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11 June

What a post-Covid global economy will look like

From shared trauma to stocking up on gold, a look at the markets’ reaction to the ‘Black Swan’ event that is Covid-19 and what this means for the near future.

Markets inevitably fall when events the magnitude of the Covid-19 pandemic occur. We can label this outbreak under the category of ‘unknown unknowns’ and, economically speaking, there is never a ‘good’ unknown unknown, because there is no basis for the market to respond.

This means that the market cannot make a tight valuation of how it trades, or even where to trade, as the world’s markets are all suffering the same trauma. Oil dropped to historic lows in April as demand fears forced the prices into freefall. Yet gold, the traditional asset of the terrified, is on the up.

The last great pandemic is out of living memory for all but the planet’s very oldest, having occurred almost exactly 100 years ago, in 1918. Since China announced its lockdown, shock has led to panic across the world. The result is that the markets can only come up with spurious evaluations as they trade because they have no precedent to go on and because no one is certain if they should be buying or selling, or at what price.

This means that prices are currently fragile. It is this fragility that has translated into the crashing and zooming of prices currently taking place on the world stage. This increased volatility is actually a good thing for traders, but it is a bad thing for investors and is usually a precursor of even more grim things to come, because certainty is an asset and uncertainty is a constraining liability.

Heading back to normality

The global markets are all interlinked, and market prices represent the best estimates of what are essentially a group of highly motivated, informed, and intelligent fortune tellers. Once volatility levels start to come down (and they have done) we can start to breathe a little easier. This is a sign that things are starting to point back in the direction of normality.

But the crash hasn’t been as deep as many had feared. There are essentially two types of market crash: a crash of 25%, and a crash of 40% or higher. The former – which we have seen, is likely to give everyone an uncomfortable ride for the next couple of years. A recession yes, but not a big depression. With a slump of 40% or more, we would have been looking at a bumpy ride for at least half a decade.

By looking at how the market has reacted now, we can measure how the global economy will pan out over the next year. This is because the market, by nature, looks out over the course of the year ahead. So, what you see in today’s Dow and FTSE is likely to be similar to what you would see if you could peer into the future, in early 2021.

Predicting the future

The theoretical physicist, Niels Bohr, once quipped: ‘prediction is very difficult, especially about the future.’

But by looking at how the markets reacted to the very worst, most uncertain and shocking unfolding of the pandemic, it is possible to plan accordingly. To know with a fair amount of certainty that, without some other global catastrophe, the direction the global market has already taken is predictive of the trend of the global economy for the coming year.

The slump levels we have witnessed have not been a total surprise, because they were very high worldwide prior to the Covid-19 pandemic. Coupled with the fact that the central banks, including the Bank of England, have been totally nonplussed as to how to mitigate the situation.

There are still likely to be bumps in the road on the way. Costly mistakes that could make the situation worse. But the good news is that, according to the current statistics, the markets should bounce back quickly from the present disruption Covid-19 is making. The market will move to drive the economy back quickly in order to appease or prevent a bad situation from becoming a chronic one.

The Covid-19 pandemic can also be described as a ‘Black Swan’ event. A Black Swan is an event that no one could have predicted coming, but in hindsight, always seemed inevitable. In actual fact, the last pandemic was scarcely a decade ago when the H1N1 virus (also known as swine flu) killed tens of thousands across the world. We have also had two far deadlier coronaviruses than Covid-19 pop up in the last 20 years (SARS and MERS, with fatality rates of 10 and 32%, respectively). So emerging viruses, epidemics and even pandemics are more common than we would like to admit. The problem is, we have always been able to look the other way. Until now.

This pandemic – like the next market slump – was inevitable. But hopefully we can learn from Covid-19 how to react, prepare for, and mitigate the next virus outbreaks in the years to come.

Original source: https://businessgraduatesassociation.com/