The Socialisation of Finance: The Undercurrent to the Coronavirus Hysteria

Dear Reader,

US stocks bounced from deeply oversold levels last night.

And when I say bounced, I mean bounced strongly!

The Dow Jones gathered momentum towards the end of the session, finishing just over 5% higher. The S&P 500 and the NASDAQ both closed up 4.6%. Gold finished flat while Brent crude surged 4.2%.

The 10-year US Treasury yield traded as low as 1.03% at the start of the session, but finished around 1.15%. That’s still at historic lows.

I don’t think you can take too much out of the session.

Stocks suffered a historic sell-off last week. Today, they bounced. It’s as simple as that.

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Why the bounce?

A big part of the reason for the bounce is the building narrative that central banks will provide market support.

In a sign of just how insane things have become, the market is now piling pressure on the Fed to cut interest rates.

To put things in perspective though, the market wants a rate cut just because stocks fell 10% in a week…from all-time highs.

This report from CNBC sums it up well…

Financial markets and the White House are demanding interest rate cuts from the Federal Reserve that may not work and may not even be necessary.

As traders ramp up their bets for central bank easing, there’s an ongoing debate about whether the Fed should accede to the pressure with as much as a full percentage point cut this year, or wait to see whether the jangling nerves over the coronavirus subside.

The market’s expectation now is for either 50 or 75 basis points to be sliced off short-term borrowing rates by April. Ultimately, if the market and President Donald Trump prevail, rates will drop close to where they were during the financial crisis that ended 11 years ago.

“There’s no need for that. Rates have already fallen. How much lower do you want the 10-year note to go?” said former investment banker Christopher Whalen, founder of Whalen Global Advisors. “The market’s like a 2-month-old child. Every time it cries, it wants to be picked up. Sometimes you’ve got to leave the baby in the crib.”

Exactly.

But here’s the issue. Every time there is a crisis, central planners want to do something about it.

Central banks are even muscling in on climate change…like they can change the weather…

The Reserve Bank is expected to cut interest rates when they meet later today. The hope is that they’ll go for a 50 basis point cut, rather than the traditional 0.25 move.

Again, is it really needed?

Do we know enough about this coronavirus to think it’s going to produce a global economic recession?

I mean, we know it’s more transmissible than SARS, but not as deadly. We know it’s going to have a short-term impact on economic growth. Is that a reason to panic and flood the world with more liquidity?

Of course not. But it’s a moot point. It’s going to happen anyway. We have been conditioned to look to central banks to help soothe our fears whenever there is an economic scare. And the state is more than willing to oblige.

For example, look what’s happening in China. From Bloomberg:

China’s financial regulators will allow the nation’s lenders to delay recognizing bad loans from smaller businesses reeling from the deadly coronavirus outbreak, giving temporary reprieve to trillions of yuan of debt.

Qualified small- and medium-sized businesses nationwide with principal or interest due between Jan. 25 and June 30 can apply for a delay to the end of the second quarter, the China Banking and Insurance Regulatory said in a joint statement with the central bank on Sunday. In Hubei province, the center of the outbreak, the waiver applies to all companies, including large firms, according to the statement.

Leverage is the order of the day

It used to be that prudent companies would hold cash reserves for rainy days like this.

Not anymore. Leverage is the order of the day. Cash is trash. Debt is king.

And now, the Chinese economy is so highly leveraged that it cannot handle economic shocks. Well, it can handle them, but only at the cost of going deeper into financial socialisation.

Which isn’t surprising. It’s a communist country, after all. But this is a taste of what’s coming to Western democracies in the years ahead.

That is, the socialisation of losses. ‘Banks, don’t recognise your losses please. We don’t want bad debts piling up and preventing you from making more loans.’

The long-term implications of all this is truly frightening. Frightening, that is, for individual freedoms. If you like the warm embrace of the nanny state, then I guess you have nothing to worry about.

But that warm embrace always, eventually, becomes a crushing, suffocating hold.

Interest rate cuts will trigger the next global financial crisis. Here is what you should do now to protect your wealth.

We’ll find that out in the years ahead.

In the meantime, understand this simple formula: Fear provides the excuse for the state to take greater control over our lives. And that control, more than anything, is exerted via the power of monetary policy and finance in general.

That’s the undercurrent to all this coronavirus hysteria.

Shorter term, you’re probably wondering what all this means for your wealth. Well, today’s bounce was to be expected. The market needs to restore some balance over the coming days.

From there, it’s wait and see. Will the power of a promised liquidity injection overcome the fear of a global economic slowdown?

More on that tomorrow…

Regards,


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Greg Canavan,
Editor, The Rum Rebellion

Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own. Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts. At The Rum Rebellion, fake news and unethical political persuasion are not in the least bit tolerated. It denounces the heavy amount of government influence which the public accommodates. Greg will help The Rum Rebellion readers block out all the nonsense and encourage personal responsibility…both in the financial and political world.


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