It is in the nature of things that severe crises sometimes result in major changes. The deselection of Donald Trump in the United States of America may be the most important political consequence of the corona pandemic. Because at the beginning of the year there was still a lot to be said for the re-election of the great disrupter.
The conclusion of a BREXIT contract may also be due in part to the additional pressure created by the raging epidemic. Only the future will show whether the gain in sovereignty resulting from the exit from the European Union was worth the high price that the British were willing to pay.
Germany will not be able to avoid a discussion about the political consequences of the virus epidemic. The voices that have already been heard want more centralism and collectivism, while our Basic Law has for good reasons anchored federalism and individual rights. However, the crisis now makes it appear questionable whether the Basic Law is actually still the top guideline for all state action in this country. Because the monetary increase policy of the European Central Bank significantly affects the budgetary sovereignty of the Federal Republic. But when the European Court of Justice in Luxembourg has the last word on the conduct of the ECB, as most politicians demand, then the Basic Law, with which we have tended to have had positive experiences over the past decades, has been undermined. It should always be borne in mind that Europe has not yet had its own constitution.
As far as state fight against the crisis is concerned, the European capitals consider the blueprint from the great financial crisis to be decisive: the abolition of positive real interest rates, expansion of the money supply and financing of the member states by buying their government bonds. This recipe has been included in the dictionary of the financial markets as ´financial repression´. State economic and support programs are flanking the zeal of the central bankers in the current crisis of demand.
On the stock exchanges, investors saw a capricious approach to the course of the crisis. While the partial shutdown of the economy in the spring of the year caused the share price to fall, the market recovered in the months that followed. Some stock exchanges even started at new highs, while other stock markets were stuck in negative territory. Crisis winners celebrate new records, while hard-hit industries face existential hardships. Overall, the word quickly got around among investors that the well-known ‘Fed-Put’ is very much alive and well and is now valid for all major central banks. In addition, it cannot be seen for years that conventional interest rate investments promise attractive returns. On the contrary: Anyone who buys government bonds today and holds them until their maturity can plan for a high loss of purchasing power. At the same time, many investment banks report that the bond market is booming. In view of the dominant activities of the central banks, it can be doubted whether this is a market.
The stock markets, however, are functional and by no means irrational. In doing so, one can avoid occasional exaggerations, e.g. Don’t be fooled on some technology stocks and new issues. Basically, equity investments are now the only meaningful large investment category. Smart selection remains the ultimate in equity investments, not least for reasons of risk.
Dr. Christoph Bruns is fund manager, board member and main shareholder of the investment company LOYS AG.