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Slavery is Freedom

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Global state policy driven “Lock-down” in response to the Coronavirus will have multi-dimensional impact on peoples’ lives and behaviour.

By Ashok Jainani

The coronavirus pandemic is a socio-economic-political tragedy which would have multi-dimensional decisive impact on human behaviour everywhere on this planet earth as the New World Order rolls amid global economy collapsing around us and Janata Curfew – self imposed “Lock-down” is hailed by people craving “Slavery is Freedom” and “social distancing” becomes a new norm across the world. It was expected, in George Orwell’s “The Nineteen Eightyfour,” that Newspeak would have finally superseded Oldspeak (or Standard English) by about the year 2050. The world is on course Orwellian prophesy.

It’s too soon to say when the nations and the world will reopen for business as it did before the advent of 2020 since one can’t just turn a switch and return to normal things in a complex dynamic evolving socio-economic system. Many businesses may not recover and millions might suffer hysteresis losses beyond comprehension of the business owners and analysts trained in the past century’s education system. Let it be understood very clearly; Disruption, a negative word used most profusely by intelligentsia recently, in people’s all-round behaviour, social and economic, will be permanent. There is no doubt this pandemic will get much worse before it gets better since that’s how pandemics work; the cases and fatalities grow exponentially.

With many countries adopting “Lock-down” of varying duration, weeks and months, the 1Q and 2Q global GDP could drop significantly with big rise in unemployment, and displacing migrant workers. The US, China, EU and the world economy is falling into the worst economic collapse in the last 100 years. Rating agencies forecast contraction in many major economies and India won’t remain insulated in this tragic and evolving hostile situation.

A significant portion of the lost output will be permanent and despite trillion-dollar stimuli announced by various governments, growth might not return to previous trend and settle on a new path below the pre-virus trend. These stimuli didn’t work in the past ten years. Sad part is that politicians in general, by the people for the people do not understand that poison in small quantity as in yeast could be tolerable in a bread but only a cup full of the same poison kills human beings. Some expenditure, like buying an automobile or consumer durable, today might be deferred to some time in future. But a dinner, a movie and taxi/plane ride forgone today is a permanent loss to those service providers. The consumption-based economy, nearly 2/3 consisting of services rather than manufactured goods, will suffer permanent loss of income not only during the “Lock-down” period, but also in future as people come out of this state policy driven psychological trauma with complete change in their socio-economic behaviour.

If consumers get used to not spending and decide that increased savings and debt reduction are the best ways to prepare for another disaster, then money velocity will fall and growth muted no matter how much money the Feds print or the governments spend on schemes for poor. After having exhausted all the bullets of rate cuts and unprecedented free money distribution, the Feds would be holding an empty bazooka. Today, nobody can measure the full economic fallout in the months ahead, but the economic impact of coronavirus could be devastating globally, including on the commodity, currency and stock markets.

Since 80% of global payments, almost 100% global oil sales and 40% of global debt are issued and traded many times over in the US dollars, the coronavirus policy driven “Lock-down” and resultant jobs/income losses will choke exports and remittances and create a massive problem for nations dependent on dollars. Those governments already running trade and current account deficits will be forced to junk the fiscal discipline measures of pruning deficit thereby witnessing run on their currencies and importing inflation in their respective countries. That is sure to slash living standards of many with reduced purchasing power.

Financial markets have not yet recognised the new reality as finance ministers and central bank chiefs are themselves uncertain about the likely impact and available policy tools but agree that economic outlook is nothing but negative as the governments must make new provisions for giving out doles while their tax collections dwindle due to “Lock-down.” The IMF has declared the US and other advanced economies have slipped into recession. Earnings will be downgraded and price multiples reassigned lower as risk capital flows dry up and future corporate earnings look blurred.

Some fools suffering from fear-of-missing-out (fomo) jumped in euphoria while the markets were peaking at valuations about 3-standard deviations above the long term average rating. The re-set in risk appetite will be achieved only when PE multiples fall 2 to 3 SD below the average line. For nearly 10 years, average new investors never knew what volatility means. It’s suddenly upon them now. Likewise, they haven’t experienced any serious inflation despite unending QE and ZIRP (zero-interest-rate-policy). When that genie get unbottled, they would lack both money and mind to deal with it.

Trends End; Patterns Fail. Buddha’s first sermon on the Four Noble Truths to his five disciples was: “What is subject to rising is subject to ceasing.” Earnings delusion is now complete as business owners/analysts fail to comprehend extent of business loss, some of which could be permanent, and the time it will take to repair. Last three years’ +3SD valuation multiples were fueled by leveraged capital flows on earnings recovery hopes that in turn were pumped and trumped by ever open purse of the Feds.

Remember, “Free is the most expensive” according to James Rickards, famous author of The Road to Ruin. Fools don’t realise, each incremental unit of free money isn’t producing commensurate growth. In fact, its serious ill-effects might now start showing as “too much of anything lead to disaster.” Whatever is free is squandered. Free water is wasted. When electricity is free, there’s no motivation to use it wisely. The same holds true for money. If money is free in the hands of politicians/bankers, there is no motivation to invest it wisely. Money that can be borrowed for next to nothing or borrowed by governments in virtually unlimited quantity is essentially “free”. And when the time comes to pay up that debt, they invent ingenious ways. “Complexity theory states that the most likely path is the one no one sees.”

Note: Markets might spend good time, as you can see, well below the long term mean PE before any durable bottom could be called. Risk Repricing is on. En Garde!

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