Vijay Kumar Gaba

Long Covid, is a term commonly used to describe the lingering adverse health effects of the Covid infection. Another dimension of Long Covid is the lingering socio-economic impacts of the pandemic. While only a small percentage of persons who suffered from the Covid infection are showing medical signs of the Long Covid; the socio-economic milieu of almost every country in the world is suffering from Long Covid.

The pandemic has definitely widened and deepened the socio-economic economic divide across jurisdiction. A significant proportion of the population that was pulled out of the abysmal poverty in the past two decades has slipped back below the poverty line. Accelerated digitalization of social services like education and health has deprived many underprivileged children.

To mitigate the sufferings caused by the pandemic, most governments provided monetary and fiscal stimulus to the poor and small businesses. The stimulus checks (and ration and medicine kits) created artificial demand for two years. This happened when the supply chains were broken across the product lines.

It is pertinent to note that ever since the global financial crisis (2008-09) the investment in new capacities in commodities (mining, metals, coal, oil & gas etc.) was dwindling, while the money to build leveraged positions in commodities was available in abundance and at extremely cheap rates. We had seen a glimpse of these positions on 15^th April 2020 when the WTI Crude Oil Futures settled at negative $37.4/bbl.

Some of the highlights of the socio-economic dimension of Long Covid are as follows:

1.    The sudden and exacerbated demand supply mismatch has caused prices of all commodities, including food, to rise sharply higher. The poor are obviously suffering the most.

2.    The modern monetary theory (MMT) that was working just fine since 2009 seems to be becoming ineffective.

The deluge of new money created since the global financial crisis did not result in any inflation as the new money was not flowing to the end consumers. The new money was mostly adding to the reserves of the banks as the lending standards were made very strict. The credit was mostly flowing to the rich and affluent for investing in financial assets; or it was used for circular trade in government securities to repress the bond yields. Consequently, bonds worth trillions of dollars traded at negative yields; the government borrowed profligately to keep the Ponzi scheme running.

The pandemic has however taken the tide down and exposed the true status of economies, governments and central bankers. The central bankers are now running for cover (withdrawing excess money from the system and hiking rates); governments are focusing on raising revenue (taxes) and distracting the attention of common people to war hysteria & political instability; and economies are slithering into recession.

3.    The stimulus checks, concessional loans and relaxation in lending standards during the pandemic resulted in billions of dollars flowing into the pockets of consumers, like a high dose of life saving steroids. The treatment proved effective and saved millions of lives. However, the effect of steroids has now dissipated. The consumers are struggling with the side effects. Widespread civil unrest, even in the most peaceful jurisdictions like Sweden, and aggression are the consequences.

4.    US consumers are now struggling with 4 decade high inflation, when the mortgage payments are rising as the Fed is getting ready to aggressively tighten. The action of the US Fed, which is preparing to hike another 50bps next month, may not result in any improvement on the supply side. It may however destroy demand and hence bring equilibrium in the markets.

5.    Many emerging markets are now struggling to honor their debt and control inflation to protect consumers. Thankfully the markets are not panicking over Sri Lanka’s default like they did at the time of Greece’s potential default. But if some larger countries join the list of defaulters, markets may react badly.

As I noted a few days ago, for now Mr. Bond is in the driver seat and yields will be driving the global markets. Interestingly, the current generation of investors, traders and money managers have never seen a bear market in bonds. The last bear market in bonds was two decades ago in the early 2000s. It is safe to assume that those below the age of 42-43yrs came out of college after that. Their skills will be tested now.

Even in the equity market, the bear markets of 2008-09, and 2020 were mostly panic driven and recoveries were faster. A pure economic cycle led bear market in equities has not happened since 2003. “IF” the central bankers fail to tame the inflation tiger in the next 6-9 months, we may see an excruciating bear market in equities that will test the skills (especially patience) of investors and traders.

There is an old Chinese curse which says, “May he live in interesting times”. Like everyone else I also do not wish to live in interesting times. But then the world does not function as per my wishes. I must therefore prepare better for the adversities and the opportunities that will follow.