Market conditions can best be described as disorderly. Over the last 32 years, we have interpreted our job here at High Frequency Economics as standing up as a voice of reason and objective analysis in even in the most troubled times. In our work, objective number crunching is what matters over emotional bleating every time. We are having trouble finding that voice right now.
On top of the equity market meltdown—inspired by fear of the economic ramifications of coronavirus containment policies, or CCP, in the world’s largest economies—global fixed income markets have lost confidence in the ability of the governments of the world to finance the fiscal stimulus they are proposing. Traders, investors and speculators have looked at the size and cost of the fiscal stimulus proposed by the United States and other governments—especially Italy—and decided to sell sovereign debt of all kinds rather than hold the paper until it depreciates in value from oversupply. We have no metrics to support or to refute the view that deficit spending on this scale is sustainable. No one does.
In our experience, the markets are always “right.” If investors do not want to buy bonds, incremental debt is not marketable at current prices. If they do not want to hold stocks as well, they have to be shifting into cash and alternative assets. A shift into liquidity from risk-bearing debt assets would be the basis for an unraveling of financial systems—a deleveraging of the economy.
Market conditions today may be a signal that financial crisis and economic crisis have become entangled with epidemiological crisis… all of it turning into a terrible mess. The end of the world is not assured, but financial markets are sending out grim signals as we write today, and substantial repricing of financial assets is the apparent outcome. Whether these price adjustments on top of the supply shock of CCP and other dislocations will break the financial system is something else we have no metrics for.