Sanjay Dixit
'People will forgive you for being wrong, but they will never forgive you for being right - especially if events prove you right while proving them wrong.' Thomas Sowell
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Sunday, 12 April 2020
Saturday, 11 April 2020
Friday, 10 April 2020
Britain and Covid-19
by Giffenman
This is an unusual time for the whole world as it deals with
the Corona
The Corona pandemic has laid
bare the unpreparedness of the UK
Boris Johnson, the British Prime Minister, did not want the UK to respond like China ,
Korea or Germany Corona
The biggest surprise in this period has been the behaviour
of the chancellor Rishi Sunak. He has, in the past few days, made unlimited
funds available for the nation to cope with the health and economic impact of
the pandemic. This is in sharp contrast to the austerity agenda in vogue since
2010. Sunak’s popularity has shot up among the public and he is being touted as
a replacement for the currently invalid Prime Minister.
Even more surprising is the behaviour of the czars of the independent
Bank of England (BOE). In synchronised operations with Rishi Sunak they slashed
interest rates to 0.1% and agreed to borrow large amounts to kick-start the
economy. Then a couple of days ago, they even abandoned their orthodox ideology
on borrowings via gilts and decided to create money out of thin air to help the
government deal with the crisis. The BOE even surprised itself when it stopped
commercial banks from paying dividends to their shareholders.
If the financial and economic arm of the government is
taking such unorthodox and knee-jerk measures in a concerted manner one does
not need much imagination to imagine what might be their prognoses for the UK
Information can make you sick
Trader turned neuroscientist John Coates in The FT on why economic crises are also medical ones.
As coronavirus infection rates peak in many countries, the markets rally. There is a nagging worry that a second wave of infections might occur once lockdowns are lifted or summer passes. But for anyone immersed in the financial markets there should be a further concern. Volatility created by the pandemic could itself cause a second wave of health problems. Volatility can make you sick, just as a virus can.
To get an inkling of what this other second wave might look like, it helps to recall what happened after the credit crisis. That event was both a financial and medical disaster. Various epidemiological studies suggest it may be responsible for 260,000 cancer deaths in OECD countries; a 17.8 per cent increase in the Greek mortality rate between 2010-16; and a spike in cardiovascular disease in London for the years 2008-09, with an additional 2,000 deaths due to heart attacks. The current economic crisis may be far worse than 2008-09, so the medical fallout could be as well.
Why do financial and medical crises go hand in hand? Many of the above studies focused on unemployment and reduced access to healthcare as causes of the adverse health outcomes. But research my colleagues and I have conducted on trading floors for the past 12 years suggest to me that uncertainty itself, regardless of outcome, can have independent and profound effects on physiology and health.
Our studies were designed initially to test a hunch I had while running a trading desk for Deutsche Bank, that the rollercoaster of physical sensations a person experiences while immersed in the markets alters their risk-taking. After retraining in neuroscience and physiology at Cambridge University, I set up shop on various hedge fund and asset manager trading floors, along with colleagues, mostly medical researchers. Using wearable tech and sampling biochemistry, we tracked the traders’ cardiovascular, endocrine and immune systems.
My goal was to demonstrate how these physiological changes altered trader performance. Increasingly, though, I came to see that a trading floor provides an elegant model for studying occupational health.
One remarkable thing we found was that traders’ bodies calibrated sensitively to market volatility. For humans, apparently, information is physical. You do not process information dispassionately, as a computer does; rather your brain quietly figures out what movement might ensue from the information, and prepares your body, altering heart rate, adrenaline levels, immune activation and so on.
Your brain did not evolve to support Platonic thought; it evolved to process movement. Our larger brain controls a more sophisticated set of muscles, giving us an ability to learn new movements unmatched by any other animal — or robot — on the planet. If you want to understand yourself, fellow humans, even the markets, put movement at the very core of what we are.
Essential to our exquisite motor control is an equally advanced system of fuel injection, one that has been misleadingly termed “the stress response”. Stress connotes something nasty but the stress response is nothing more sinister than a metabolic preparation for movement. Cortisol, the main stress molecule, inhibits bodily systems not needed during movement, such as digestion and reproduction, and marshals glucose and free fatty acids as fuel for our cells.
