Crisis Averted? Printing Money is Hardly a Solution…

US markets rip-snorted higher overnight.

The 5.1% rally was the biggest one-day gain since 2009.

So, crisis averted then?

Hardly…

As I said yesterday, we’d get both dips and rips in the coming months. This is how markets react in the face of uncertainty.

One minute the end of the world is nigh, the next it’s happy days once again.

But the fact is, the trigger for the current market panic hasn’t gone away. Indeed, the coronavirus is spreading…

As reported in Bloomberg, things are escalating quickly all around the world:

Four more patients died in Washington state, and a top U.S. disease expert said the coronavirus is likely becoming a pandemic. New York Governor Andrew Cuomo said he expects more cases after the state identified its first patient.

A World Health Organization team arrived in Iran with kits to test 100,000 people. The OECD warned that global economic growth will sink to levels not seen in more than a decade. The European Union set up a special team to deal with the outbreak as cases rose from Italy to Spain.

Does that sound like a good reason for markets to go up?

Well, of course that wasn’t the reason behind the rally.

The real reason, was the usual one. The white knights of the world’s central banks were saddling up to ride to the rescue.

They announced they were ready to lance the crisis with sharp rate cuts and ‘monetary stimulus’.

Is there anything printing money can’t solve?

I say this facetiously of course.

After all, despite the markets’ short-term euphoric reaction, I don’t see this as a sustainable solution…

A supply side crisis

This crisis is a supply side crisis, not a demand side one.

That’s a key point to realise.

Meaning, if factories and businesses have to shut up shop to try and contain the virus, interest rate cuts will have zero effect in stopping it.

Even if governments follow Hong Kong’s lead and just shove money directly into people’s pockets by way of cash handouts (ala Kevin 07), it won’t put more goods on empty store shelves.

Joseph Brusuelas, chief economist at RSM, put it like this:

I’m looking at the combination of fiscal and monetary policy as potential triage. All they can do is really mitigate the shock of supply chains and reduce the second-order effects.

This is economic containment. Not an economic vaccine.

But when all you’ve got is a hammer, you just keep banging away.

My feeling remains that if you were caught out in a bit of a panic last week, you should use any market moves higher to re-evaluate your equity exposure.

Use the rips to your advantage.

As my colleague Lachy Tierney’s excellent Money Morning piece on Saturday pointed out, markets move in waves. The market decline in the GFC put in three false bottoms — followed by three rallies — before eventually bottoming out.

Most importantly is this…

The end isn’t nigh

I may sound like a bit of a worrywart today, but I’m actually very optimistic.

I think a vaccine will be found. I think the warmer weather of the Northern summer will buy researchers some time.

And I’m almost of the same view as my co-editor Sam Volkering. We could look back at this at Christmas and talk about ‘bat flu’ in much the same way as we do of the other scares of the past.

I’ve no doubt economic activity will increase and markets will recover…eventually.

The only nuance for me is the pathway — and timeline — the markets take in reaching that point.

I think a good healthy market correction is better for the economy than propping it up with ultra-easy monetary policy.

The government’s fixation on stock market prices is wrong and destroys trust in a system which is meant to reward judgement, not blind greed.

Our system works because people have skin in the game. If things go bad, they can lose money. This makes people think about consequences. This makes businesses prepare. It makes investors weigh up risks.

Money printing papers over these issues and removes the incentives that make the system work.

And it’s not the philosopher’s stone. It won’t work forever, even if it works this time.

Two types of socialism, neither good

Beyond the risk of the coronavirus getting worse (a very real risk in my opinion), there’s the risk that we destroy the economic system that’s worked for us for so long.

My colleague over at the Rum Rebellion, Greg Canavan, has coined a phrase for it. He calls it ‘the socialisation of the financial system’.

The idea that financial losses are socialised but profits are privately held.

Who wins in that kind of system?

The already rich do.

It’s a wonder the young aren’t revolting over this.

Perhaps they’re about to?

In the US there’s the possibility of Bernie Sanders — an old-fashioned socialist — winning the Democratic nomination.

Could he go on and win the presidency?

I wouldn’t think so, but who can say?

Imagine that, a socialist in the White House. That would be economic disaster.

But in a way, you couldn’t blame the young for voting for it. After all, they’ve seen how the current system allows money to be printed out at will to prop up stock markets and property prices.

Why not print it out for education, housing, and healthcare, they’ll think.

It’s wrongheaded. But it’s a direct reaction against the current irresponsible monetary policies of central bankers.

As the Bible says, you reap what you sow…

Good investing,

Ryan Dinse,
Editor, Money Morning

PS: Download your free copy of our Analyst Lachlann Tierney’s report today and you’ll discover two key investment ‘asset groups’ that look set to benefit as the global pandemic escalates. Click here to get a copy.


Ryan Dinse is an Editor at Money Morning. He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur. With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle. Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time. Ryan's premium publications include:


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