Authored by Richard Breslow via Bloomberg,
This has been what looks like an awfully cheap lesson. And few have any interest in learning from it. Scan down the day’s headlines and there is no shortage of items about the ill-effects on businesses from disruptions caused by the coronavirus outbreak. Turn on the TV or radio and it has been more of the same. Naturally, the next thing to do was fire up the launchpad and see what was the damage.
The good news has been, so far, that Nasdaq 100 futures are down less than 1%. That may also be the bad news. We last saw these prices last Thursday. For Apple, one would have to go back further -- to the beginning of last week. If this resiliency was really based on an educated assessment of the long-term prognosis for the disease, or even the extent of business interruptions, it would be one thing. But as we are learning, and likely to keep learning, that really can’t be done with any certainty.
What traders, with good reason, choose to believe is that the authorities, in China and all over the world for that matter, will respond with yet more liquidity. It is taken as a given. They have been assured that the central banks are watching things carefully. So you don’t have to.
On the one hand that is a comforting message for investors. On the other hand, it’s a bad message to be sending.
Not every problem can be solved by cutting rates or with additional quantitative easing. It’s a disease, not a housing bubble.
And even if, over time, more liquidity might soothe a slowing economy, it isn’t likely to work presto chango. And markets don’t have patience. Convincing people that nothing can go wrong is begging for a comeuppance. What central banks need to avoid is employing the wrong cure and being left with traders panicking because, “it isn’t working.”
We don’t know if, when or what the next shoe to drop might be. And there isn’t likely to be a one-size fits all solution as we convinced ourselves was the case during the financial crisis. Trickle-down economics won’t get people out of quarantine. Investors are sanguine. I’m not sure very many others are. We’ve been here before. And actions have consequences.
Meanwhile, another data miss from Germany. This time the ZEW survey of investors. Results such as these have become all too worryingly common. Analysts seem to be reticent to mark down their forecasts adequately. That may have something to do with the notion that, to the extent it is China and supply-chain related, this too shall pass. And when it does, Germany will be a prime beneficiary. There is a surprisingly sure expectation that it will happen on some sort of schedule. The weakness of their manufacturing sector has been prolonged. And has lasted a lot longer than expected. What ails it won’t be cured by the ECB experimenting with where the reversal rate will kick in. If it hasn’t already. Stay tuned to the Markit PMIs coming out later this week. Core Europe could do with a win.
This week is chockablock with central banks speakers. It’s time for the annual Chicago Booth Monetary Policy Forum. The main paper being presented is “Monetary Policy for the Next Recession.” It seems a lot less theoretical than we thought not very long ago.