RisingCovid,forecastingissuesandGreenspan'sbriefcase

The number of new covid cases in India jumped to an all-time high at around 183k on 13^th April 2021. Compare this to the number of new cases on 13^th April 2020, the new case additions on that day were 1248. The nation was under a complete lockdown at that time with overbearing restrictions on any human or goods movements. In the US which is now in the middle of a confident reopening amidst vaccination roll out, the daily new cases on 13^th April 2021 were around 70k compared to 26k one year earlier. Fed Chief Powell asserted in another TV address that the economy is going into a period of higher growth and high job creation, but he caveated it by saying that a second spike in covid cases is still a big risk. Opening too much or too early invites that risk. He also added that it is unlikely that an interest rate rise will happen before the end of 2022, bond purchase taper may happen before that. Dow Jones ended in green last night. Dollar Index is well below 92 and US 10-year yields are 1.63. The Indian Rupee is trading at around 75.30 which is its lowest since August last year.

The last point made by Powell about being judicious on “opening much and early” can only be judged in hindsight. It has been written multiple times previously that the human mind has not evolved to appreciate phenomenon’s which carry an exponential streak. The virus trajectory sadly follows that pattern and hence it becomes extremely difficult to predict the chances of a case surge once the economic activity reopens. The only possible solution left with authorities is either complete vaccination (or vaccinating a critical mass) or achievement of herd immunity. The latter’s efficacy again can only be gauged in hindsight.

Now how all this connects with our global market musings? There are two basic aims which any information mailer should serve. Firstly, it should allow the reader to make sense of what is happening. This is by providing context to the events which have happened by connecting the dots. Second is to provide an informed take on what can happen in future in probabilistic terms. The market then aggregates all these disparate forecasts and reconfigures the asset prices. Here the important thing to appreciate is that even if the forecast is for the long term, the change in asset prices is reflected instantaneously. Hence whether the forecasted future plays out eventually becomes immaterial from the forecast point of view.

Another problem with making radical forecasts is that it can start impacting the phenomenon in question. For example, if one says that the economy is expected to shrink by 50% in one year because of covid. The striking assertion itself can result in galvanizing government to act which ultimately might salvage the economy. One interesting example of the same which we can remember is from the late 90s when Fed watchers had started predicting the rate action based on the size of Greenspan’s briefcase on the day of policy. The theory went that if the briefcase is bulging then it is full of evidence that Greenspan has gathered to persuade other members for a rate increase. If the briefcase is thin, then no rate change is likely. However, the problem is that once Greenspan knew of such forecasts, he altered the size of the case to add a layer of surprise. Hence the act of making the forecast public made it redundant.

Finally, one has to submit humbly that nothing much can be forecasted about covid currently. The only thing that can be said is that it will be a period of heightened uncertainty. As of now the US is doing much better compared to Eurozone and EMs when it comes to fighting the virus. The vaccine roll-out is on track and the fiscal and monetary support is abundant. We will pause here. Such confidence can lead to a phenomenon called the Peltzman effect, we will take it up in coming days.