Once again, the predominant belief in the financial markets is to never bet against the Federal Reserve. However, in the case of a new coronavirus wave in the fall, central bankers will have a hard time to counter the destructive impact of a renewed lockdown on the economy.
Wall Street’s primal belief is «Don’t Fight the Fed.»
What that means today is that the Federal Reserve, the US central bank, can increase or decrease the amount of money available to buy financial assets and increase or decrease the cost of money via changing interest rates.
More money at lower interest rates creates higher stock prices. Less or even the same amount of money plus higher interest rates creates lower stock prices.
On July 23th 2012, former ECB chief Mario Draghi said the European Central Bank would be willing to buy up all the bad debt of European banks and governments. Since then all the world’s central banks have been buying up government bonds, using newly created «money». And ever since, the price of all financial assets – stocks, bonds and real estate – has been surging higher.
Yes, there was a short-term market plunge due to the coronavirus earlier this year. But then the global central banks stepped up and printed enough new money to keep levitating the US stock market to all-time highs. That is despite that the global economy is declining as a result of Covid-19.
In one of my previous commentaries from last October, «The Global Fake News Economy», I outlined why stock prices have been and could keep going up regardless of whether the underlying economy was growing or not.
Fake money creates fake news. Add in a fake President, and we had then and still have a fake stock market. All of what I wrote then pertains to today. Except for a major new player: The Virus.
Covid-19 is surpassing the Federal Reserve as the predominant economic force that will affect not only the stock market, but the global economy as well. In other words, the resulting new mantra should be «Don’t Fight the Virus».
Right now, the stock market is ignoring the virus, believing the ever-increasing amounts of newly created money can keep stock prices levitating. I agree, that is likely to continue for the short term.
But then, there is the virus. All the health experts agree that it is nowhere near being contained. Plus, an effective working vaccine is at least six months away. Anybody with an IQ of at least 100 should ignore the blithering idiocy that this virus has been beaten.
It’s certainly not the case in the U.S., where conspiracy theorists should spend more time wondering why this administration is actively working to kill many more Americans, instead of talking about Democrats eating babies.
So far this summer whenever any area opens up, the virus surges. This fall the experts are predicting a spike in new cases given the relatively openness of much of the U.S. Such an increase, if it happens, will likely result in a Biden win. And with a Biden win in the midst of Covid-19 cases more than doubling from the current 40,000 to 50,000 per day, I would expect a new lockdown again shuttering the economy.
In my opinion Biden should then appoint someone like New York governor Andrew Cuomo as Virus Czar who will be in charge of doing whatever it takes in taming the pandemic. Only then can the U.S. can get back to work. And, the premise of «Don’t Fight the Fed»will be back in charge.
In the face of a surge of new infections resulting in a post-election shutdown, the question then will be, can continued free money printing cover up the huge increase in unemployment, business bankruptcies and economic collapses. And most importantly: Can the Fed keep stock prices levitated?
The answer will depend upon how much lasting damage the expected virus surge will cause.
In other words: Don’t Fight the Virus.