The Start of the New Depression?

We have all been treated to the real-life drama of the CV-19 epidemic. And now that Italy and some other nations with honest data reporting have made their stats available on a daily basis, we see how an epidemic really works. Not like the fictional data from China.

I don’t mean to imply that we know the number of infections in Italy and elsewhere. We only know the results shown by testing. What about the silent majority who have not been tested? Mrs. Trudeau, wife of Canada’s Prime Minister, has recently, just like the wife of Spain’s Prime Minister, tested positive for the virus. Her infection has been attributed to her brief visit to London for a speaking engagement. So, there she was in a country where officially one in a hundred thousand people have the virus. What is the likelihood that Madame Trudeau encountered even one infected person on her trip? Even if she was with two meters of 10,000 people, the likelihood of her being infected would have been very low IF only one in 100,000 people in the UK have the virus. Statistically, her infection indicates that a much higher proportion of the population is infected than what the tests show. It makes sense because most people don’t get tested. What’s even the point of testing if there is no cure? If you have symptoms, keep away from other people. You don’t need testing to know that.

The virus scare plus the oil price collapse have served as two pins to burst the asset price bubble that has been with us for a long time. The bubble was bound to burst; it was just a matter of finding the straw to break the camel’s back. 2007 to 2009 should have done the job of reallocating assets from the inefficient to the efficient and grounded the economy on a stronger foundation, but our frightened governments kicked the can further down the road with their bailouts. Well, guess what…?  We seem to have arrived at where the can landed. The trouble is that we are a lot more tired and the can is a lot bigger now. I doubt we can kick it out of the way again. I laughed yesterday when I heard that interest rates had been cut to zero, like that will do anything. You can’t stimulate an economy with interest rate cuts when the rate is already very low. Part of the drawn-out delay in coming to grips with the economic dislocations of 12 years ago has involved the low interest rates. Had they been allowed to rise, then today there would be some wiggle room.

There is another aspect to the problem: the notion that reduction in interest rates will give businesses a chance to borrow money to tide them over until they can pay it back. The businesses that need the cash don't have the credit rating to gain access to the cash. Interest rates are not the problem. Liquidity is. Soon, more and more businesses will not be able to keep their workers working.

Many people around the world are no longer working; they are avoiding other people. Prosperity in an economy depends on the production of goods and services and distribution of them. When people are not working, they are not producing or distributing. A depression will be the natural outcome of the current state of things unless people get back to work before the start of our northern summer methinks.

The fear that is toppling markets is seen in the strengthening of the U.S. dollar. Even gold and silver prices are collapsing. The Japanese Yen is one of the few major assets holding its value in dollar terms, not unusual in times like today.

Cash is becoming king again. Hang onto it. Keep your powder dry and wait for prices to come to you rather than chasing them. Prices are dropping and will drop more.