The stress response evolved to be short lived, acutely activated for only a few hours or days. Yet during a crisis such as the current one, you can activate the stress response for weeks and months at a time. Then an acute stress response morphs into a chronic one. Your digestive system is inhibited so you become susceptible to gastrointestinal disorders; blood pressure increases so you are prone to hypertension; fatty acids and glucose circulate in your blood but are not used, because you are stuck at home, so your risks increase for cardiovascular disease. Finally, by inhibiting parts of the immune system, stress impairs your ability to recover from diseases such as cancer, and Covid-19.
So why the connection with uncertainty? The stress response is largely predictive rather than reactive. Just as we try to predict the future location of a tennis ball, so too we predict our metabolic needs. When we encounter situations of novelty and uncertainty, we do not know what to expect, so we marshal a preparatory stress response. The stress response is comparable to revving your engine at a yellow light. Situations of novelty can be described, following Claude Shannon, inventor of information theory, as “information rich”. Conveniently, informational load in the financial markets can be measured by the level of volatility: the more Shannon information flowing into the markets, the higher the volatility.
In two of our studies we found that traders’ cortisol levels did in fact track bond volatility almost tick for tick. It did not even matter if the traders were making or losing money; just put a human in the presence of information and their metabolism calibrates to it. Take a moment to contemplate that curious result — there are molecules in your blood that track the amount of information you process.
Today, with historically elevated volatility, there is a good chance cortisol levels are trending higher. Immune systems could also be affected. When your body is attacked by a pathogen, your immune system coordinates a suite of changes known as “sickness behaviour”. You develop a fever, lose your appetite and withdraw socially. You also experience increased risk aversion.
Central to the immune response is inflammation, the process of eliminating pathogens and initiating tissue repair. However, inflammation can also occur in stressful situations, because cytokines, the molecules triggering inflammation, assist in the recruitment of metabolic reserves. If inflammation becomes systemic and chronic, it contributes to a wide range of health problems. We found that interleukin-1-beta, the first responder of inflammation, tracked volatility as closely as cortisol.
Recently we have focused on the cardiovascular system. Working with a large and sophisticated fund manager, we have used cutting-edge wearable tech that permits portfolio managers to track their cardiovascular data, physical activity and sleep. The cardiovascular system similarly tracks volatility and risk appetite.
In short, here we may have a mechanism connecting financial and health crises. On the one hand, fluctuating levels of stress and inflammation affect risk-taking. In a lab-based study, we found that chronically elevated cortisol caused a large decrease in risk appetite. Shifting risk presents tricky problems for risk management — and for central banks. Physiology-induced risk aversion can feed a bear market, morphing it into a crash so dangerous that the state has to step in with asset purchases. On the other hand, chronically elevated stress and inflammation are known to contribute to a wide range of health problems.
We are not accustomed to combining financial and medical data in this way. But corporate and state health programs should start.
The markets today are living through a period of volatility the likes of which I have never encountered. March was, to put it mildly, information rich. As a result, there is now the very real possibility of a second wave of disease. Viruses can make you sick, but so too can information.
As coronavirus infection rates peak in many countries, the markets rally. There is a nagging worry that a second wave of infections might occur once lockdowns are lifted or summer passes. But for anyone immersed in the financial markets there should be a further concern. Volatility created by the pandemic could itself cause a second wave of health problems. Volatility can make you sick, just as a virus can.
To get an inkling of what this other second wave might look like, it helps to recall what happened after the credit crisis. That event was both a financial and medical disaster. Various epidemiological studies suggest it may be responsible for 260,000 cancer deaths in OECD countries; a 17.8 per cent increase in the Greek mortality rate between 2010-16; and a spike in cardiovascular disease in London for the years 2008-09, with an additional 2,000 deaths due to heart attacks. The current economic crisis may be far worse than 2008-09, so the medical fallout could be as well.
Why do financial and medical crises go hand in hand? Many of the above studies focused on unemployment and reduced access to healthcare as causes of the adverse health outcomes. But research my colleagues and I have conducted on trading floors for the past 12 years suggest to me that uncertainty itself, regardless of outcome, can have independent and profound effects on physiology and health.
