidies and loan guarantees from the American taxpayer. 

And so on, and so forth. I’m specifying these measures because they could be implemented in a week with no visible strain on the real economy, no damage to our political culture, and at little or no cost. And because they are right there on the surface: just sign, relax and watch the true free market economy rise from the ashes of predatory capitalism. No more golden parachutes or obscene raises during the time when the US realistically faces 30% unemployment - an indicator not seen since the Great Depression. No more extreme wealth or extreme poverty, every tax payer essentially holds a dividend-paying stock in the entire national wealth-producing machine where captains of industry are beholden to all citizens rather than only shareholders. Or in the words of FDR, “These economic royalists complain that we seek to overthrow the institutions of America. What they really complain of is that we seek to take away their power. Our allegiance to American institutions requires the overthrow of this kind of power. In vain they seek to hide behind the flag and the Constitution. In their blindness they forget what the flag and Constitution stand for. Now, as always, they stand for democracy, not tyranny; for freedom, not subjugation; and against dictatorship by mob rule and the over-privileged alike.” Ah, nice.

What Are We Looking At In Reality?

The probable consequences of the Covid-19 pandemic will be impossible to predict definitively but that's where it gets interesting because, as I've firmly established above, nobody knows anything, at least not to a degree that would allow them to make a claim with undisputed authority. Even the WTO Director-General Roberto Azevedo, having grimly predicted “economic recession and worse job losses than seen in the global financial crisis of 12 years ago,” acknowledges in his video message posted on the agency’s website that “no concrete forecasts are yet available.” Let us also not get too concrete and merely invoke the right of opinion. 

I believe that inanity and meekness of the first-world governments' responses to the Covid-19-induced crisis will accelerate de-globalisation, which is already taking firm hold in our political and economic culture. International treaties are crumbling all around us, trade wars are raging on, separatist and nationalist movements are gaining momentum, the new arms race is becoming an alarming reality. The international institutions designed specifically to hold the world together are struggling immensely and the giant apparatus of monopolised capital is in no hurry to assist them.

Add the pandemic to the list above and we will probably see businesses in Europe and the United States shift their crucial supply lines away from Asia and toward local suppliers - something Apple began "exploring" almost a year ago. Curiously, the centrifugal forces of the past-pandemic capitalism will hardly affect the actual mindset and logistical layout of global trade. Business - big and small - will still want to move capital, raw materials, spare parts and finished products swiftly and freely, which will result in a paradox: though becoming increasingly domestic, the global economy will continue to rely on the existing capital markets and legal frameworks. 

To succeed, international business will have to implement diverse consensus-based technological solutions to substantially shorten distances between market participants essentially digitalising the rest of the global asset pool to ascribe it universal accessibility, greater transparency, and ultimate liquidity to serve the economy productively and  purposfully. In other words, getting closer while staying away from each other is going to be a new world’s order. 

The financial relations we are accustomed to are going to get shredded beyond recognition. The system of earmarking cheap money for massive shenanigans like QE and stock buybacks will end (it has to!) or at least go through a period of major reassessment. Inflating assets through leveraged speculation leading to creation of a self-replenishing ocean of wicked liquidity - no more. The very definition of “safe assets” and value of holding them will be altered to a degree that would reveal to us that there’s no such thing as a safe asset any more, which in turn will have us redefining the notion of risk. Hell, AI may even have to write some new laws for the new era of transformed labour markets and trade relations in which people will have to play completely different roles, but let's not go there just yet... 

To keep the world trading in the post-pandemic times, we'll have to innovate our way into a system that would make markets substantially more efficient through partial and complete automation, and there are people who are already hard at work doing it. We would have to trust technologies like blockchain with removing some of the middlemen functions, "overseeing" rapid cross-border settlements, solving problems with identity, land titles, currency, central banking, voting and dozens of other sticky issues people just can’t seem to resolve on their own.

These are non-trivial problems in the business universe and civic relations, and the incremental gains to even one facet of the purported benefits of digitalisation could be highly compelling to society, governments, businesses and market participants. Or as Chris Burniske put it in 2018, “...regardless of what we call it, the important thing is that the “consensus system” remains, providing a decentralized way for [rational] economic actors to reconcile the truth. The economic incentives that induce actors to perform this function without a central coordinator is the true innovation.”

Essentially, - and finally- the post-Covid-19 world order is going to have to face a question simple enough on the surface but bearing crucial implications for the future generations: are we divided or united? On the one hand, rising regionalism will have international agencies reach across oceans making sure that local policies and economic trends aren’t running counter to the global agenda. On the other hand, we aren’t going to be able to just switch off the ills of the world and the looming environmental catastrophe, extreme poverty, unchecked power of the military industrial complex, racism, sexism, fascism, monopolism aren’t going anywhere anytime soon. Before our biological beings move to a whole new plane of existence and evolve into Eloi, we will have to face myriads of existential threats and whether we will be able to endure, survive and prosper remains a $23 trillion question.