The coronavirus news feed is getting worse and generating a corresponding news feed. I just want to make a few comments that stick to my limited expertise. From a market perspective, the important market is the credit market, not the stocks. I’m not plugged into the credit market news feed, but I don’t see anything to indicate that something is irreversibly broken. Otherwise, the situation highlights the big difference between chance and uncertainty. It’s a geek distinction, but it’s one of the things that distinguishes post-Keynesian thinking from neoclassical.
Credit: Too early to panic?
The stock market is more transparent (and more attractive), and therefore the drop in stock prices is making the headlines. However, nobody uses the equity market to raise capital – in fact, this is where capital will die (via share buyback strategies that invariably implement the “buy” stock trading strategy. high, sell low ”).
I didn’t even bother to check, but it seems safe to guess that no new credit offers are priced. It would be very bad if it were maintained. However, the credit market closes periodically for new issues (for example, Europeans go on vacation for most of August), and issuers therefore know they have to bypass temporary market closings.
Until it is proven that the reopening will not take place, any sale of panic is purely speculative. It may be perfectly fine to panic, but I don’t have the information to offer helpful advice.
The problem with the virus is that we are facing radical uncertainty.
- We do not know what will happen to the economy under various disease scenarios.
- We do not know the probabilities of the scenarios.
The post-Keynesian geeky line is that this uncertainty is very different from the randomness that plagues the (neo) classical economy, which assumes that all the states of the world are known, and a probability distribution of these states is also known.
It is different from the situation a few weeks ago, for those of us who did not pay too much attention to the situation in Wuhan. There was uncertainty – what are the chances of a recession? – but most of us probably thought we could map out the recession scenarios and have an approximate probability that each scenario would happen.
The situation on the markets is extremely difficult because we are currently browsing the news, trying to be able to convert this uncertainty into at least probabilistic scenarios.
Central banks to the rescue?
There is a choir of economists on my Twitter feed calling for emergency actions (of varying magnitude) to end the “loop of fate” in the markets. So far, the Fed has refused to offer anything other than generalities. Since we will be in a very uncertain state for at least a few weeks, I think waiting for a more effective moment is reasonable.
(c) Brian Romanchuk 2020