Govtborrowing,JoblessclaimsandCognitiveerrors

The total number of Corona cases in the world has now crossed the 4.1 million mark as per the data available on 9th of May, with the US leading the table with 1.36 million cases. In India the current number of positive cases stands close to 63,000. 9th May also marked the day with the highest number of increase for a single day in the world with close to 96,000 cases adding during the day. The number of additional cases per day stood at a benign 1700 at the end of February. The assessment of the economic impact of the pandemic induced pandemonium has also followed a similar curve. Take for example the growth estimates for India’s GDP by various agencies, which have shifted from a few point shave off at the end of march to a full throttle negative as of now.

Nassem Taleb in his book Fooled by Randomness discusses two aspects of cognitive errors which us humans display when faced with somewhat unknown phenomenon. First is the inherent inability of the human mind to gauge and understand processes which are multiplicative in nature. The steady start of virus infections and the delay in response by the authorities can be attributed to this. The second error he points out is thinking with temporary bias. Taleb writes that as any process/phenomenon starts, as humans we have an overt tendency to believe that it is a “temporary” event. He gives examples of numerous wars where at the start the combatants and the afflicted believed that it will stop in few days but they continued on for years. He writes that in his hometown Lebanon when the civil war started, it looked like a 5 day event though it carried on for next 15 years. In case of the virus response, at the beginning it looked like a fleeting phenomenon. The sober reality of how long it will stay has still not dawned on us. The constant urge to put out a GDP number and then revising it in few days can be attributed to this cognitive lacunae.

Coming back to the markets, the important event for the Indian markets, especially the bond markets, was the announcement of the changed borrowing calendar on Friday. Govt announced that it will borrow INR 12 trn in FY 21 compared to the budgeted estimate of INR 7.8 trn. This is an increase of close to 2% of GDP. 10 year and 14 year auction sizes have been increased the most. The increase in borrowing has been necessitated on two accounts, the first is a sharp drop in taxation revenue given that the economic activity has come to a grinding halt. The monthly GST numbers, which generally come out in the first week of every month, have not been released yet. The second is the constant clamour for the stimulus package. The old 10 year is trading at 6.21 against the 5.97 close on Friday. Stock markets are up, as any stimulus adds directly to the purchasing power of the end customer. Rupee spot trades at 75.70.

In other news, the job report in the US came out staggeringly non-normal on Friday, as we had written. The unemployment rate jumped to 14.7% in April which is its worst showing since the Great Depression years. The Dow Jones, though, ended up by 1.9% on Friday closing. The markets have started discounting that further stimulus measures might come over and above the current 3 trn $.