Coauthored by Khadija Syed.
In the short run, the market is a voting machine but in the long run, it is a weighing machine.
Benjamin Graham
We are currently in a massive globalized economic crisis. No sector is safe and entire industries are bottoming out with no hope of return. 16 million people have filed for unemployment and as we know, companies are typically fast to fire and slow to hire meaning unemployment may last long beyond just a few months.
The recent stock market rally has confused many as speculators act on reactionary news cycles to make a quick buck. The media and by extension, its everyday viewers, are quick to look to market fluctuations to evaluate economic prosperity (including the President). But the stock market is not the economy. And the market and any short term reaction to it are more often than not a circular fallacy.
Here’s what is actually happening — the current state of the market is a result of the Fed (central banks) printing massive amounts of money. The Fed is now projected to print close to $10 trillion dollars, only $600 billion of that (6%) actually going into the hands of people. Most of the money is being used to buy debt that is providing loans and temporary relief to large companies. As companies’ credit ratings and balance sheets decline, the Fed is purchasing the majority of this riskier debt with no limits. The federal purchase of this debt is just serving as a temporary snooze button. Continuing to press snooze never helps when it’s time to get up.
The most recent upswing in the market is just a reaction to the Fed hastily attempting to stop the market from bleeding out with a tiny bandaid on one part of the problem. Wall Street is being disproportionately propped up in comparison to Main Street. This leads to a temporary upswing and illusory conclusion that the economy is on the mend. Politics aside, the only way to bring back the economy is by supporting individuals and families.
We are still in the damage control phase. This massive historic shakeup of the economy as we once knew it will require a lengthy recovery to get back to some semblance of “normalcy” and along the way, major cracks in the system will be revealed. One option is to place yet another insufficient bandaid on the problem or use this moment as an opportunity to think creatively and strategically about an overhaul of the system as it once existed. The government needs to pass legislation to get money in the hands of the American people. But even if the government does this tomorrow and shelter in place restrictions are lifted, allowing some restoration of economic activity, this will just be a temporary fix. Any ultimate economic recovery will have to include consideration of the interconnected global economy, debt cycles, and most importantly, how to rebuild human trust that social distancing measures have implicitly impacted.
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