Who to blame

Stock markets have dived as the world goes into lockdown over the COVID-19 (pity the poor brewer) pandemic. Though no one could foretell what the detonator would be, it had been obvious for a while that a correction was imminent. The value of investments - whether shares, bonds or real estate - cannot increase infinitely. They go up and come down, and over time stay in line with the general growth of wealth. As they represent that wealth, they can only follow its actual progress. Deviations, above or below, must compensate each other so as to conform to reality. The value of investments on the market varies with supply and demand, which in turn are influenced by speculative trends, with prices rising or falling. Prices rise when there is more money entering the market and they fall when money is taken out. For close to a decade free credit and tax cuts supplied the vast quantities of liquidities that pushed up the market price of equity. Corporations were borrowing or, for a few, repatriating their overseas profits to buy back their shares. Meanwhile institutional investors, public and private, were doing their share of buying, with the more adventurous leveraging as much as they possibly could. All these were joined by millions of internet investors playing the game with their savings, or more when they could. An ever growing amount of funny money was investing the market and lifting its various indexes to unprecedented heights. From November last year to the end of February records were being broken on average twice a week on the NYSE. Then that unsustainable progression began to slow down and, in so doing, instilled doubt. Future obscurity became a manifest certainty with COVID-19, and quite suddenly everyone wanted cash, instead of all that other paper stuff. The need and the urge to sell combined and, as sufficient cash was not forthcoming, prices dropped. Wall Street was wilting, so the Federal Reserve Bank of New York poured money into the system through the repo market. Share prices have been moving up and down with unusual amplitudes, but so far the downward motion has been the strongest. When shares are in trouble, Treasury bonds are habitually in strong demand. But T-bonds are actually so overpriced –double last summer’s value, from 2% interest to 1% and below – that they are also being sold off (1). The demand for cash and particularly US dollars means other currencies are getting a beating on the foreign exchange market, though they are locally also in strong demand. Cash is cash. Even though there is more of it than usual because of quantitative easing, liquidity only represents a small fraction of exchanges. This works because money is constantly changing hands in serial exchanges. When money is being horded for security or is disappearing down the debt hole as credit repayments, cash becomes scarce and prices plunge. The present situation has been regularly offset since 2008 by more and cheaper credit, but all debts finally come home to roost and insist on obtaining their due. Credit and debt have ups and downs, in cycles that vary according to their periodicity. This multitude of time scales rising and falling may cancel each other, or may move together either up or down. Revolving credit and renewing debts reduces the effects of a downturn by pushing the reckoning further into the future. But that supposes the future inspires confidence. When it does not, lending dries up and cash is demanded. And as cash is rare bankruptcies will spread like prairie fires, driven by the viral winds of COVID-19.

03/28/20
The Federal Reserve's cash bomb seems to have made the US dollar less atractive.

1. 13/05/20. This was an exaggeration due to miscomprehension. The price of bonds varies according to interest rates, and interest rates vary according to the price of bonds. But the relation is not direct. What remains the same is the price plus the interest still to be paid. 100 at 5% will pay 50 over ten years (= 150). Supposing that a year after emission, when there are still nine payments pending (= 145), interest rates drop to 2.5%. Then 145 = 9 x 2.5 + the new price (122.5).