‘Reality Repression’: Markets Witness Biggest Disconnect In Modern History

With the OECD’s somber economic outlook in hand, it’s worth taking a moment to quickly mention an equally disconcerting set of projections from the World Bank.

In a piece called “A Changed World” summarizing their June outlook, the Washington-based development organization notes that there has never been a year during which a larger proportion of countries face a recession.

In data back to 1871, the closest year to 2020 in terms of the proportion of economies expected to witness an annual contraction in per capita GDP, is 1931, at 83.7%, followed closely by 1932 and 1930. The figure for 2020 is expected to be an astounding 92.9%. The visual (below) gives you some context.

“The baseline forecast envisions a 5.2% contraction in global GDP in 2020, using market exchange rate weights–the deepest global recession in decades, despite the extraordinary efforts of governments to counter the downturn with fiscal and monetary policy support”, the organization said. “Over the longer horizon, the deep recessions triggered by the pandemic are expected to leave lasting scars through lower investment, an erosion of human capital through lost work and schooling, and fragmentation of global trade and supply linkages”.

Scary stuff, no?

And yet, the snapback in 2021 is projected to be dramatic. Just 12.6% of countries will see a recession next year, the same set of forecasts says. That would be among the lowest such figures in 150 years.

A similar rebound is reflected in the country-by-country breakdown. Note that China is still expected to eke out growth this year. Advanced economies will see a 7% contraction, the World Bank reckons.

“This is the first recession since 1870 triggered solely by a pandemic, and it continues to manifest itself”, the World Bank’s Ceyla Pazarbazioglu said Tuesday. “Given this uncertainty, further downgrades to the outlook are very likely”.

But don’t tell global equities which, as of this week, had tacked on more than $20 trillion in market cap since the late-March lows.

That leaves global shares fully-valued. Or at least if you consider a 20x forward multiple (the highest in 18 years) “rich”.

Does this make sense in the context of the worst year for the global economy in the history of modern (or even semi-modern) economic statistics?

Well, maybe. “How can markets reflect fundamentals when there are no fundamentals that matter other than [central bank] liquidity?”, Rabobank’s Michael Every wondered late last week. “How can analysts reflect anything but that simple liquidity dynamic too?”

Not everyone thinks it’s so absurd.

“The disconnect is a movie I have seen many times”, one veteran told Bloomberg Wednesday. “I have seen it in every recession, every downturn. The stock market, before the end of recession, begins to go up and the next equity bull market begins”.

Fair enough, but one can’t help feeling a bit incredulous. After all, what is a projection about the evolution of a biological threat other than speculation? Even the models from virologists cannot possibly be definitive. We are, after all, talking about Mother Nature. She does not play by our rules, and she most assuredly does not care what equities are or aren’t pricing in.

Rabobank’s Every is fatalistic. “Just look where central bank trillions are flowing and follow that trail; nothing else matters”, he says. “This is not financial repression. It is reality repression”.