A dangerous gap
Financial markets have got out of whack with the economy. Something has to give
Stockmarket history is packed with drama: the 1929 crash;Black Monday in 1987, when share prices lost 20% in a day; thedotcom mania in 1999. With such precedents, nothing should come as a surprise, but the past eight weeks have been remarkable, nonetheless. A gut-wrenching sell-off in shares has beenfollowed by a delirious rally in America. Between February 19thand March 23rd, the s&p 500 index lost a third of its value. Withbarely a pause it has since rocketed, recovering more than half itsloss. The catalyst was news that the Federal Reserve would buycorporate bonds, helping big firms finance their debts. Investorsshifted from panic to optimism without missing a beat.
This rosy view from Wall Street should make you uneasy (seeFinance section). It contrasts with markets elsewhere. Shares inBritain and continental Europe, for example, have recoveredmore sluggishly. And it is a world away from life on Main Street.Even as the lockdown eases in America, the blow to jobs has beensavage, with unemployment rising from 4% to about 16%, thehighest rate since records began in 1948. While big firms』 sharessoar and they get help from the Fed, small businesses are strug-gling to get cash from Uncle Sam.
Wounds from the financial crisis of 2007-09 are being re-opened. 「This is the second time we』ve bailed their asses out,」grumbled Joe Biden, the Democratic presidential candidate, lastmonth. The battle over who pays for the fiscal burdens of the pandemic is just beginning. Onthe present trajectory, a backlash against bigbusiness is likely.
Start with events in the markets. Much of the improved mood is because of the Fed, which has acted more dramatically than other central banks, buying up assets on an unimagined scale. It is committed to purchasing even more corporate debt, including high-yield 「junk」 bonds. The marketfor new issues of corporate bonds, which froze in February, hasreopened in spectacular style. Companies have issued $560bn ofbonds in the past six weeks, double the normal level. Evenbeached cruise-line firms have been able to raise cash, albeit at ahigh price. A cascade of bankruptcies at big firms has been fore-stalled. The central bank has, in effect, backstopped the cashflowof America Inc. The stockmarket has taken the hint and climbed.
The Fed has little choice—a run on the corporate-bond market would worsen a deep recession. Investors have cheered it onby piling into shares. They have nowhere else good to put theircash. Government-bond yields are barely positive in America.They are negative in Japan and much of Europe. You are guaranteed to lose money by holding them to maturity, and if inflationrises the losses would be painful. So stocks are appealing. By lateMarch prices had fallen by enough to tempt the braver sort. Theysteeled themselves with the observation that much of the stockmarket’s value is tied to profits that will be made long after thecovid-19 slump has given way to recovery.
Tellingly, though, the recent rise in share prices has been un-even. Even before the pandemic the market was lopsided, and ithas become more so. Bourses in Britain and continental Europe,chock-full of troubled industries like carmaking, banking and energy, have lagged behind, and there are renewed jitters overthe single currency (see Europe section). In America investorshave put even more faith in a tiny group of tech darlings—Alphabet, Amazon, Apple, Facebook and Microsoft—which now makeup a fifth of the s&p 500 index. There is little euphoria, just a despairing reach for the handful of businesses judged to be all-weather survivors.
At one level, this makes good sense. Asset managers have toput money to work as best they can. But there is somethingwrong with how fast stock prices have moved and where theyhave got back to. American shares are now higher than they werein August. This would seem to imply that commerce and thebroader economy can get back to business as usual. There arecountless threats to such a prospect, but three stand out.
The first is the risk of an aftershock. It is entirely possible thatthere will be a second wave of infections. And there are also theconsequences of a steep recession to contend with—Americangdp is expected to drop by about 10% in the second quarter com-pared with a year earlier. Many individual bosses hope that ruth-less cost-cutting can help protect their margins and pay downthe debts accumulated through the furlough. But in aggregatethis corporate austerity will depress demand. The likely out-come is a 90% economy, running far below normal levels.
A second hazard to reckon with is fraud. Extended booms tend to encourage shifty behav-iour, and the expansion before the covid crashwas the longest on record. Years of cheap moneyand financial engineering mean that account-ing shenanigans may now be laid bare. Alreadythere have been two notable scandals in Asia inrecent weeks, at Luckin Coffee, a Chinese Star-bucks wannabe, and Hin Leong, a Singaporean energy trader that has been hiding giant losses (see Schumpeter).A big fraud or corporate collapse in America could rock the mar-kets』 confidence, much as the demise of Enron shredded inves-tors』 nerves in 2001 and Lehman Brothers led the stockmarketdown in 2008.
The most overlooked risk is of a political backlash. The slumpwill hurt smaller firms and leave the bigger corporate survivorsin a stronger position, increasing the concentration of some in-dustries that was already a problem before the pandemic. A crisisdemands sacrifice and will leave behind a big bill. The clamourfor payback will only grow louder if big business has hoggedmore than its share of the subsidies on offer. It is easy to imaginewindfall taxes on bailed-out industries, or a sharp reversal of thesteady drop in the statutory federal corporate-tax rate, which fellto 21% in 2017 after President Donald Trump’s tax reforms, from along-term average of well over 30%. Some Democrats want tolimit mergers and stop firms returning cash to their owners.
For now, equity investors judge that the Fed has their back.But the mood of the markets can shift suddenly, as an extraordi-nary couple of months has proved. A one-month bear marketscarcely seems enough time to absorb all the possible bad newsfrom the pandemic and the huge uncertainty it has created. Thisstockmarket drama has a few more acts yet.
年費會員
終生會員
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