Last March 18 – I know it seems like a long time ago, but lockdown measures to contain the coronavirus were introduced around this date in several countries – the FTSE 100 Index (the share index of the 100 companies listed on the London Stock Exchange with the highest market capitalisation) dipped to 5080.58. The Dow Jones Index (the stock market index that measures the stock performance of 30 large companies listed on stock exchanges in the United States) dipped below 20,000 on that day, for the first time since February 2017.

On June 16, the FTSE 100 Index had risen back to 6,242.79 and on June 17, the Dow Jones Index had risen to 26,244. Both indices had a remarkable recovery which does not necessarily seem to correspond with either current consumer sentiment or current business confidence levels. It has been said often enough that financial markets anticipate the performance of the real economy, but such a recovery is still baffling many analysts.

Central Banks around the world are satisfied with this recovery as it would seem to indicate that we may end up having a V-shaped boom – bust – boom economic cycle. The recession will hit deep but it will be short-lived, if financial markets operators have got it right. And what if they did not?

It is a bit like a film already seen in past years – an economic recession biting hard, high unemployment, great economic uncertainty and buoyant financial markets. However the end bit is still to be written. If the end will be the same as in previous films, it will not be good news at all, as once more, the few will gain significantly from the economic recovery, but the rest will have to go through years of economic austerity.

There is a great deal of cash being pumped into the financial markets

The only difference is that this time round, I really doubt whether governments will make their electorates go through the type of financial austerity we had in the last decade and I doubt even more if these electorates will take it sitting down.

The economic data from around the world is quite telling. Industrial production is in free fall. Investments are blocked. Consumption is at a standstill and, in some countries, also decreasing. Prices have been frozen by low consumer demand, leading to an inflation rate that is getting dangerously close to zero per cent. Unemployment is increasing at an alarming rate. So one wonders why financial markets are so optimistic.

The reason, from an economic perspective, is fairly straightforward. There is a great deal of liquidity in the market. With interest rates hovering around zero per cent and with the US Federal Reserve and the European Central Bank about to buy bonds of companies (and not only of governments), there is a great deal of cash being pumped into the financial markets, and what may have appeared to be a risky investment some months ago, is no longer viewed as such. Risk is cheap and is not coming at a premium.

One has to add to this the massive injection of funds by governments to stimulate the real economy, in incentives for investment and in social welfare, or simply to keep people in a job. Even though, there will come a time when this public sector debt will have to be paid back, operators in financial markets ae still feeling very optimistic.

This is all very worrying because there is an evidently an increasing disconnect between the financial markets and the real economy, which will lead once more to increasing social inequalities. There are those who feel safe and confident, irrespective of the coronavirus and those who have lost everything, between those who are affluent and have the resources to invest in financial markets and those who just cannot make ends meet.

This cannot last long and governments have to address it. This cannot be the world that will emerge from the pandemic. We cannot have a repeat of the situation experienced after the economic recession of eight to 10 years ago. The film cannot end the same way.

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