Global bond markets refuse to ratify a V-shaped economic recovery. Futures contracts in fixed income derivatives are even more bearish, signalling nothing less than a worldwide deflationary slump as far as the eye can see.
"If markets are pricing a 'V', they're going about it in an odd way," says Andrew Sheets from Morgan Stanley.
It is simply not true that investors are ignoring the massive economic shock of the pandemic. The picture is being distorted by equities, and within that by a clutch of US tech stocks in the grip of a parabolic spike all too like the final phase of the dotcom bubble in 2000. But debt markets are three times bigger and ultimately matter far more.
Yields on 10-year US Treasuries have not rebounded as you would expect if the economy is genuinely healing. They are trading at 0.62 per cent, close to their all-time low during the panic flight to safety in late March.
You can perhaps rationalise such low yields on the grounds that the Federal Reserve has repressed the Treasury market with its US$3 trillion ($4.5t) blast of pandemic QE, although be aware that the Fed balance sheet peaked at US$7.2t in early June and has since fallen by US$200 billion.
What you cannot so easily rationalise is the long-range pricing of futures contracts. They imply that yields will remain pinned to the floor until the mid-2030s and that the Fed will not come close to meeting its inflation target by the middle of the century.
Fixed income funds are telling us central banks will fail to generate more than a flicker of inflation despite heroic efforts. It is the portrait of a truncated recovery with corrosively high unemployment.
Swathes of the US stock market remain in distress. David Rosenberg, from Rosenberg Research & Associates, says the sectoral tally is: auto stocks (minus 23 per cent), advertising (minus 34 per cent), energy and regional banks (minus 37 per cent), hotels (minus 43 per cent), and airlines (minus 55 per cent).
I notice a growing unease among the equity gurus at the big US banks. JP Morgan says the risk no longer justifies the reward. Tobias Levkovich, from Citigroup, says his "panic/euphoria" model is now signalling an 80 per cent chance of an equity correction. He has cut his year-end target for the S&P 500 to 2,900, a 10 per cent drop from current levels. Citigroup estimates that global profit forecasts for the next year are 30 per cent too high.
Wall Street is being held up by a diminishing handful of equities. Microsoft and the FAANGs (Facebook, Amazon, Apple, Netflix and Google/Alphabet) added half a trillion dollars in capitalisation over the six trading days up to the end of last week. I can appreciate Tesla's first-mover advantage in electrification but I do not believe that it is worth more than VW, Daimler and BMW combined.
This tech surge has pushed Wall Street capitalisation to a record 152.2 per cent of GDP even as the pandemic spins out of control across the US Deep South, with a similar pattern building up in the Mid-West. Total hospitalisations in the US are back near their peak in early May.
"Not to be hyperbolic, it really is the perfect storm," says Anthony Fauci, the US pandemic tsar. And remember, he warns us, this is still only "wave one".
The FAANGs and Microsoft make up a quarter of the S&P 500 index by value, and 8 per cent of revenues, but employ just 1 per cent of the American workforce. Leaving aside the obvious point that a significant bloc of their customers is in difficulty, American society will not allow these companies to attain monopolistic supremacy for long. They will be broken on the democratic wheel.
We now have a perverse situation. The worldwide shock from Covid-19 is getting worse. The IMF has slashed its global growth forecast to minus 4.9 per cent for this year, from 3 per cent in April. The OECD has come in even lower. Its forecast for Europe is catastrophic, with figures ranging from minus 11.4 per cent to minus 14 per cent for France and Italy, and minus 11.5 per cent to minus 14 per cent for the UK, depending on the outcome of the pandemic.
Equity bulls are betting that the combined fiscal and monetary stimulus is large enough to overwhelm the damage of the pandemic with all its long-tail consequences. But is it actually big enough if the crisis drags on for months in a messy fashion with fresh lockdowns? Emergency relief in the US and Europe was designed on the assumption that Covid-19 would be done and dusted by now.
America has been running through the US$2t injection of the Cares Act at a terrific pace. The Economic Policy Institute in Washington estimates a 10th of the US workforce will never regain their previous jobs. Nor have the job cuts ended.
I find it hard to believe that there will be a surge in pent-up spending in this atmosphere of pervasive angst. It is more likely that large numbers of people will save frantically in self-defence, and this will combine with efforts by thousands of over-leveraged companies to pay down loans taken out during the crisis to stave off collapse. It will take years to rebuild damaged balance sheets.
Nor is the European stimulus large enough or fast enough. The fiscal component of the recovery fund does not kick until next March at the earliest. Until then it is a patchwork of national plans, vastly differing in intensity.
The monetarist view is that the sheer scale of QE and money creation by central banks trumps all else and will drive an explosive surge in activity almost by mechanical effect, probably culminating in a inflationary boom in 2021. I do not rule that out.
But the monetarist premise, anchored on the theories of Milton Friedman, is that the velocity of circulation will return to normal over time and ignite this reservoir of monetary jet fuel. If they are wrong on that core point, the monetary expansion could prove to be inert.
Nobel economist Myron Scholes told me over the weekend that the monetarists were likely to lose their bet this time. I pay attention because he cut his teeth under Friedman in Chicago before going on to master the arcane world of financial derivatives.
His view is that the pandemic shock has broken large parts of the American economic system and accelerated the "death of Thatcherism" as dirigiste ideologies come back into favour. It will be a very long time before the process of creative destruction unleashes fresh growth.
Specifically, he predicts that velocity will keep falling and the extra money created by the Fed will accumulate in idle excess reserves. "Milton Friedman was wrong; velocity can keep on falling," he said.
"The banks cannot figure out how to lend in this environment and the multiplier only works if there is an opportunity to lend. You can bring a horse to water but you can't make it drink."
- Telegraph Media Group