Highlights from Live Caixin Roundtable on “The Global Economy: from Infection to Recovery?”
In the online discussion, Larry Summers, Harvard University professor and former U.S. Treasury Secretary made a keynote speech, followed by comments from Zhu Min, Chair of Tsinghua University's National Institute of Finance Research and former IMF deputy managing director. The speakers answered several questions from the audience in the latter half of the webinar.
I. Key points made by Larry Summers:
We do not yet know if the market has over adjusted.
• If the market drop is caused by fundamental factors, then it reflects the real problems caused by the virus: factory slowdown, travel disruptions, etc.
• If it is a panic, the market will rebound; if it is a real meltdown, the market will stay there. We do not yet know if the market is overreacting and over-adjusting.
Primary task for the world is not to reassure the market, but to solve the virus problem.
• Usually, financial crises are situations where everyone outside the markets is scared by what's happening inside the markets. This is a different situation, where markets are alarmed by what is taking place outside.
• The impetus behind the economic downdraft is concern about the success of enterprises around the world. No one can be certain that it's wrong for the market to have substantially revised its view as to what their profits will be.
• Often, financial policy makers think that there's a basically healthy world, which the market is misjudging, and the task is to manage the market, so it stops reassessing a basically stable world. Here, the task is not to reassure the market. The task is primarily to solve the problem.
• Relative to past moments of financial crisis, when the instinct was to focus heavily on the dynamics in financial markets, with respect to this one we must pay close attention to the underlying biomedical developments.
President Trump's reactions have been erratic.
• I welcome the fact that he has recognized the gravity of the situation, but it is unfortunate that he was comparing this to the common cold as recently as several weeks ago.
• Emphasis on travel restrictions, rather than internal testing, was an error. If the U.S. had focused more energy sooner on increasing the number of tests, it would be in a much stronger position to contain the virus today.
• At an earlier stage, the President essentially eliminated the precautionary bureaucracies that President Obama had put in place to assure that if something like this happened, the United States would have a cadre of informed officials ready to lead the response.
• Democrats or Republics, we should all hope the Trump administration to succeed.
Monetary policy has been necessary, but it was slated for limited impact.
• The economy is almost certainly heading for recession, potentially a quite serious recession, and total output losses may be in the range of the 2008 financial crisis.
• The Federal Reserve's rate cut was essentially necessary. The central bank has no choice but to cut rates to assure the continuing function of Treasury markets and indicate its readiness to support liquidity more generally. But given that there wasn't much additional room to pull rates down going into the downturn, it is not realistic to think monetary policy has the capacity to solve it solely.
• For a variety of technical reasons, the share of the economy that is interest sensitive as spending has gone down over time. And a large part of the shortfall in demand is voluntary, because people don’t want to go out and get sick. It never would have been right to expect monetary policy would have been terribly potent in its impact.
• So we're going to have to rely much more on a broader range of fiscal policies. Moving forward, U.S.-China priorities include ensuring, an absence of protectionism; financial stability, especially given the quantity of cross-border capital flows; and that both countries manage their exchange rates, not in ways that are rigid or fixed, but in ways that are responsible given global conditions
There are three scenarios of the final outcome of the virus in the U.S.
• Scenario one: the current intense program of isolation will operate for a few weeks. At the end of which, somehow this virus will no longer be a pervasive fear. This is the scenario we are hoping for.
• Scenario two: This program will work, but because we haven't been able to test enough, and because we haven't been able to do it in a draconian way that's China did. Perhaps that is because China's results so far are an optimistic read of what is possible. In conclusion, it will be possible to maintain the disease a low level, but only by maintaining social isolation for a very long time. If this scenario is true, there’s a lot of suffering and a lot of corporate profit lost.
• Scenario Three: We're not going to be able to enforce the social isolation to keep people separate for more than a small number of months. As many of the epidemiologists fear, the epidemic is going to break out and become pervasive. There is going to be a sub significant number of fatalities and a great deal of fear.
• The market doesn't yet know which of those three scenarios is going to play out. That’s why you're seeing such volatility and hair trigger character in the market.
