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Treating the virus, not the markets

‘Rather than trying to manipulate the market, we should be treating the economy as one would treat a virus.’

“Are governments and central banks treating the stock markets when they should be treating the virus?”

I recently came across a really interesting article written by Julian Koski, the chief investment officer of New York-based asset manager New Age Alpha, in his CIO Outlook dated March 16, 2020.

New Age Alpha’s view is that financial markets are moved by human biases and it is these human biases that cause markets share prices to become too high for the management of the listed company to be able justify the share price of the company or conversely when share prices are too low and the management of the company can easily justify the share price of the listed company it is at this stage that the share price reflects a buying opportunity for the investor. They refer to this approach as “Avoiding the H-Factor.” H-Factor being a shortened version of Human-Factor.

The article made me think that the US government, Federal Reserve and some other governments have been tackling the Covid-19 virus in completely the wrong way.

Consider that Covid-19 is firstly a medical crisis

The first step is to consider that the Covid-19 crisis enveloping the globe is a medical crisis. It is the medical crisis that has given rise to the financial market conditions we are currently facing.

In the last two weeks, we have seen the US Federal Reserve cut interest rates to near zero, the UK also cutting rates with the European Union also seemingly in discussions to consider cutting rates.

In addition to the cut in interest rates, many governments (especially the US) have announced stimulus packages to support the financial markets. And let’s face it, the financial markets do need all the help they can get at this stage. But now the question must be asked:

Where did all the current market volatility start?

With the coronavirus outbreak. The virus initially caused many factories in China to close in order to contain the virus, this was followed by a global economic slowdown which then caused the current market crash.

So why not treat the cause of the problem rather than the symptoms?

According to Julian Koski of New Age Alpha, the stimulus packages announced by governments should actually be utilised to increase intensive care beds or to purchase more respirators. In other words, treat the virus, not the markets.

In the article, Koski writes that “the Covid-19 pandemic is both a medical crisis and informational one. There is still so much unknown about the virus. Already, social media disinformation teems with incorrect and potentially deadly treatments.”

If one considers that with certain human medical conditions the treatment is “concrete”. Like when a patient presents with a burst appendix the treatment is to remove the appendix. However, when one is dealing with a viral pandemic the treatment is complex and involves many unknowns. In these situations, an economy should be treated as the patient and treated when symptoms arise.

Too much focus on stock markets?

Koski in his article states:

“Instead what have our leaders done? They have focussed to a fault, we would argue, on the stock market. True leadership was – and is still – needed in the form of assurances and material support. Trillions go to the stock market while a fraction of this goes to stopping the virus. We know we will need hospital beds; we know we will need medical supplies and respirators. In terms of addressing ‘the five inches in front of our face,’ it is incontrovertible that these supplies will be critical. Instead, the White House and the Federal Reserve have worked to cut interest rates and increase appetite for equity assets. This doesn’t do anything to help the morale of the 80-year old in a flyover state terrified that she’s peering at her final days.”

On Friday, March 13 2020, US officials unleashed a historic amount of $1.5 trillion at 3pm just as the US markets were about to close for the weekend. This was followed by a late Sunday, March 15, announcement that interest rates would be brought down to near zero and then the Federal Reserve announced a $750 million fifth round of quantitative easing. On Monday, March 16, the US markets had their biggest fall since 1987!

On these events, Koski comments that:

“The fundamental flaw in this approach is the government is trying to treat the economy without knowing what is broken. The H-Factor, the unknown risks, abound. A proper physician would be standing by to reassure the patient that he or she is ready to utilise the best resources to treat symptoms as they surface. Instead, it’s become apparent, sadly and unfortunately, that the government’s current actions are to maintain stock market performance in a blatant attempt to save a re-election bid. And in the process, as is also apparent, they’re all but ignoring the barren shelves and ever-increasing health and safety fears of their constituents.”

The Human Biases

Koski believes that by feeding into human biases (What New Age Alpha refers to as the “H-Factor” mentioned above) that pegs the severity of the pandemic to the market. New Age Alpha believes that such a band-aid approach may be making the situation actively worse and lacks any reasonable quality of precaution or attentiveness to the importance of social distancing with some reports reflecting that in many US cities there were as many people around as in normal times.

In the article, Koski says, “This is terrifying. If true across America, it means the government has utterly failed in its primary job to treat the symptom at hand. Rather than truly leading and approaching the pandemic with the respect it deserves, their nonchalance and market-fixation have likely fed into dangerous human biases.”

I think that Koski is right in many ways, in that this current crisis is a health crisis, first and foremost and therefore exponentially complicated to deal with. The pandemic is multi-faceted with huge needs of supplies and equipment and the constant problem of finding and testing those persons who may have come into contact with the virus. When comparing this crisis to the 2008 global financial crisis (GFC), Koski explains that GFC eventually reached main street US after first hurting Wall Street. However, this pandemic is first affecting main street US and this is where the problem needs to be treated.

Where South Africa got it right!

As South Africans we can be proud that our government lead the nation well on Sunday evening (March 15, 2020) when President Cyril Ramaphosa addressed the nation on this pandemic, announcing the correct measures to begin to contain the spread of this virus.

The measures announced included among others, limiting travel from and to affected countries and closing schools until after Easter. Ramaphosa in his statesman-like address even demonstrated the “elbow greeting” as the alternative to the handshake.

In the US, leadership has been missing from the US Federal Government as Koski explains, “The government’s role is to lead. In times of crisis, they should inspire the public’s confidence in the ability to make it through to the next day. Unfortunately, we’ve seen anything but this from the federal government. If your mother arrived at your doorstep coughing, unable to breathe, would you offer to review her investment portfolio? No. That’s preposterous. You’d treat the symptoms at hand. So, it should be with the Covid-19 pandemic. We believe the government is addressing unknowns when they should be focusing on the knowns. Rather than trying to manipulate the market, we believe they should be treating the economy as one would treat a virus. There are no quick fixes, there are no short cuts, it can only be treated symptomatically.”

I know that in these critical times there are not always known solutions, but I do feel that the best approach is always to face the problem head-on and to tackle the most important aspect first. Let’s stop the spread of this virus by being responsible and thinking about the person next to us.

Extracts and quotes from the article by Julian Koski of New Age Alpha have been used with Koski and New Age Alpha’s permission.

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Mauro Forlin

Global & Local Asset Management

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