Our studies were designed initially to test a hunch I had while running a trading desk for Deutsche Bank, that the rollercoaster of physical sensations a person experiences while immersed in the markets alters their risk-taking. After retraining in neuroscience and physiology at Cambridge University, I set up shop on various hedge fund and asset manager trading floors, along with colleagues, mostly medical researchers. Using wearable tech and sampling biochemistry, we tracked the traders’ cardiovascular, endocrine and immune systems.
My goal was to demonstrate how these physiological changes altered trader performance. Increasingly, though, I came to see that a trading floor provides an elegant model for studying occupational health.
One remarkable thing we found was that traders’ bodies calibrated sensitively to market volatility. For humans, apparently, information is physical. You do not process information dispassionately, as a computer does; rather your brain quietly figures out what movement might ensue from the information, and prepares your body, altering heart rate, adrenaline levels, immune activation and so on.
Your brain did not evolve to support Platonic thought; it evolved to process movement. Our larger brain controls a more sophisticated set of muscles, giving us an ability to learn new movements unmatched by any other animal — or robot — on the planet. If you want to understand yourself, fellow humans, even the markets, put movement at the very core of what we are.
Essential to our exquisite motor control is an equally advanced system of fuel injection, one that has been misleadingly termed “the stress response”. Stress connotes something nasty but the stress response is nothing more sinister than a metabolic preparation for movement. Cortisol, the main stress molecule, inhibits bodily systems not needed during movement, such as digestion and reproduction, and marshals glucose and free fatty acids as fuel for our cells.
The stress response evolved to be short lived, acutely activated for only a few hours or days. Yet during a crisis such as the current one, you can activate the stress response for weeks and months at a time. Then an acute stress response morphs into a chronic one. Your digestive system is inhibited so you become susceptible to gastrointestinal disorders; blood pressure increases so you are prone to hypertension; fatty acids and glucose circulate in your blood but are not used, because you are stuck at home, so your risks increase for cardiovascular disease. Finally, by inhibiting parts of the immune system, stress impairs your ability to recover from diseases such as cancer, and Covid-19.
So why the connection with uncertainty? The stress response is largely predictive rather than reactive. Just as we try to predict the future location of a tennis ball, so too we predict our metabolic needs. When we encounter situations of novelty and uncertainty, we do not know what to expect, so we marshal a preparatory stress response. The stress response is comparable to revving your engine at a yellow light. Situations of novelty can be described, following Claude Shannon, inventor of information theory, as “information rich”. Conveniently, informational load in the financial markets can be measured by the level of volatility: the more Shannon information flowing into the markets, the higher the volatility.
In two of our studies we found that traders’ cortisol levels did in fact track bond volatility almost tick for tick. It did not even matter if the traders were making or losing money; just put a human in the presence of information and their metabolism calibrates to it. Take a moment to contemplate that curious result — there are molecules in your blood that track the amount of information you process.
Today, with historically elevated volatility, there is a good chance cortisol levels are trending higher. Immune systems could also be affected. When your body is attacked by a pathogen, your immune system coordinates a suite of changes known as “sickness behaviour”. You develop a fever, lose your appetite and withdraw socially. You also experience increased risk aversion.
Central to the immune response is inflammation, the process of eliminating pathogens and initiating tissue repair. However, inflammation can also occur in stressful situations, because cytokines, the molecules triggering inflammation, assist in the recruitment of metabolic reserves. If inflammation becomes systemic and chronic, it contributes to a wide range of health problems. We found that interleukin-1-beta, the first responder of inflammation, tracked volatility as closely as cortisol.
Recently we have focused on the cardiovascular system. Working with a large and sophisticated fund manager, we have used cutting-edge wearable tech that permits portfolio managers to track their cardiovascular data, physical activity and sleep. The cardiovascular system similarly tracks volatility and risk appetite.
In short, here we may have a mechanism connecting financial and health crises. On the one hand, fluctuating levels of stress and inflammation affect risk-taking. In a lab-based study, we found that chronically elevated cortisol caused a large decrease in risk appetite. Shifting risk presents tricky problems for risk management — and for central banks. Physiology-induced risk aversion can feed a bear market, morphing it into a crash so dangerous that the state has to step in with asset purchases. On the other hand, chronically elevated stress and inflammation are known to contribute to a wide range of health problems.
