Ashok Dhillon
Mar 11, 20205 min
The Corona Virus triggered one of the greatest stock market crashes of all time. Prior to the ‘Corona Virus Crash’, a probable title, for posterity, as the crash easily ranks as one of the most dramatic in stock market history, the US markets were setting frequent ‘all time record highs’, and seemed to be impervious to any and all political, geo-political, and economic risks and bad news. The Corona Virus changed that dynamic rather dramatically by infusing the markets with real fear.
In a series of dramatic falls, over a period of a week, the decent from ‘record highs’ was swift and deep; in fact they were some of the fastest and deepest drops in history. As we have mentioned previously, the market fall was worthy of Trump’s need for everything in his life to be the ‘greatest ever, in history’. Well the Stock Market Crash of 2020, certainly will live up to that Trump requirement.
While the US Stock Markets were followed most closely, and were the focal point of the ‘Crash’, the Stock Market meltdown was in fact global, and was triggered by the very real threat of global economic lock-down (albeit temporarily) by the Corona Virus, as governments and businesses scrambled to contain the spread of infections within their populations, and their work environments.
This time, the realization that neither governments nor their Central Banks could fully prevent the potential massive hit to the global economy, triggered the ‘panic’ selling, and led to the crash in just about all equity markets, while the flight to safety into government treasuries, and all other Bonds, decimated their yields and set separate records for their particular drops.
From the initial reaction of Trump and his administration, to weaponize the Corona Virus crisis to score political points against rival Democrats (calling it repeatedly ‘a Democrat hoax’), to finally being forced to deal with it as a public health crisis, precious time was lost, which subsequently showed in the unpreparedness of the administration’s response, which left it scrambling in trying to contain it; it is now safe to say that the Trump administration flubbed the response, the efforts to contain it, and shook the Market’s confidence.
And since anyone paying attention would have noticed the devastating impact the Corona Virus had on China’s economy as the government there tried to contain it, there was no excuse for Trump and his administration to be caught so off-balance. But Trump could not take it seriously, as he genuinely couldn’t understand the dynamics of a globally spreading virus, and its ultimate impact on the global markets and the economies, and the inevitable impact on the US.
This obvious cluelessness added to the fear building in the Markets, and ultimately led to the most severe crash since the Financial Crisis of 2008.
The potential disruptive impact of this pandemic is real enough, no matter how light Trump tries to make it sound with his ludicrous ramblings about the response of his administration being perfect, ‘like the letter, and the transcript’ etc. And as the situation in the Markets got worse, rather than better after his attempts to reassure, he and his administration finally got down to some business and have started to think of appropriate policy response to a building crisis.
Apart from the obvious interest rate cuts initiated by the Federal Reserve (the Fed), and the additional ones coming shortly, which will lead to ‘zero bound’ and possibly ‘negative rates’, Trump has announced potential payroll tax cuts, and possibly some other policy initiatives that his people are trying to formulate.
The announcement of possible payroll tax cuts and general policy support, boosted the Markets on Tuesday (March 10th) morning opening, but, the conviction seems to be lacking as the indexes whipsawed through the day.
The Markets are looking for action from the Trump administration, and eventually they will get it in all its fullness, as nothing is more important to Trump than the restoration of the market-highs to assist in his re-election bid, but the question that remains is – how effective will deep Fed rate cuts, along with Trump’s economic stimulus actions will be - as the Corona Virus is literally oblivious to government and Central Bank stimulus, while it triggers an expanding lock down on travel, the general public, and all aspects of business, big and small.
For all those that have tried to minimize the impact of the Corona Virus, or the deaths it has caused so far, as compared to the flu for instance, which certainly includes President Trump as he pointed to the greater number of annual deaths from the flu, it’s not that simple.
According to the experts working on the crisis, the Corona Virus has a higher fatality rate than the flu, but its great danger lies in its ability to infect people without showing any symptoms for days.
And what that means is the virus can rapidly spread through a population, practically without detection.
And for those yet unconvinced, it must be pointed out that in China, with an ultra authoritarian government at the helm, who certainly is less worried about its citizens and worries more about retaining its own power (not unlike Trump, come to think about it, but a lot more intelligent), the drastic steps that it was forced to take to try and stop the spread of the virus, illustrates just how dangerous they thought it was.
And in spite of their actions, it is estimated that the economic cost of battling the Corona Virus for China will be quite severe, and may half their GDP output for the first quarter or more.
The Corona Virus is going to cost China dearly not only in lost economic activity, but it may cost China its long-term status as the World’s supplier of practically everything, as other countries and their businesses now will be forced to look to diversify their sources of goods and services (their supply chains) that were severely disrupted with China’s lock downs as the government battled to bring the viral spread under control.
With China as an example of a powerful economic giant and an on-command economy being brought to a virtual halt (a very significant slowdown) by the Corona Virus, as entire cities, factories, schools, public places, and businesses were locked down to slow and stop the spread of the infection, it is not an exaggeration, or ‘fear pandering’, or ‘dumb’, or ‘panic’ stoking, to say that the Corona Virus has the potential to tip the World into a global recession, even with the economic and monetary stimulus from governments and their Central Banks.
The Italian government’s pressing need to lock down the entire country, and its neighbouring countries banning all Italians from crossing their borders, to stem the flow of infections, underscores what we are saying.
Such dramatic examples of mass shut-downs may have to become a lot more commonplace before this virus can be brought under control, as authorities and companies race to come up with an effective vaccine, which according to the experts, is at least a year or so away.
This is not to say that actions by the Central Banks, and governments (even Trump’s), are not necessary, they certainly are, to mitigate the negative impact of the potential health crisis, but it is to say that with this true ‘black swan’, the effectiveness of fiscal and monetary stimulus may not be enough to stave off a significant economic hit globally and in the US.
The bond markets certainly indicate that it may not be enough, and we think that the equity markets will back that sentiment, with further losses in the coming weeks and months, as they continue their downward descent, with the requisite bounces, into ‘Bear Territory’.