“The real economy is hostage to the markets”


Collapse of world GDP, deflation prospects, peak confidence, anemic demand: the picture drawn by economic estimates for 2020, the year of the coronavirus, is not at all encouraging. Yet the stock markets, although hard hit by the Covid crisis in the lockdown weeks, have immediately started to climb again despite the damage that is expected to be even more serious than those caused in 2009 by the crash of Lehman Brothers. Now it’s different: while the developed countries are making great strides towards a certain recession, the markets are only licking a few wounds and are already hoping for a long jump. How is it possible?

As the Sole 24 Ore pointed out, after the sharp blow to the stock market in March (-34% worldwide) the rise in the lists was sustained and in June the stock discounted only 6% less than the levels of beginning of the year. In other words, it is slowly returning to its starting point. The opposite is true for the real economy: if in 2009 Europe recorded a 4.5% drop in GDP, for 2020 the estimate is a drop of 6.7%, but in some countries it will be even worse. It would be reasonable to expect blood red price lists, but for now the damage seems very limited. “If I am allowed a somewhat crude expression, the real economy has become hostage to the markets,” explains Intermonte Sim Chief Global Strategist Antonio HuffPost. “Since 2008-2009, central banks, first the Fed and then the ECB and others to follow, have started to introduce large amounts of liquidity into the economy. From then on, markets have become accustomed to ever larger “gifts” in the form of increasing liquidity. ” The same thing happened when the world suddenly stopped due to Covid, an event that has never happened before like a prolonged and contemporary cardiac arrest in more developed countries. “Central banks have started flooding the liquidity market again (today amounting to approximately 85 thousand billion dollars worldwide) through various maneuvers such as plans for the purchase of public but also corporate (corporate) securities, refinancing auctions (Tltro ), Repo and other operations that have ‘spoiled’ the markets just like a dad with a son who suffered a serious accident. The Fed in particular is pushing itself to the limit of granting loans to medium / small companies as well as to states and counties, “added Cesarano.

The intent is to avoid the inverse path compared to 2008 when the financial crisis became economic: today we want to prevent the recession from moving to the markets. “On the other hand, the president of Fed Powell recently warned on how ‘the malfunction of the markets can damage the economy’, which is a bit like saying that monetary policies cannot fail to take into account the dynamics of the market”.

It was seen in 2018 when Powell himself seemed intent on raising rates, “investors took little time to change his mind in 2019 because they know that if they start to cry they can get something”. Another case in point and above all punctual is the warning launched today by the President of the ECB Christine Lagarde during the first and disappointing EU Council on the Recovery Fund, blocked as it was intended to demonstrate by the vetoes of several Northern European countries opposed to much of the system proposed by Ursula von der Leyen: “A failure on the recovery package could lead to a change in market sentiment,” Lagarde told the 27 EU leaders. Until now, the monetary policy measures adopted by Eurotower have given time to the Old Continent, where the fiscal response has been very varied and in some countries such as Italy it has been weaker than others. Yet, after a few peaks, the increase in sovereign risk has been (for now) contained: the spread has returned to acceptable levels, even if the economic forecasts have not improved at all and indeed for Italy they speak of a 9% loss of the GDP.
This does not mean that “the more time passes, the harder the recession will be,” said Spanish Prime Minister Pedro Sanchez.

This is not the case for financial markets. “In some ways, the economy should almost be read backwards to understand its reaction: if there is a recession, it is the right opportunity to obtain increasingly succulent gifts, which are monetary or fiscal in nature, it does not matter. It is enough to see how much liquidity there is with respect to the capitalization of the indices, “added Cesarano.

For example, retail investors, especially from the United States, know about it, achieved by helicopter money measures or non-refundable grants (one-time resources for $ 1,200 plus a $ 600 increase in weekly unemployment benefits until the end of July ): “And what did they do? With the boom in online trading increasingly within everyone’s reach and thanks to the blocking of sports betting, they have started investing on the stock exchange. ”

What is recorded, in essence, is an increasingly evident separation between the real economy and the financial one. The good mood of the markets, however, is not eternal and depends strictly on the power of monetary policies, especially in Europe where the ECB is much more plastered, by statute, than the American Fed. But above all: even if the markets smile there is little to be happy about because the real economy can safely (and at the same time) go to hell.

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