The reality virus bites deep

Is the coronavirus the trigger that will burst the big financial bubbles?
Day of reckoning approaching? Stock market investors, obsessed with shareholder value and capital growth, are more likely to take their lead from monetary authorities than earnings potential. Image: Shutterstock

A question many are asking after the coronavirus started playing havoc with the markets this past fortnight or so, is whether we are witnessing the end of excessive financialisation of economic activity.

Ever since we went off the gold standard, the world has used record levels of debt creation and money supply to stimulate economic growth. And it went much further than countering natural and essential economic cycles to include political and electioneering pressures, with the growing power of the financial elite in particular putting pressure on the monetary authorities to issue more debt and reduce interest rates.

From a real economic growth point of view, it hasn’t really worked, a point emphasised recently by our own SA Reserve Bank Governor Lesetja Kganyago.

While some economic growth may have been a spinoff of increased money supply and increased debt, the bulk of extra money creation did not find itself in the hands of the public or even in production capacity, where real value is created. Instead it found its way to the rentier financial elite, where it has been deployed in reinvesting in assets and causing some big bubbles in stock markets, upmarket property, and bonds.

That broadly left us with two economic systems: financial and real, where the former has increasingly become disconnected from the latter.

It took a small bug to trigger a clash of horns between the real economy and the financial economy.

For a while it seemed as if the real economy was stamping its authority on financial markets and finally triggering a blow-off of the speculative froth that has been driving global economics for decades. But it is early days yet to see whether Wall Street has seen a long-predicted solid correction from years of prices being pumped by cheap money, share buybacks and private equity purchases and mergers.

In the years since the 2008 global financial crisis, shares on average are still nearly 250% up; and 150% higher than five years ago.


Stock markets are the strongest connection between the real economy and the financial because while prices may be propped up by cheap debt, the effects of developments in the real economy are immediately felt in listed companies’ earnings and performance. These can only be ignored for so long and offer a trigger for speculators to take positions for and against various equities. The confusion between the two was blatantly clear in the performance of Wall Street.

For weeks after the virus hit the headlines in early February, Wall Street simply ignored it and the Dow Jones Industrial Average continued to show daily gains.

Wall Street’s reponses to the coronavirus were bizarre to say the least and showed the difficulty in balancing capital investment growth based on cheap debt with performance and earnings based on market factors.

Down, up, down, up … where to next?

When Wall Street realised that the latter could be severely affected by the Covid-19 outbreak, the Dow dropped like a stone. Then it quickly recovered some losses on an anticipated “unexpected” stimulus from the US Federal Reserve board. Then it fell again, because some saw the 50-point rate cut as a reflection that things were really bad. It then recovered somewhat when the positive effects of the cut were taken into account.

At time of writing, this market was still very confused and is expecting a further 75-point rate cut this month.

All of this shows that stock market investors, especially in the US, have been obsessed with shareholder value and capital growth and are more likely to take their lead from the monetary authorities than from earnings potential.

In truth, rate cuts seem senseless. They may help some capital gains in shares, but they certainly won’t do anything for company earnings.

What on earth are sick and quarantined supply chain operators going to do with cheap debt – if it reaches them in the first place?

Real earnings and wages are going to be affected more by supply constraints than demand and it’s on the cards, albeit not fully calculated yet, that Covid-19, as exaggerated as it may be, is going to have significant impact on global economic growth on many fronts.

One cannot at this time say that the stock market bubble has burst. But one can say that the bond bubble has inflated further.

Panicky investors have run to ‘safe haven’ investments, of which one has been bonds. There, prices rose and yields tumbled further, to the point where the US 10-year bond was very close to negative yields for the first time – adding to the more than $15 trillion bonds where interest rates are negative.

This is rewriting economic text books, and the only way for that froth to be blown off is for interest rates to increase. That in turn could plunge the world into a depression.

But is that not a price that has to be paid for decades of money mismanagement and affluence?

The point is that for some time now, the global malaise has largely been a financial one and while we have seen different markets heavily shaken by Covid-19, the real trigger for a global breakdown will most likely be financial, such as a major corporate or institutional insolvency, or monetary stimulus not working and running out of monetary options such as creating more debt and pushing interests to much below zero. Of course, that could be kindled by events in the real economy such as an oil price collapse.

As far as South Africa is concerned, I have argued for some time now that while we desperately need corrective measures on a number of fronts, these are all going to be overtaken by global events. None more so than Finance Minister Tito Mboweni’s 2020 budget.

