Markets continue to see daily movements that would have been shattering only a month ago. This is a result of the markets still trying to grasp what the shutdown and covid-19 scare mean for the longer term prospects of the global economy. Looking longer term isn't any easier with the potential for a protracted (U-shape) recovery or a more robust return to normal (V-shape). There are a couple things that are certain in this environment that were true but now accelerated by recent events.
Another deleveraging cycle:
The abrupt moves by the Fed and other central banks in the wake of the crisis moved faster than ever before. In a matter of weeks, central banks had reverted back to the levels of the 2008 crisis response and then some. This was due to the dislocations seen in the liquidity markets, causing a high demand for dollars and seeing all assets fall in unison. This is due to the need for cash to pay back existing debt obligations which have risen over the last decade. The future will bring about more slowdowns and black swans like the covid-19 pandemic did, and the one thing that will be present at these times is the need to raise cash to pay debts. These turn in events will make the sell-offs in assets more acute and require constant market interventions to resolve.
Strong fiscal responses:
As these shocks to the system occur, more and more individuals will save and delay spending. This is not good for an economy that requires GDP growth to stay ahead of debt growth. This means that the governments of these highly indebted countries will need to have a larger role in maintaining the growth rate. This will most likely mean more deficit spending and a higher cost of capital raising through debt.
How do you invest in this type of environment?
There is not one right answer but the theme among all solutions is to break out of the norms that have been the staple of investing over the past 40 years. Investing in large developed markets due to their size and relative safety will no longer be a sure bet. Having more of your money looking for growth and staying out of currencies based in a deleveraging currency will provide better returns for, what we are now seeing, a similar amount of risk.