Stockmarketcorrection,pandemicreliefandfrugalitynarrative

Stock markets across the world are retreating being led by the US markets. The Dow Jones was down 1.9% by the time it closed, after falling close to 3% at the lowest point during the day. The US sell off followed a sharp drop in London share prices where the FTSE 100 lost 3.3%. As is the case with any well meaning commentator we have dug out several plausible reasons for the correction, one being the fear about the second wave of covid infections. UK’s covid 19 alert level has been raised to level four indicating that virus risk is rising exponentially. New rounds of restrictions are expected to be put in place following such an alert. The second reason for the correction can be traced to the continuing gridlock in the US about any second tranche of pandemic relief. The generous relief we saw previously puts money in the hands of people who spend it, in turn helping the economy to get back on its feet.

Now the first reason about the second coming of covid hardly needs to be debated. But the second one regarding the absence of relief and its unintended impacts requires some further discussion. The Nobel laureate Robert Shiller in his book The Narrative Economics delves into this effect. In a chapter named Frugality versus Conspicuous Consumption, Shiller writes about the feedback loop of declining consumption during the times of economic stress. The oft repeated example is from the onset of the Great Depression where a large number of American families lost their earning capacity. In the absence of earnings the families quickly scaled down on any non-essential consumption. But there was a second order impact too of such a decline in spending. The population which was still earning relatively well (having the means to consume) started cutting down on their spends too. The reason was to make sure that no ostentatious display of wealth is done in such testing times. Shiller describes this phenomenon as the frugality narrative in his book. This generates a strong feedback loop making any recovery even more difficult.

To break this vicious chain of low consumption leading to lower growth governments need to step in with stimulus measures (which governments across the world have done). The question now is “how much more is required”. The conundrum is how much fiscal space the sovereign has and how much it can stimulate without going broke. The curious thing about this question is whether a sovereign which prints its own fiat currency can go broke or not. We will tackle this question in a future note.

In the market round up the dollar index trades strong at 93.60, US 10  year yield at 0.67, Euro at 1.1760. The British Pound is trading around 1.28 which is close to its weakest level in 2 months. Brent crude trades at 41.35$/bbl whereas gold trades at 1910$/oz. Silver prices though took a close to 9% knock off in the trade yesterday trading at 24.5$/oz from 27 $/oz yesterday.

Domestically, the INR trades at 73.40 in the morning trade and the 10 year benchmark bond trades at 6.01.