Mboweni’s budget is closely dependent on what happens elsewhere – but more disturbing is that it is a budget of intentions rather than action.

Intentions need solid commitments from all of those affected.

He never had that and the cracks are becoming clearer.





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“Bull markets are born on pessimism, grown on scepticism, mature on optimism, and die on euphoria.” – Sir John Templeton

Monetary policy explains, and drives these wise words of Sir John Templeton. Reserve Banks devalue currencies on pessimism, keep interest rates low during scepticism, raise interest rates during optimism, and invert the yield-curve on euphoria.

That is why the current mayhem in the markets is a buying opportunity and not the beginning prolonged slump. The correction may even be near its end. It is impossible for a sharemarket index to decline in terms of a currency that is being devalued at a faster rate. A virus or health scare causes corrections. Only monetary policy can cause a crash, because, like the preceding bull market, the crash is also a monetary animal.

We always experience a crash when US money has a positive value, and we never experience a crash while money is for free. Money is for free when the cost of credit for banks is below the rate of inflation. When the yield on the 2-year Treasury Bill is below that of the 30-year bond, it means that the cost of money is lower than the inflation rate – money is for free for banks and the larger hedge-funds.

When money is for free, then there cannot be an upper limit to the stock market indexes. The sky is the limit, and that limit is set by the Federal Reserve Bank.

Perhaps you loose sight of one problem that no amount of “free” money will be able to stop simply because no central bank or joint effort of all the central banks combined will be able to plug that hole. Its that monster called derivatives. If that (estimated) 1.2-1.5 Quadrillion $ beast goes out of balance and begin to collapse it will spell the end of money as we know it

I hear you.

Derivatives that trade on a regulated exchange is a zero-sum game though. There is a long position for every short position and at futures closeout, both positions disappear. Both positions are margined to ensure compliance with the contractual agreements. The only derivatives positions that can cause harm to the economy are Over The Counter contracts that do not have margin requirements, and that is not being market-to-market on a daily basis.

If there are such unfunded liabilities, and if parties are unable to honour their contractual obligations, then it is no different from fraudulent behaviour. It comes down to intentional fraud, as in the case of AIG, and that was an insurance issue. If such a book blows up again, then the purchasing power of every person on earth will be used to plug the hole, as in the case of AIG.

The Reserve Banks are on top of it. They use the purchasing power of our money to buy us a sense of security in a chaotic world. This is why most people want Central Banks. They like that false feeling of control that Central Banks provide.

Interesting times. Is the whole world financial structure in for a revamp?

Thank you for the reminder and the reality check Jerry. I would love to know how much cash has been destroyed as a result of the popular share buy back momentum, orchestrated by those in the driving seats, whose main aim was to keep the share price up high. Maybe the alternative to invest in the real economy is/was not so expensive after all!

There is a conspiracy theory that says this is economic terrorism. Somebody sold at the top of the market and will now be buying again and the virus will slowly disappear. All this driven by social media to cause panic. Just a thought.

I have spent 8 days visiting UK and EU clients. Pre season courtesy visits. No one believes this Corona media panic and hype propagated to literally unfathomable levels backed up by governments unable to take advantage of any crisis alleged or real.

The media has us believe that this is a bubonic ebola hybrid alien super virus with a 90+% mortality rate. When it is nothing more than the sniffles for a few days at around 1.7% mortality rate unless you happen to be 95 with a pre-existing medical condition. The media should for perspective publish the daily common cold infections and deaths which run at 10-20 times corona. USA on I think 20k deaths from the last 5mths official flu season. Globally we still on 1850-2150 deaths a day from cold.

Central banks = governments. When faith in them is lost then gold will shine for a while as will equities and all commodities that time is coming. Current repo crisis totally ignored by media. The governments of Japan and EU or I should say ECB are the only bond buyers and they can never sell.

Personally I think this is a correction and the DOW will explode upwards to 35k or even higher in the next couple years. Why – the dollar still yields positive returns even if shrinking and most EU citizens are at their breaking point with their imbecilic politicians and policies and negative yields.

Corona will pass … strange how barely any children are catching it also not being reported.

Lastly as expected the WHO has officially declared the sniffles (corona) a global pandemic … allowing their masters at World Bank off the hook for having to repay half a billion dollars in the creepy pandemic bonds they issued in 2017. First payments were due 23rd March next in June. Obviously only a coincidence and the timing as well … lol.

From now on I will only read your comments and not waste my time reading Bloomberg and CNBC. You provide more concise information in one post than those losers peddle in a year.

Jerry’s views are like a breath of fresh air

End of comments.



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