Stock markets are near their all time highs, despite the devastation wrought by the Covid pandemic on industries. The top ten industries by turnover, globally, are life & health insurance, pension funds (devastated by zero or negative interest rate policies), Oil & Gas (destroyed by low crude oil prices; Shell just lost $18b in Q2 due to write down of oil and shale assets), commercial real estate, automobiles, general insurance, auto parts (all hammered by vanished demand due to lockdown), commercial banks (will be hit by bad loans after the bailouts to businesses ends) and tourism (butchered by Covid).

If the top industries are badly hit by the pandemic and the lockdown, why are stock markets near highs? S&P 500 is 1.6 per cent below from peak, DJIA is 7.4 per cent below and Sensex is 10 per cent away.

Quantitative easing

This is what happened after the 2008 global financial crisis. The quantitative easing by central banks, to rescue businesses and help citizens, is also providing liquidity to those with good credit rating to be able to raise money at extremely low rates, and, since bank deposits yield such poor returns, to invest this into stock markets.

In June 2020, US Fed has printed more money in a month than in its first 200 years!

Sadly, some of this relief money is being misused. An article in zerohedge.com mentions that a fifth of America’s limited liability companies do not have the cash flow to meet their debt obligations, and are, therefore, bankrupt. They are called zombie companies.

They continue in business because of low interest rates and the ability to find lenders to continue. Some of these zombies go into bankruptcy.

Now they are discovering the PPP programme (payroll protection programme) of the US Government which gives money to companies to pay employees. So these zombies come out of bankruptcy, claim the PPP benefit, and go back into bankruptcy protection!

Three countries, Japan, Denmark and Switzerland have negative interest rates, i.e. a depositor has to pay interest to a bank to deposit his money!

Completely bizarre and begs the question – why should people save? And if people don’t save, where will money to invest/consume, come from?

Besides, 22 countries have zero interest rates and 23 have less than one per cent interest rates.

There are several unsavoury consequences of such insane policy. Pension funds, e.g., don’t earn enough from debt instruments to meet their obligations and necessarily venture into riskier investments. This is going to result in a denial of retirement benefits and consequently will exacerbate the social unrest already manifested in the BLM movement in USA.

4th Industrial revolution

Investors are anticipating the start of the Fourth Industrial Revolution and the productivity gains that would bring.

But a major obstacle is the US-China cold war and China’s increasing belligerence against all countries.

This makes the US presidential elections in November the most crucial one, for the entire world. Trump has shown a capacity to stand up to China; Biden has not yet shown his resolute. The benefits ensuing to the world from the 4th Industrial revolution will be diluted if there are two separate technological standards which may not be connected. So one hopes that the next US president will be able to deal with the situation and we usher in a brave new world.

The alternative is unthinkable.

The writer is India Head-Finance,Asia,Haymarket.The views are personal

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