On Level One, And Living With Predatory Markets

Welcome to Level One, earthlings. This is the new normality while the virus still roams beyond the border walls. Those borders will remain closed and guarded by quarantine for any entrants from outside, and while the Transtasman bubble remains an idea that the Australians have yet to sign off. Although some firms in the tourism sector still don’t seem to have grasped the fact, our government can’t unilaterally create a Transtasman bubble, or declare when it will come into existence. We need Canberra to agree, and to prioritise it.

But good news, otherwise. Within New Zealand everything else is now open for business, and this heralds a new phase for the politicians, too. Instead of haggling over the details and timing of the various Alert Levels, the government and opposition now have to focus on how to deal with the recession itself. So long as the international supply chains remain functional and affordable, most of the major problems are going to be congregated elsewhere, on the demand side of the economy. Hey people, its Level One ! Come out and spend money on non-essentials as if you don’t have a care in the world – although, as National’s new leader Todd Muller put it so well, many of you are actually unemployed but just don’t know it yet. How about patriotically blowing it all on a holiday in Queenstown? Your family has been through so much, during lockdown.

Meaning : the siren call to spend is going to be heard throughout the land. To kick the economy into life, large numbers of New Zealander will have to be convinced that their income is so stable and sufficient that they can and should become major consumers again, and for a sustained period of time. That sounds more an invitation for New Zealanders to join in a collective hallucination ; and probably, that’s something beyond the ability of the folks at Zoom to arrange.

What about tax cuts then, the centre-right’s magic potion for whatever it is that ails ye. A round of tax cuts dangled in front of voters in September would certainly give the economy a brief sugar hit before the hangover kicked back in. Yet if National’s past performance would be anything to go by, that hangover would include reductions in the quality and scope of public services – including another shortsighted round of cuts to the health system that has just saved us from Covid-19. Also, expect any incoming National government to slash the welfare supports that hundreds of thousands of New Zealand will be reliant on once the economic recession really begins to bite. It is hard to see why voters would want to take the tax cut bait and then reduce the welfare safety net during this time of utmost uncertainty. Still, people have been known ( see “Trump : USA”) to vote against their own best interests in the past.

How long is the Covid-created economic uncertainty likely to last? Every developed country in the world right now is being mindful of the example of Japan, which has never fully recovered from the bursting of its asset bubble, nearly three decades ago.

Footnote : An interesting aspect of PM Jacinda Ardern’s speech yesterday was its skewering of the oft-repeated centre-right claim that Australia was more open during lockdown. and thus did less damage to its economy. Not so. They’re facing just as bad a recession as we are, and furthermore :

Oxford University publishes a Government response stringency index, ranking countries from 0 to 100 in terms of their level of restrictions. Before today’s move to Level 1, New Zealand was at 33.3, while Australia was at 62.5. We were already nearly twice as open as they were.

Playing the casino

In the meantime, we have the sharemarket news as a fantasy to distract us. As if obliged, RNZ devotes a ridiculous amount of time to reporting on the detailed percentage fluctuations in the state of the S&P 500, and the like. For the 90% of its listeners who will never ever invest in shares, this might as well be a weather report from Mars. (Surely, the tiny minority desperate to know the second-by-second arc of the Dow can just ring up their sharebroker.)

Even pre-Covid, the disconnect between the sharemarket and the economy in which most us earn our living was obvious enough. Now, we’re experiencing the worst recession in 90 years and unemployment is rising to levels unseen since the Great Depression amid sharp contractions in economic growth everywhere….not to mention the social disruptions after the killing of George Floyd. Yet somehow, the US sharemarket is now almost back at the highs it was hitting in January.

Not that it hasn’t been a wild ride, en route. Reportedly, during the eight weeks to the end of May : 

[Over that period] central banks have deployed a total of $US4 trillion in asset purchases, according to Bank of America chief investment strategist Michael Hartnett, while the global equity market cap has grown by $US15 trillion. The pace of the central bank policy has come out to $US2.4 billion in financial asset purchases per hour, a rate that Bank of America expects to fade to $US608 million in coming weeks.

Even so, the bailouts have not lifted everyone’s boat. As many as 2,215 out of 3,042 global stocks remain in bear markets, meaning they trade 20% or more below their all-time highs, As Hartnett says, the revival has been highly concentrated in growth-focussed US technology stocks and – in particular – among the “FAAMG” group comprised of Facebook, Apple, Amazon, Microsoft and Google. Incredibly, the market capitalisation of those five companies alone exceeds that of the entire Eurozone equity market. Sure, global sharemarkets did take a major hit in February and March, but as of last Friday – the outcome for Wall St had virtually evened out :

The furious stock-market rally, already the best-ever over 50 trading days through Tuesday, on Friday pulled the S&P 500 just about even for the year. Including dividends, the index has made you money in 2020, after a 37% collapse, a global pandemic and in a still-constrained economy.

All up, this has been a working lesson in the realities of this era of modern capitalism. Collective pain is someone’s profit opportunity. In that respect, the post-Covid landscape has reminded me of comments made by former finance trader Alessio Rastani in the wake of the GFC. At the time, Rastani was being asked about how Wall Street was reacting to the various government attempts to fix the US and global economies, after the damage done to them by banking de-regulation. Rastani couldn’t have cared less:

I’m a trader; I don’t really care about that kind of stuff… If I see an opportunity to make money, I go with that. So for most traders… we don’t really care that much how they’re going to fix the economy, how they’re going to fix the whole situation. Our job is to make money from it.