• The rule of making policy: hope for the best and plan for the worst.
How the pandemic will impact the U.S.-China trade negotiation, and furthermore the bilateral economic relationship.
• Both sides will recognize the fact that people can’t travel safely between the two countries, that has already erected a substantial barrier.
• When natural barriers increase, man-made barriers should decrease. I hope they will renew and redouble their commitment to reducing various trade barriers between the United States and China.
• I would hope the example of need for life-saving drugs would help to remind people on both sides of the very important advantages of scientific cooperation between our two countries, and the very substantial cost, if there were to be a complete splintering of the scientific systems of our two countries.
The world is dependent on China-US cooperation.
• A lot of people are watching China very anxiously. If China is able to bring gradually life back to normal, without any recurrence of the virus, this will be a fully encouraging example for people from other countries.
• We need all the cooperation of which the United States and China are capable if we are to find successful outcomes for maintaining the health and ongoing prosperity and vitality of our societies.
• The world is dependent on the quality of cooperation and the broader order more generally that the United States and China create together.
Key avenues to control the virus:
• Pool scientific resources towards finding a vaccine and finding the cure, and pool research efforts and foster cooperation.
• Coordinate on immigration orders and customs procedures.
• Global aid: China and the U.S. need to make their resources, their knowledge, and their skills available on a global basis. While the United States and China have sophisticated internal infrastructures that can help track cases, identify cases, assure that people who should be kept separate are kept separate, not everywhere does. There are questions that can be raised about those responsibilities, both in China and the U.S.
What advice can be given to individual investors during this turbulent time
I hesitate to give investment advice. Because each investor’s decisions need to depend on their own contexts.
Guess where I would advise people in general: to think to yourself, if you're buying somebody else's selling and if you're selling somebody else's buying, why do you know more about it than them? And if you have a reason to think that other people are making a mistake, or that you have a superior assessment, then it might be a good idea to buy or sell, in response to your perceptions.
But for most people, you are just anxious, so if you want to sell at the moment where there's a bear market, or you are greedy and want to buy, because you think the stocks have gone far down. You need to think about whether your emotion of fear or greed is enough to put to you in a smarter place than people who somehow have come to the opposite emotion.
Usually, when I'm feeling fear or greed, I think to myself that this is probably not going to be my wisest and most rational moment, so I tend to stay put and will not be engaged in a major transaction.
II. Key points made by Zhu Min:
We expect a strong rebound of the Chinese economy in the next few months.
• The coronavirus has been contained in China. Our model shows the Chinese economy bottomed last week. Strong fiscal stimulus and consumption stimulus is driving a strong rebound in China.
• However, the global virus spread has become a great challenge; trade has become a great concern. In 2019, 0.7 percentage points of the 6.1% growth came from net export. For these couple months, that is all gone.
Fiscal policy and administrative measures are more important when combating the virus.
• Coronavirus is different from a recession. Although monetary policy can help, fiscal policy and administrative measures are more important.
• The Federal Reserve rate cut is perhaps necessary, but will hardly provide substantial help to the economy.
International organizations need to coordinate with local efforts.
• Financial assistance to less developed counties will be very important, but that alone is insufficient.
• Localized administrative efforts are needed to cope with the virus, such as manufacturing and distributing medical supplies in affected countries, enforcing social distancing and shutting down public spaces. Macroeconomic and fiscal policies should work in line with these more detailed policies.
• International organizations such as the WHO, OECD, World Bank, IMF and regional development banks should cooperate with local authorities and share experience with the world, especially lower income countries.
Every company must reassess its debt situation.
• We found in many countries, particularly emerging market, low-income countries, that a lot of companies’ interest coverage ratio is less than 3, which is not healthy.
• ALthought current interest rates are low, market liquidity and interest rates can change overnight. For example, the spreads between Italian and German government bonds jumped to more than 135 basis points in roughly a week’s time.
• But the good news is that the global banking sector still very strong and healthy. Since the 2008 financial crisis, the banking sector has more capital and the liquidity situation has improved dramatically. So they can provide more credit and liquidity to the private sector, and in the worst situations, governments can as well.
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