Fed BGD Does Nothing to Stocks


Extraordinary measures taken by the United States government and the Federal Reserve Banks appears to be having a limited effect both on the economy and on the stocks.

Fed has been the biggest money printer as can be seen above with that big blue hard-line shooting straight up to above $6 trillion of base money.

ECB is chasing them with a smaller rise and the Bank of Japan has an even smaller one, while the Bank of England is not playing, nor the Bank of China.

Dow price as of May 4 2020
Dow price as of May 4 2020

Despite all this spring measuring contest stocks are seemingly not seeing much joy because of a potential double whammy that has an economic contraction on one end and either inflation or deflation on the other leaving little room for fed to do much but some massaging.

Thus we can see above the near halving in March with a big green candle in April but this month seems to have returned back to red with a 500 points loss, 2%.

That’s while data showed the US economy contracted by 5% and the European one by 3.8% in the first quarter.

The estimate fo the second quarter is a 14% contraction for US which amounts to a 40% seasonally adjusted fall.

The estimates vary by country with a yearly fall of 10% expected for the US, while in Spain and Italy it may be as much as a beyond great depression drop of 20%.

That’s presuming things get back to normal by next month with much of Europe starting to open up, but there are signs politicians just have no clue what they are doing so especially for Italy and Spain the third quarter might be a significant negative too due to potentially politicians there cancelling the summer holidays.

Making the big question whether there will be a quick bounce back or whether complete incompetence will give especially the south a prolonged depression.

The Hong Kong economy contracted most on record due to the shutdown. GDP shrank 8.9% in Q1 vs the same period last year. That plunge surpasses the previous record of -8.3% in Q3 of 1998 and a 7.8% contraction in Q1 of 2009.

Hong Kong had other specific circumstances due to the liberation movement, but what makes this very unique is its global nature.

Usually, economic contractions are localized. The west might be hurting while Asia is fine or vice versa or Latin America is in trouble while the rest are not affected.

This time however the whole world is in economic trouble which could have a compounding effect within each economy.

For example, iPhone sales probably have plunged which means less demand for Chinese manufacturing, thus a reduction in employment which feeds back to fewer iPhone sales due to less wealth for consumers.

That can lead to a downwards spiral which can be difficult to overcome especially if these politicians act on their statements that things aren’t going back to normal any time soon.

North Europe and America would probably still just about manage but the whole world will be poorer and thus each country will be a lot poorer than if it was an ordinary somewhat localized recession.

Thus the money printing might have some effect but what is probably necessary is a big investment in infrastructure to get people to work and so that the west to has trains that go 600 miles an hour like in China.

In addition grants for robotization in manufacturing to increase productivity and more generally fiscal policies aimed at growth are probably necessary instead of putting all the burden on fed which clearly has limited power over the economy.

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