Oh, and furthermore :

I have a confession, which is when I go to bed every night; I dream of another recession. I dream of another moment like this. Why? Because… the depression in the ‘30s wasn’t just about a market crash. There were some people who were prepared to make money from that crash …And I think anyone can do that…Governments do not rule the world. Goldman Sachs rules the world. Goldman Sachs do not care about this rescue package, Neither do their big clients….

In other words, dumb people doing socially important jobs may suffer during the Covid-19 recession, but monied predators will manage to make more money from it, regardless. Perhaps we should return the compliment and ignore the workings of the Dow, most of which seem actively harmful to society. Instead, maybe RNZ can devise some index of economic news that actually reflects the world most of us live in - where for example, wage growth, and benefit levels relative to the prices of essential goods and services etc do matter – and for existential reasons that go beyond the morning’s efforts at profit maximisation.

What is keeping the markets relatively buoyant? Well, the markets have been factoring in the existence of those trillion dollar taxpayer bailouts. They’re basically relying on the state to smooth out the impact of market forces until something more like business as usual can be restored. Moreover, when that happens, the chances are that many firms will have taken the pandemic opportunity to invest in technology that will (sadly) cut even more jobs, while boosting productivity and profits. And if like trader Rastani, you don’t really give a toss about the society you live in – beyond society serving as the host for parasitic efforts at enhancing personal wealth – then what’s not to like about the Covid-19 crisis? It offers so many profit opportunities.

It isn’t a real market any longer though. In New Zealand and in the US, the government bailouts, loans and the tacit underwritings are serving to create what Bank Of America’s Michael Hartnett calls “ fake markets” that only look like the real thing. In fact, the state, central banks and corporates big and small are all converging, with unknown risks and consequences for the parties involved. We now know a good deal about the poor social outcomes and rampant inefficiencies of an unregulated free market. The modern forms of state capitalism being brought about by Covid-19 though, are unknown territory.

We’re already seeing some of the weird and distorting effects. The investors willing to hang in for the medium to long term will probably conclude that the future of Air New Zealand here (and Boeing in the US) is not quite as dismal as you might logically expect. Face it : if pure market forces were being allowed to decide the outcomes then the prospects would be pretty grim for any business enterprise that’s engaged in building and flying big, big aircraft filled with people stacked close together over long distances, for extensive periods of time.

But because investors can see that government are waiting on the sidelines with big bags of cash and hefty loans on hand for firms that have been deemed too big to fail…then no wonder the sharemarkets are feeling much more positive than they have any rational right to be.

Meaning : the virus may have a 15 – 20% fatality rate among vulnerable human beings, but it seems to be having an almost 100% fatal impact on the entrepreneurial spirit that used to be keenly promoted by market liberals in the dim, distant past.

In this time of crisis, the owners of small firms who were once so vehemently in favour of cutting red tape, are now virtually begging to be wrapped up safely in it. No-one of course, knows how things will ultimately play out once the government supports are removed and economic reality begins to bite in earnest. Obviously, there will be plenty of opportunities for the owners of small business to blame the ref. With National egging them on, they’ll blame anything but themselves, and anything but the inherent risks of doing business.

Patriots, To Your Work Stations

One of the interesting asides in Ardern’s speech yesterday was this Soviet-era gem :

There has been some good adaptation over the past couple of months with flexible working. This is progress and has helped people with care arrangements and has also helped to avoid traffic congestion – these things we should not lose. But we can balance that with ensuring we also have thriving CBDs. For our part we have asked the State Services Commission to issue new workplace guidance to make it clear that every public sector worker should return to their usual place of work, taking into account flexible work policies.

Love that phrase “ new workplace guidance.” For the greater good of our thriving CBDs, the government is going to pressure the SSC to put pressure on workers to cease their selfish habit of making sandwiches at home and wolfing them down at the kitchen table. Their patriotic duty is to return to the office and buy lunch downtown. Will this be an offer that workers wary of a virus “ second wave” can decline ? Hardly. They will not only be induced to be good and selfless consumers, but to function as the canaries in the coal mine to test when and whether a second wave of the virus materialises.

You might think that if public servants are going to be required to report for duty in crowded, poorly ventilated offices…then at least the government ( and the health authorities) would be encouraging them to wear masks on say, public transport. After all, the World Health organisation has finally advocated the wearing of cloth masks by the general public in crowded public contexts, such as buses, trains, air terminals, theatres…and even presumably, within open plan offices.

Until now though, Health Ministry director general Dr Ashleigh Bloomfield has been rationalising his tacit deterrence of ordinary people wearing cloth masks, by claiming that the scientific evidence is inconclusive. Well, with WHO’s capitulation it isn’t, and it hasn’t been for months – not if we were actually to follow the lead of the successful Asian countries and territories ( South Korea, Taiwan, Vietnam etc) that we claim to be trying to emulate.

Otago epidemiologist professor Michael Baker – who has been describing New Zealand as an outlier for a very long time when it comes to the desirability/efficacy of the public wearing masks – has been vindicated. Too bad that the public servants facing that new workplace “ guidance” are not being encouraged to pursue this option of protecting themselves.

Probably, we will have to wait until the advent of the Transtasman bubble, and until other countries expect it of us. Ultimately, the WHO policy change on masks is likely to be implemented here only if and when we open our borders to selected global partners, such as Australia and Japan. Certainly, any future Asian visitors would be freaked out at the paucity of mask-wearing evident here, in public spaces.

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