Dynamic Planner's Chatterjee: Navigating the 'tidal wave' of fiscal policy
"May you live in interesting times," goes the apocryphal Chinese saying. Whether this is a curse, or a blessing is open to interpretation, as all pithy statements are.
Within the past six weeks, I have seen more from my little home office desk than all the time spent on trading desks.
The single largest day increase in VIX since 1990, two of the largest daily falls in the S&P 500 since 1927, central banks committing larger amounts of money to targeted relief than during the Global Financial Crisis, and people ready to pay others $38 to hold a barrel of oil.
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Given stringent public health policies, a sharp decline in economic activity has already occurred as shown by PMI numbers plummeting to unforeseen lows, and it is expected that we will see a deep recession in the Western, as well as Emerging economies.
The question now remains as to how long the recession lasts and what the longer-term impacts of the pandemic are going to be.
The answers to these questions currently lie in the realm of speculation, as there is no definitive idea on how and when lockdown measures are eased, or if there is a chance of a second wave of the pandemic.
A realisation that occurs quickly is that extrapolation of data from past recessions are unlikely to be helpful.
All we do know is that the pent-up domestic demand should come back online once stringency measures are relaxed gradually, but economic growth may still be sluggish due to a gradual growth in international trade and investment.
In the wake of the pandemic, the central banks around the world have unleashed a tidal wave of fiscal policies to help the private sector, which is the cornerstone of all developed economies.
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In a concerted action across the board, central banks of developed countries have assured individuals as well as corporations that no measure is big enough for them to use in these times.
Central bank rates are at all -time lows, asset purchase programmes worth billions which involve buying up of below investment grade debt and asset backed securities, and governments effectively providing loan guarantees to mortgages providers, banks and the like.
It appears that Western governments have opened their balance sheets for households and the private sector, in order to stave off bankruptcies and large-scale lay-offs.
Credit is the fuel which businesses run on and the availability of credit will determine which parts of the economic anatomy remain unaffected by the virus.
However, credit perpetuates on the optimism of growth - the promise of increase in activity resulting in repayment. Without growth, be it sustained or otherwise, we face a self-reinforcing cycle of diminished confidence, bankruptcies and lay-offs.
Thus the over-leveraged world, which gorged itself to a surfeit of debt in a low interest environment, looks on with mounting concern and interest (all puns on the word intended) the policies to be enacted by public institutions, who face the ultimate dilemma: the Scylla of a stagnant economy or the Charybdis of human cost.
Hopefully, the answer to this manifests itself serendipitously.
Abhi Chatterjee is chief investment strategist at Dynamic Planner
Bull points
• This is macroeconomic shock and not a macroeconomic regime change - yet
• Valuations on equities should provide opportunities
Bear points
• Uncertainty around relaxation of social distancing and lockdown policies has macro impacts
• Expected expansion of Government balance sheets could have long term inflationary effects
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