We are not accustomed to combining financial and medical data in this way. But corporate and state health programs should start.
The markets today are living through a period of volatility the likes of which I have never encountered. March was, to put it mildly, information rich. As a result, there is now the very real possibility of a second wave of disease. Viruses can make you sick, but so too can information.
Bank of England to directly finance UK government’s extra spending
Chris Giles and Philip Georgiadis in The FT
The UK has become the first country to embrace the monetary financing of government to fund the immediate cost of fighting coronavirus, with the Bank of England agreeing to a Treasury demand to directly finance the state’s spending needs on a temporary basis.
The move allows the government to bypass the bond market until the Covid-19 pandemic subsides, financing unexpected costs such as the job retention scheme where bills will fall due at the end of April.
Although BoE governor Andrew Bailey opposed monetary financing earlier this week, Treasury officials felt it was best to have the insurance of the central bank willing to finance its operations in the short term.
It highlights the extraordinary demands on cash the government has experienced in recent weeks, which it feels it cannot finance immediately in the gilts market.
In a statement to financial markets on Thursday, the government announced it would extend the size of the government’s bank account at the central bank, known historically as the “Ways and Means Facility”, which normally stands at just £370m.
This will rise to an effectively unlimited amount, allowing ministers to spend more in the short term without having to tap the gilts market. In 2008, a similar move saw the facility rise briefly to £20bn.
The scale is likely to be large. The government has already tripled the amount of debt it wanted to raise in financial markets in April from £15bn announced in the March 11 Budget to £45bn by the start of this month.
Although the gilts market showed severe stress in the middle of March as the coronavirus crisis deepened, the government has so far had little difficulty raising finance, especially as the BoE had already committed to printing £200bn to pump into the government bond market to ensure there was sufficient demand for gilts and improve market functioning.
This direct monetary financing of government would be “temporary and short-term”, the Treasury said in its statement.
“As well as temporarily smoothing government cash flows, the W & M Facility supports market function by minimising the immediate impact of raising additional funding in gilt and sterling money markets,” it added.
It said any drawings on this facility would be repaid as soon as possible before the end of the year.
Market reaction was muted. Sterling was trading 0.1 per cent higher against the US dollar at just below $1.24 shortly after the announcement, while the yield on the benchmark 10-year UK gilt was flat at 0.37 per cent.
But many economists saw the Treasury’s demand to be financed directly as a big step.
Tony Yates, senior adviser at Fathom Consulting and a former BoE official, said the move was “an indication of the extraordinary pressures on government”. He added, however, that UK monetary financing of government deficits was unlikely to turn Britain into Zimbabwe because, once the crisis was over, the UK’s capacity to raise taxes again remained intact.
But just as the quantitative easing the BoE has introduced since 2009 has never been repaid, Richard Barwell, head of macro research at BNP Asset Management and also a former BoE official, said temporary moves such as this often became more permanent as time passed.
“Persistent monetary financing feels inevitable. Central banks just need to figure out a plan for how to best get into it and how they might eventually want to get out of it,” he said.
The Ways and Means Facility had long been used as a financing means of government for day-to-day spending before the BoE would sell government bonds to the market, but by 2006 it had become an emergency fund with the financing of government undertaken by the Debt Management Office on a scheduled basis.
Less than a month ago, the BoE said there was little chance there would be any need to use the facility, demonstrating just how much stress government finances have come under in the past few weeks.
In a call with journalists on March 18, Mr Bailey said the facility was just a “historical feature”.
“I don’t think at the moment we’re facing an inability of the government to fund itself, so, yes, it’s there, but it’s not a frontline tool,” Mr Bailey said at the time.
In an opinion column in the Financial Times earlier this week, the BoE governor pledged not to slip into permanent monetary financing of the government. He said the central bank would not engage in permanent monetary financing, but did not rule out temporary operations that he said would not be inflationary.
