Pandemic and the stock markets !!
Each of us is wondering what’s up with the world stock markets. Since March 2020 there have been global lockdowns. Cities and countries and even continents have been shut for travel, business, education, recreation etc. Yet the stock markets have given roughly over 100% returns. Historically, this is one of the best return generating periods. One cannot understand this dichotomy. Reasonable and logical investors had exited whereas passive and bullish sentiments made money.
Let us try to explain what’s happening. Since middle of 2020, western countries, to fight the pandemic, resorted to what we commonly call MMT ie Modern Monetary Theory. As per MMT , the governments have a right to print currencies so they can do so to generate liquidity, maintain consumption levels, give stimulus and meet Governmental expenses like defence and healthcare. Hence countries such as USA, Europe (Euro zone), Great Britain, Japan and even China resorted to printing their respective currencies. This enabled Governments to spend on healthcare and stimulate the economy. USA printed so many dollars that 40% of all dollar in circulation were printed in the last 18 months. Besides, US is still continuing to print. To further aid consumption and borrowings, Governments kept interest rate at near zero levels. A large part of this excess Global liquidity came in the emerging markets like India. India’s FII flows in 2020- 2021 were 37.6 billion USD. This is more than combined FII flows in the preceding 6 years. This led to a situation wherein domestic investors started exiting at different levels and foreign investors pumping in billions of dollars. This easy money took the BSE Sensex past 60,000 levels. Who would have thought this would happen? This is technically called a “melt up “ stage. Asset prices (housing, luxury cars, crypto, stocks, commodities) going up. This explains the rally in US housing and Cryptos.
Global recovery has been much better than previously thought. The pace of the recovery is so fast that it has even led to supply chain issues. Inflation in a lot of countries have spiked. And now the government’s will have to taper and raise interest rates. This will not only suck excess liquidity out of the system but may also lead to unprecedented economic consequences. With 28 trillion dollar in debt, USA cannot afford to raise interest rates. Some economists have raised concerns that countries like USA and UK may see unprecedented levels of inflation and also run the risk of currency debasement. The biggest fear is something going wrong with the US dollar. It’s the world reserve currency and has depreciated considerably in the last 1 year against all major currencies. Besides dollar holding amongst all central banks are now at 27 year low. We are living in interesting times. Amidst a very scary monetary experiment. Consequences of which are still not known.
