An occasion for change

Two months ago it was generally accepted that shares on the stock market were overpriced. This was explained by the very low or negative interest rates that were the consequence of central bank interventions on the short term (repo) and long term (QE) lending markets. As dividends and interest are alternative forms of profit, they always keep more or less in step with one another. And even the smallest of dividends is better than negative interest.

The pandemic is savaging supply and demand, and countless businesses are on the verge of destruction. The market’s first reaction was to sell. The rush for cash resulted in most share indexes losing a third of their value, and interest went up a few decimal points. But holding cash does not generate revenue so, as soon as governments and central banks promised hand-outs of hundreds and thousands of billions, buying started up again. At present the Standard & Poor index is only about 17% below its peak and interest rates have sunk lower than ever.

Market gamblers are betting that industry, commerce and finance will weather the storm and regain their previous splendour. They seem to have forgotten that the past glory was built on sand, and was already showing severe signs of strain. The return of market exuberance seems premature, as nobody knows when or how the pandemic will end. All this commotion cannot fade away without a trace. Tomorrow will not be like yesterday. It could be better and it could be worse. In the second case, it might be just as well that Boomers are no longer around to see the mess they made and cry over spilt milk. But the first case would mean that same generation - who owns most of the world’s wealth and decides how it is governed - has radicalised suddenly and remembered its rebellious and carefree youth, or has mostly died off with respiratory symptoms.

The idea that the epidemic will go away just as it came: quickly and quietly, is presumptuous and most certainly wrong. The repercussions will be long lasting, measured in years not months. A different way of life will emerge, more centred on essentials and more localised. Travel and tourism will be the worst hit, in what could be a permanent trend. Sea cruises and sight-seeing plane flights may never start up again, and the makers of cruise ships and passenger planes will have no more customers. In which case, providing them with financial assistance is pure waste, especially Boeing with its parking lots already full of 737-MAXs. The countries that host tourism, and all do to some extent, will lose a more or less important inflow of foreign currency, with a direct impact on their national finances. The fall in travel miles equals a drop in fuel consumption, which means excess production and shrinking prices. And cutting off that surplus will be an unprecedented and massive reversal of the growth trend and its ideological monopoly. There is talk of a reduction in global demand of 25 million barrels per day, more than twice US production and over a quarter of world consumption. Agriculture is also in trouble. Especially industrial farming that employs large numbers of seasonal labour, lodged and fed in often sordid conditions with no social distancing, and many have been stopped by closed borders. A lot of these industries sell their crops and meat to fast-food and restaurant chains that have largely closed down. Small farms that employ family and neighbours, and sell their produce locally may fare better than the mega ones. The fashion industry is crashing and the production of cars and trucks is on standby, but so far the military-industrial sector does not seem to be complaining.

Exceptional life-changing events are occurring in every domain. The fundamental processes of expansion and growth have gone into reverse. Everything is shrinking, production, consumption and space itself has dwindled to domestic proportions. As this is likely to last a year or more, until widespread vaccination has occurred, it could be a time for thought. Humanity has been hurtling towards financial, environmental and climatic chaos, so the global lockdown could be an opportunity. Having almost come to a standstill, a complete change of direction becomes possible. For the time being all talk is about getting back to “normal”, the normality of poisoning the atmosphere, soils, rivers and oceans, of desperate poverty and of wanton mayhem with high-explosives. The desirability of such a norm is questionable, and what better time to question it than now, as it is forced into slow-motion. 2020 could be the year 01 of a cooperative, durable future, or of heightened violence and destruction. The outcome will depend on how many people are convinced that a different world is possible. And the disruption of the coming months will decide the balance.

Oceans of cash

To keep interest rates close to zero or negative, and thereby encourage more borrowing, central banks are buying up debt as fast as they can. They are doing all this buying on the market, not at the source of emission, and market prices for the more secure debts (Treasury, corporate, mortgage-backed) are much higher and often multiples of their face values. In mid-October 2018, US Treasury 10-year bonds were offering 3.2% interest. They are presently at 0.74%, which means their price has multiplied by four. 3.2% of 100 equals 0.74% of 432. Central banks are accumulating ever larger stocks of overvalued debts, and overpaying necessarily devalues the currency.

The massive acquisition of debt by central banks – mysteriously named quantitative easing (QE) – was a response to the liquidity crisis caused by exorbitant subprime mortgage lending. A decade ago, the idea was to re-float the banks with liquidity in exchange for their stocks of debt, and have them start lending again. And, once the crisis was over, the cash poured into the system would be drained out progressively by selling back the debts or by redeeming them at term. But the crisis never really ended. And, after the briefest of interruptions, central banks had again started buying debt, even before COVID-19 laid waste to all previous planning. Now it seems that the whole process is spiralling out of control, with $Trillions materialising on a weekly basis and no end in sight. Print and spend is the new normal on the path to nowhere. Beware the pending coronal inflation.

Social distancing or class divide?

Humanity is undergoing an amazing experience, unprecedented in scale. A situation where everyone must be wary of everyone else, neighbours, family, fellow workers, friends, customers, cashiers, any and every contact runs the risk of catching or transmitting the virus, and many do not even know they are ill and contagious. This general state of wariness seems quite similar to descriptions of life in totalitarian societies, except that the risk of social contacts is different. Instead of an Arctic labour camp, the consequence may be a hospital ventilator, and both can be terminal. It is not the exchange of ideas that is dangerous and possibly fatal, it is merely about spittle and snot, not what one says, only where one coughs. But the state of anxiety and suspicion can be just as extreme, and the psychological impact just as debilitating.

Humans are used to being and coming together. They enjoy gathering in large crowds for entertainment or to experience the power of numbers. Most people spend their time mingling, and the hermit’s isolation needs a particular, often mystical, mind-set. Very few are mentally prepared for a prolonged confinement. Fortunately, there are the virtual communications of print, sound and video. All those digital messages racing round the planet had already created a form of social distancing, where the screen obliterates the surroundings. Many already had a more intense life on-line than in the real world, especially among the younger generations. They will probably manage the best in isolation. And it so happens that they are also the ones least likely to have severe symptoms if they are infected by the virus.

This global quarantine is accentuating the importance of communication networks, cable and Hertzian. It is also showing the world what is essential to its survival, and how life is possible without the perpetual movement of fossil fuel consumption. And it has glaringly highlighted the fact that the workers who actually keep things running are among the lowest paid categories. They are the frontline heroes, and simply clapping for them every evening will not raise their wages. This springtime 2020 is pinpointing a number of realities that may be quickly forgotten once the pandemic abates, or maybe not.