“Short-term operations play an important role in stabilising market conditions and counteracting any immediate tightening of monetary conditions,” Mr Bailey wrote.
Fran Boait, executive director of Positive Money, an advocacy group, said: “This use of direct monetary financing demonstrates once and for all that the government does not depend on the market to finance its spending. Hopefully now we can have an honest debate about how our collective resources should be allocated.”
The UK has become the first country to embrace the monetary financing of government to fund the immediate cost of fighting coronavirus, with the Bank of England agreeing to a Treasury demand to directly finance the state’s spending needs on a temporary basis.
The move allows the government to bypass the bond market until the Covid-19 pandemic subsides, financing unexpected costs such as the job retention scheme where bills will fall due at the end of April.
Although BoE governor Andrew Bailey opposed monetary financing earlier this week, Treasury officials felt it was best to have the insurance of the central bank willing to finance its operations in the short term.
It highlights the extraordinary demands on cash the government has experienced in recent weeks, which it feels it cannot finance immediately in the gilts market.
In a statement to financial markets on Thursday, the government announced it would extend the size of the government’s bank account at the central bank, known historically as the “Ways and Means Facility”, which normally stands at just £370m.
This will rise to an effectively unlimited amount, allowing ministers to spend more in the short term without having to tap the gilts market. In 2008, a similar move saw the facility rise briefly to £20bn.
The scale is likely to be large. The government has already tripled the amount of debt it wanted to raise in financial markets in April from £15bn announced in the March 11 Budget to £45bn by the start of this month.
Although the gilts market showed severe stress in the middle of March as the coronavirus crisis deepened, the government has so far had little difficulty raising finance, especially as the BoE had already committed to printing £200bn to pump into the government bond market to ensure there was sufficient demand for gilts and improve market functioning.
This direct monetary financing of government would be “temporary and short-term”, the Treasury said in its statement.
“As well as temporarily smoothing government cash flows, the W & M Facility supports market function by minimising the immediate impact of raising additional funding in gilt and sterling money markets,” it added.
It said any drawings on this facility would be repaid as soon as possible before the end of the year.
Market reaction was muted. Sterling was trading 0.1 per cent higher against the US dollar at just below $1.24 shortly after the announcement, while the yield on the benchmark 10-year UK gilt was flat at 0.37 per cent.
But many economists saw the Treasury’s demand to be financed directly as a big step.
Tony Yates, senior adviser at Fathom Consulting and a former BoE official, said the move was “an indication of the extraordinary pressures on government”. He added, however, that UK monetary financing of government deficits was unlikely to turn Britain into Zimbabwe because, once the crisis was over, the UK’s capacity to raise taxes again remained intact.
But just as the quantitative easing the BoE has introduced since 2009 has never been repaid, Richard Barwell, head of macro research at BNP Asset Management and also a former BoE official, said temporary moves such as this often became more permanent as time passed.
“Persistent monetary financing feels inevitable. Central banks just need to figure out a plan for how to best get into it and how they might eventually want to get out of it,” he said.
The Ways and Means Facility had long been used as a financing means of government for day-to-day spending before the BoE would sell government bonds to the market, but by 2006 it had become an emergency fund with the financing of government undertaken by the Debt Management Office on a scheduled basis.
Less than a month ago, the BoE said there was little chance there would be any need to use the facility, demonstrating just how much stress government finances have come under in the past few weeks.
In a call with journalists on March 18, Mr Bailey said the facility was just a “historical feature”.
“I don’t think at the moment we’re facing an inability of the government to fund itself, so, yes, it’s there, but it’s not a frontline tool,” Mr Bailey said at the time.
In an opinion column in the Financial Times earlier this week, the BoE governor pledged not to slip into permanent monetary financing of the government. He said the central bank would not engage in permanent monetary financing, but did not rule out temporary operations that he said would not be inflationary.
“Short-term operations play an important role in stabilising market conditions and counteracting any immediate tightening of monetary conditions,” Mr Bailey wrote.
Fran Boait, executive director of Positive Money, an advocacy group, said: “This use of direct monetary financing demonstrates once and for all that the government does not depend on the market to finance its spending. Hopefully now we can have an honest debate about how our collective resources should be allocated.”
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