Over the last three months the U.S. markets achieved some stability, with the Dow Jones consistently trading at over 21,000 points and market volatility being halved on the VIX Index. Optimistic market analysts believe a bottom and an ascent into a bull market have been established.
Before the Pandemic was declared a national disaster, Federal Reserve Chair Jerome Powell and the Board of Governors adjusted interest rates and implemented liquidity measures, mounting shock absorbers a bicycle just before the rough terrain kicked in.
The resulting biking experience insulates the rider from a realistic sense of the gravel and gravity of the situation while tricking him into thinking he grasps it by a token bump here and there. He’s tempted to recalibrate the experience down to a, “This isn’t as bad as I thought it would be,” complacency. But the shocks are not indestructible: sooner or later, they’ll wear off. And he doesn’t know how long the rough terrain stretches out, nor whether it worsens further along. In his panic, he may mistake the shimmer of the mirage over the horizon for an oasis and miscalculate the length of the journey still ahead. He naturally wants to believe that he can complete it without a radical rethink about his priorities and resources, but the cruel irony is his misplaced optimism may cost what it promises.
Not only has the U.S. benefited from lowered interest rates, paycheck protection plans, currency swaps and a $2 trillion capital injection, its shock absorbers have helped half the world economy as well. 55% of global transactions are executed in dollars (Bridgewaters, 2020) and that economy’s actions have brought ease to investors and curtailed panic selling, consequently calming swings on Wall Street that the world wouldn’t have had the capacity to absorb. To illustrate the influence of the U.S. market, consider that circuit breakers, or the cessation of trade from overselling, kicked in to slow a market sell-off. This hadn’t happened in over 20 years and it was followed, on the 16th of March 2020 — dubbed Black Monday — by the biggest single market decline in the U.S. since 1987, plunging the Johannesburg Stock Exchange down 8.3%. That Wednesday, the Rand weakened to R17.14 against the U.S. Dollar from the previous Monday’s R16.32. On Thursday, the Federal Reserve Bank came to our collective rescue by announcing the currency swap facility with 9 other Central Banks. A cross-currency swap allows an exchange, off-balance sheet, of principal and interest in different currencies to hedge exposure to exchange rate risk.
When there’s chaos on Wall Street, the resources needed for meaningful forward planning are redirected to diffusing pressure and reducing volatility. Though the Federal Reserve Bank’s shock absorbers have isolated the bumps to “just” record-breaking unemployment claims and historic oil price swings, the confluence of these events’ impact haven’t had as dramatic an effect on the financial markets as they otherwise would have.
Within that global context, let’s examine what governments’ response to COVID-19 has consisted of: lockdown restrictions on movement (and therefore trade), emergency health responses and money. This has led to market swings and savings being tapped into, creating holes in reserves and capital that could have been reinvested or liquidated and channeled towards productive initiatives, economic growth and improved living standards and quality of life in general. It’s both a shrinking economy and a market bubble, and all the unlocking of billions and trillions can really do is buy the illusion that the liquidity can cover the gaps and prevent a burst. Society intuitively knows that the stimulus packages are in no way adding new wealth into the system. Being on lockdown, we’ve maxed out on productivity. All we can do is meet immediate needs, and even that goes as far as our administrative agility to do so.
To use another analogy, let’s imagine the global economy is a pregnant wife who’d been promised a refurbished kitchen and a car by an inattentive husband who’s showered her with unfulfilled promises. When her water breaks, she yells, “Take me to the hospital!” and her husband responds by surprising her with the Porsche and expensive kitchen fixtures he’d promised, which she could have really used a few months back. At any other moment, she would have been the most grateful and gracious person on earth but right now she’s calling her parents, throwing appliances at him and being an all-round nightmare. And yes, that is an analogy for social unrest.
While we can delay cars and home upgrades, we can no more postpone the future than an expectant mother can postpone labour. If this moment doesn’t cause us to intentionally create a system that builds up every person’s economic resilience and access to opportunity, then neither can the baby’s arrival shock this husband to rethink his priorities. The next piece, “Champions Of Southern Africa”, outlines the thinking we must adopt to complete this metamorphosis. Reserve Banks worldwide bought us time, but will that time absorb the shocks we need to ride all the way to our future at the horizon?