Hope,TrumpandRobertShiller

After the better than expected non-farm payroll numbers on Thursday, which were a day early owing to the 4^th of July celebrations in the US, there was a slew of conflicting messaging coming from the country. The daily new cases continued to clock more than 50,000 leading to a major jolt in reopening efforts, whereas President Trump in his speech at Mt Rushmore declared that the war on Corona has been mostly won and the increase in new cases is just because the US is doing more testing , “no one can match us, not in terms of the numbers or in the terms of quality (of tests).”

Now whether the war has been won or not hardly depends on the rhetoric. Researchers in the field of epidemiology have worked assiduously to provide some markers. In the 2019 book Narrative Economics, Nobel Laureate Robert Shiller describes in detail the life cycle of a viral curve. He writes that the shape of the curve (infected people) is hump shaped and takes its form from the two forces which are at odds with each other i.e. the contagion rate and the recovery rate. During the start of the virus the contagion rate is more than the recovery rate hence the upward sloping nature of the curve and vice versa is true post the inflexion point. The more unique part of Shiller’s argument is the exact location of the inflexion point and the reasoning behind it is mostly in the domain of guess work. He writes that a myriad of factors, ranging from medical intervention to change in weather or wind direction, can play a role and that the exact cause is difficult to identify. Government responses hence are two pronged: reduce the contagion rate (with quarantine measures) and increase the recovery rate (with a vaccine) and then just wait for the inflection to occur. Shiller cites the example of the Ebola virus of 2013 where the eventual spread was stopped owing to the success of the former approach even when no vaccine ever got made.

With the number of infected people still increasing in some countries, it is clear that the inflection point is yet to occur. But in the markets across the world it appears that the hump has already been passed. Asian stock are in a good mood. The Hang Seng is up a whopping 3.45% whereas the Nikkei is up 1.6% in the Monday trading. Chinese stocks are up too. The markets are not only discounting the Covid news but they are nonchalant about the news of military drills in the South China sea, the stray reports of bubonic plague and swine flu or the continuing stand-off in northern Indian. Their firm belief on continuing liquidity and fiscal support by the central banks and governments has “trumped” almost everything else.

Domestically, the mood is following the global optimism. Stock markets are up by 1%. The Rupee is stable around 74.55 and the 10 year benchmark bond is trading at 5.83. The results of weekly bond auction cut offs on Friday was better than market expectations and even after the exercise of green shoe option the rates have held up, showing that demand is good. Though on the side of caution it must be noted that India has overtaken Russia and has reached third place in the list of countries with the most number of cases. The number is just shy of 700,000 and shows that to reach the inflection point will still require some heavy lifting.