The speed of recovery left us all speechless. The markets collapsed in March but have only risen since then. Common sense tells us that monetary incentives have only postponed the inevitable. That is, this increase is not sustainable. However, the dreaded second crash was prevented for the time being. A few days before the presidential election in the United States, nobody wants a correction. So the show goes on for the sake of simplicity and Trump is sure to have something in store at the last minute. Could we have the long-awaited vaccine before November 9th? Are we having a bullish party for a while?
Recovery began after the March crash. All of the models told us that the recovery would take much longer and that after a brief increase, there would be another decrease. It wasn’t stupid to think so. In fact, it was very logical. We have to remember that there was already a bubble before the arrival of the coronavirus. At that point it was clear that everything was grossly overrated. In other words, the fundamentals were well below market prices. We had a bubble.
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The bubble continued to inflate because of cheap money. But we all knew the breakdown would come sooner or later. Then the crash came due to the coronavirus. The fall in demand dramatically lowered revenue and ruined the economy. We went from Bonanza into poverty in a couple of weeks. Because deflation has eaten us alive. The situation was dire and at some point we found ourselves in the worst crisis since the Great Depression. The most revealing data was the tragic rise in unemployment rates. In these extreme cases, stimuli are a matter of life and death. The charms came and that was the lifeline.
Money stimuli increase demand and curb deflation. This is, Liquidity helps alleviate the crisis. But there is a detail. There are different types of stimuli. And these affect the economy in different ways. The first step is lower interest rates to stimulate lendingHowever, this option is out of stock as the prices are very low at first. The next step is this Treasury bond, but we are also there on site. You can also increase your payment in a number of ways. You can help millions of people. It works and has been done. You can also invest in large infrastructure works. However, these options have their limits. On the one hand, the amounts are limited. On the other hand, there are late sequelae methods. I mean it takes a while for the results to appear. That said, of course, applies more to infrastructure work than to auxiliary controls.
However, How could we explain such an aggressive recovery? Why hasn’t there been another crash despite weak fundamentals? We owe everything to quantitative expansion. The famous QEs. The latest trend in stimulus fashion. An unconventional, controversial, and dangerous tool, but with explosive results. The fastest economic recovery in history is no accident. This historical recovery is directly related to a historical use of QE.
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Let’s imagine two sick people. One follows traditional treatment and the other is injected with heavy doses of adrenaline. Voila! This is your historic recovery. Any doctor would say the patient goes back to bed after the adrenaline subsides. But what if we keep giving him more and more adrenaline shots? The second crash does not come and the financial bubble does not burst because the markets are under the influence of adrenaline. This is, the effects of traditional stimuli plus quantitative easing (QE).
What is quantitative easing? Basically, it is a monetary instrument used to increase the supply of money by buying financial assets in the market. Usually corporate bonds. And in some cases, actions. With this money, companies make investments, acquisitions, or buybacks (buy their own shares). This of course increases the prices in the markets very aggressively. The main advantage of QE is its speed. You seem violent. On the other hand, its big disadvantage is that it mainly benefits Wall Street and the rich. The effects on the economy are indirect. In other words, QEs promote inequality.
Both QE are possible because inflation has not increased. The moment inflation rises, the party is over. Every effort has been made to weaken the dollar, but it has not been easy. On the other hand, the Federal Reserve is feeling bipartisan pressure to keep the party going. It is already evident that the intention is to continue this way until the elections. And certainly also in the first months of the new mandate. I mean, we have adrenaline pumping for a while. At least that’s the politicians’ intention.
What could be the big last minute surprise? I speculate it will be the vaccine and a great treatment. At the beginning of the week, The markets increased due to optimism in this area. Eye! Achieving this is very difficult. I am not saying that the announcement will be made before the elections. What I’m saying is this: Trump probably wants this before the election because it would be the bomb for his campaign. Dealing with the pandemic has been a disadvantage for Trump. You might want to redeem it with a super ad like this one. Vaccine, distribution, treatment and all paraphernalia. The end of the coronavirus and Donald Trump as a saving hero.
Of course it is one thing to want and another is power. The Russian vaccine and others out there are kidding because they don’t meet the requirements. According to the World Health Organization There are 170 vaccines in development and 30 of them are in clinical trials. Moderna, Pfizer / BioNTech and Curevac are working on a vaccine based on mRNA. Note: This RNA refers to ribonucleic acid, which is a generic material for certain viruses. It’s related to DNA (DNA in English), but it’s not the same.
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The point is, developing an antiviral vaccine isn’t easy. It’s not just about money. It is also a matter of time. But there is another important detail, namely the transport. For example, US logistics company UPS is currently building huge refrigerators (the size of a soccer field) specifically designed to store coronavirus vaccines. All of this as part of a global effort to make the vaccine available as soon as possible. Temperature is the big enemy here because it destabilizes the vaccine. So the problem of the blessed vaccine is not an impossible task, but it takes time and a lot of logistics.
Quantitative easing, technological euphoria and optimism (rational and irrational) have kept the rise. Because of the monument, it was the capital market that drove this boom. However, medical advances could have a major impact on the real economy as it could return us to normal. In this case, We could have an economic recovery based on production, not just paper.