Many things are opaque, leaving how and why they work unclear at best.
Why, for example, has the US stock market recovered nearly 20% in the last month even though we remain under the cloud of a pandemic with no clear end in sight, the economy is shut down put into a coma, tens of millions have become unemployed, world trade and supply chains are in a shambles and global institutions, intended to provide a stable market environment, are facing an existential threat?
Stimulus packages help. My wife sent me the following explainer:
It is a slow day in the small Saskatchewan town of Pumphandle, and streets are deserted. Times are tough, everybody is in debt, and everybody is living on credit.
A tourist visiting the area drives through town, stops at the motel, and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs to pick one for the night.
As soon as he walks upstairs, the motel owner grabs the bill and runs next door to pay his debt to the butcher. The butcher takes the $100 and runs down the street to retire his debt to the pig farmer. The pig farmer takes the $100 and heads off to pay his bill to his supplier, the Co-op. The guy at the Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her “services” on credit. The hooker rushes to the hotel and pays off her room bill with the hotel owner. The hotel proprietor then places the $100 back on the counter so the traveler will not suspect anything.
At that moment the traveler comes down the stairs, states that the rooms are not satisfactory, picks up the $100 bill and leaves. No one produced anything. No one earned anything … however, the whole town is now out of debt and now looks to the future with a lot more optimism.
While I understand the story, I don’t think it helps me understand the nuances of the current financial situation. I am left to faith that stimulus packages just work. After the 2008 market crash, my broker’s advice was don’t bet against the Fed. What he meant by that was have faith the quantitative easing program introduced by the Federal Reserve would stabilize the markets.
Author, businessman and economic advisor, Mohamed El-Erian, observed that the Fed’s intervention effectively de-risked the markets. My interpretation of what El-Erian was suggesting was that the remedy was like an opioid; while it solved the initial pain, the markets became hooked on the measures, however the fundamental issues were never fully resolved. With the pandemic, he warns that the markets may be forced to reconcile. That was my fear as well.
Economist Paul Krugman cautions that the stock market isn’t the economy. Rather the market is largely driven by the oscillation between greed and fear. However, in today’s economy, with interest rates so low, there really isn’t any where else to invest your money. From a different slant than El-Erian, Krugman observes that because the bond market expects the economy to be depressed for years to come, the Fed will continue its easy-money policies for the foreseeable future. In other words, the stimulus packages — the opioid of the markets — will continue and it is thus that a weak economy is good for the stock market.
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