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Read by 3500 professionals in the global financial industry
Share prices around the world rose very rapidly yesterday. This raises the question as to whether the low point of the economic contraction is near. The following factors plays a role here.
Governments and central banks are intervening en masse.
A growing number of parties start to suspect that the draconian measures against the virus might harm the economy too much; could the cure be worse than the disease? In any event, US President Trump believes this to be the case. He is hinting at a significant softening of the measures around Easter.
We have serious doubts about Trump's plan. The US lags far behind in the fight against the virus and has set all manner of ill-advised priorities. The flawed healthcare system does not contribute to a solution here. It is not without reason that the WHO is concerned that the US will prove to be the largest flashpoint of the Coronavirus pandemic.
The number of hospital admissions in the US will continue to rise exponentially over the next couple of weeks. There is nowhere near enough material and medical staff to absorb the impact. Let us suppose that Trump gets his way and measures are relaxed in order to limit economic damage. At least tens of thousands of Americans will die, and probably more than that. This will not only concern the elderly, but also young people with chronic diseases. An example is obesity-linked diabetes, which is common in the US. In this scenario, we will see the same terrible images in America as we are seeing in Italy.
This almost certainly means that massive numbers of people will refuse to go to work, go to a cinema or restaurant, board a plane, et cetera. The chaos will be complete in this case. Rather than boosting the economy, a softening of the measures will create even more economic problems (not to mention the ethical side of the issue). This is therefore certainly not an alternative.
So what will happen? Many countries are more or less in complete lockdown now. This is only partially the case in the US. In a few weeks from now, demands on hospitals will probably decline considerably in places where there is a lockdown. Simply because the virus is far less likely to spread. However, a large part of the population has been infected and people cannot avoid contact completely. The number of cases that require hospitalisation is therefore unlikely to decline to zero.
Nevertheless, the number of hospitalisations is likely to decline considerably below the capacity limit that hospitals are still able to handle. All the more so because all-out efforts are being made to rapidly increase the capacity of hospitals. It is also likely that more protective material will gradually become available to protect medical staff against infection. All this means that the total lockdown could be lifted over time and that people will be able to resume contact with each other. The following factors are helpful here.
A considerable proportion of the population has become infected and has become immune by now. As a result, the number of hospitalisations per 1,000 inhabitants will decline.
More and more specialists come to the conclusion that the virus will thrive less well once the weather warms up. This is also likely to reduce the number of hospitalisations per 1,000 inhabitants.
The latter means that the virus is likely to resurface in the autumn. By that time, the damage will be limited by the following factors.
An even larger proportion of the population will have become immune by that time.
Tests are rapidly being developed which indicate whether an individual is infected, but also whether this individual is immune. The latter is done with a blood test and can be done rapidly on a large scale. The enormous advantage here is that people who have become immune can go back to work. If there is sufficient test material, people with complaints can be quickly isolated, which will stop the virus from spreading rapidly.
Young people will be able to (partially) resume work, as they are less at risk – certainly when medicines become available.
It is not the case that the economy will soon run at full capacity again – this will require herd immunity or a vaccine and this will take at least another year – but it means that more and more sections of the economy will slowly pick up again. The economic pain is felt most keenly at the present moment, but the pain will slowly subside in a few weeks or months – at an ever faster pace.
The economy is currently receiving massive support from governments and central banks. However, this looks more favourable than it is. The measures will only be able to prevent a knock-on effect on bankruptcy figures and wide-spread long-term unemployment. The measures will not boost economic growth. This will only happen once the virus is more under control.
We will run into economic barriers in this case. Debts have increased to exceedingly high levels over the last decades. In addition, public deficits are increasing very rapidly – to the extent where public finances are completely out of balance. The coming years will therefore be characterised by growth being converted into repayment of old debts. It will therefore take quite a few years before the economies are back at the level they were at at the beginning of this year.
This is why we believe that the stock markets are in a fundamental bear market. The following two factors should be taken into account.
Each bear market is characterised by major rallies. We are probably in the middle of an interim rally at this point (it is likely to continue for another 5%-10%). Gloom is likely to return if the number of casualties continues to rise rapidly in the US. In addition, Europe has yet to reach the end of the tunnel.
It is quite possible that the West will ultimately opt for an inflationary policy to reduce its debt burden. In this case, there would still be a bear market in real terms, although prices could rise considerably in nominal terms.
If you want to find out about the consequences for the markets and prices, read our asset allocation report which will also be published today.
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