Guess what? Central banks have run out of ammunition. The US Federal Reserve said as much by saying absolutely nothing at its latest meeting. The Bank of England had nothing much to add apart from some mutterings about the uncertain economy and recent Brexit developments….
…. And the Bank of Japan has pledged to hold interest rates below zero until 2023. Yes, you read that right…. 2023. Even then, that is more likely to be a finger-in-the-wind guess than a finger-on-the-pulse calculation.
We are, to put it mildly, up the creek without a paddle.
Central banks everywhere are now caught between a rock and a hard place. All that they have left is hope that an effective vaccine can come to their rescue before their balance sheets implode from the weight of money printing….
…. But still, they will continue to flood their economies with liquidity, regardless of how much further their funny-money will push up asset prices.
Is there a Plan B? Probably not. Central banks are behaving like the monkey that jumped on the tiger’s back. They now have no choice but to hang on for the ride until the tiger tires or when the virus weakens.
When that might happen is anyone’s guess. But the signs are not good. No sooner that governments take their hands off the wheel than the virus comes back with a vengeance. It is almost as though the virus is content to bide its time and pounce whenever the opportunity presents itself.
The upshot is that the global economy will be smaller than before the pandemic struck. Many businesses will go to the wall. Some already have. Some are hanging on by the skin of their teeth. But those that can remain relevant will take a bigger share of a smaller pie.
Our job as investors is to try and identify those last-man-standing companies. To do that, we need to dig into their balance sheets and cash flow statements because cash is king. And only the fittest will survive.
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Disclosure: David Kuo does not owns shares in any of the companies mentioned.
