Ashok Dhillon
Mar 20, 20206 min
To underscore the interesting times we are living in - that which created the greatest asset market bubble in history, namely government & Central Banks’ decades-long debt-fuelled binge - is having limited impact with the stock markets of late as the Corona Virus threatens social and global economic Armageddon.
As the US Fed and the other major Central Banks of the World announce their counter measures, either as pre-emptive or belated rescue efforts with the opening of the fiscal and monetary floodgates, the markets either tank, merely shrug, or rally for a day or so, before tanking, again.
This pattern in the stock markets has been repeating since the Corona Virus left its origination point in Wuhan, China, where it is coming under control, and is now spreading in the rest of the World. And now, the virus is rampaging in countries like South Korea, Italy and Iran, and is threatening total shutdowns in most others.
With the onslaught of this unseen and unanticipated marauder, and in the face of the potential devastation it can cause to the vulnerable in all societies, and to the economies of the World, developed or developing (it does not discriminate), the Corona Virus has the up-till-now easy money fuelled stock markets terrorized with its potential World stopping impact. And as the governments of most countries have started to take measures to try and contain its rapid spread with varying degrees of seriousness (predictably it took Trump a while to catch on), by increasingly shutting down normal activities, while pulling out their collective financial bazookas and potential nuclear options (in terms of ‘all bets are off’) to try and mitigate the social and economic damage that is taking place, the assumptions and declarations coming from the global medical communities fighting it, and from the financial gurus, have been getting increasingly dire, putting the ‘fear of God’ into the global stock markets.
As with all else in life, this crisis is probably going to be somewhere in the middle of the two extremes; on the one hand, all those who think it is all some kind of a hoax and a conspiracy of some kind (to Trump and his followers it started as a ‘Democrat hoax’), and two, all those who believe that this is truly Armageddon, or as Hedge Fund Manager Bill Ackerman recently put it, ‘Hell is Coming’.
Well, it is neither – it is certainly not a ‘Democrat Hoax’, nor is it ‘Hell Coming’.
What it is - is a very dangerous virus that can infect without any symptoms showing for days, or at all, so that the spread of it is under the radar, and therefore hard to detect (particularly without adequate numbers of proper testing kits, as in the US), and therefore it is harder to stop. And, its fatality rate is much higher than the common flu, with which it is frequently compared, especially for those over 70 years of age, and those with compromised systems, be it chronic diseases like diabetes, respiratory problems, or some other susceptibility.
The potential of this virus to spread all across the globe very rapidly (as it already has) and to potentially kill millions of susceptible people, if not checked and stopped relatively quickly, is at the moment very high. And with that possibility comes the potential for global social and economic devastation, as all economic and social systems come to a harsh and grinding halt. This is its potential, and this is what the authorities around the World are trying to control and ultimately stop. And until an effective vaccine is developed, and/or a cure is found, this virus can infect the same person more than once, and keep coming back, with catastrophic results on the global health budgets and systems.
In those countries where it has seemingly gone out of control (at least for the time being) as in Italy, it has overwhelmed the health professionals, and all the country’s social and economic systems, and is an unmitigated disaster already. And in the US and the UK, where those in power, namely Trump and Boris Johnson, were at first too nonchalant about it, a worse case scenario may develop rapidly as containment efforts got delayed, and adequate testing for this particular virus fell woefully behind because of the sheer unavailability of the proper test kits. So now both countries may have a lot more infected people than they are aware of and are able to identify and quarantine before they infect others.
So the financial markets have cause to run scared. And running scared they are.
For the first time all traditional investments such as Stocks, Bonds, Precious Metals - particularly Gold, and new-age investments like Bitcoin, were being sold en-masse, at the same time, as almost all investors sought to be only in cash. This was highly unusual, as is usual in times of great uncertainty, investors sell ‘riskier’ assets such as stocks to buy ‘safer investments’ such as Bonds, and Precious Metals, particularly Gold, which historically has been the World’s go-to safe-haven in times of crisis. But this time, at least for some time, all assets (except for Real Estate, generally) seemed to be on sale, driving the financial markets deep into the red, repeatedly. For the time being, Real Estate is generally being spared, at this time, because of the extraordinary drop in interest rates, to practically zero percent. But, if a jobs Armageddon materializes then it may be difficult for the Real Estate Markets to stay untouched.
One thing is already certain, the Corona Virus brought one of the ‘Greatest Bull Markets’ of all time to a crashing halt - and it may be triggering one of the ‘Greatest Bear Markets’ of all time - but it’s much too early to tell just yet. And all adverse outcomes, social and economic, resulting from the Corona Virus, are going to get a lot worse in the near term before there is any sign of them getting better. And by worse, it could mean a surge in the number of infected people becoming known as testing becomes more available, and unfortunately a surge in fatalities as the numbers grow, as in Italy and Iran.
Prior to the Corona Virus contagion, the American economy was arguably one of the strongest among the global economies. No more.
The American economy has now entered a potentially ‘Severe Recession’ that is going to get worse, and incredibly, some in the financial and economic world are suggesting the growing contagion could slip it into a ‘Depression’. Again, we feel it is a bit early to go there because some of these people sounding the extremist alarm, were the same that even a few weeks ago laughed at the suggestion of a possible ‘Run-of-the-mill Recession’. But, the hit to the US companies alone by the Corona Virus could be in the range of 4 Trillion dollars, and to the corporations globally, 12 Trillion dollars, according to legendary manager of the World’s largest Hedge Fund, Ray Dalio.
And it does not stop there (if it gets there).
What is almost certain is that there are going to be mass layoffs and forced ‘stay-homes’ (for a lack of a better word), and some of the largest corporations, like the auto-manufacturers, are already shutting their plants down.
As is now widely known, the global travel industry is already shut down, forcing mass layoffs in airlines, hotels, restaurants and bars, cruises, and tourism and tourism related industries worldwide. And most of the entertainment industry is also now in lock-down, with theatres closed, movie productions halted and releases postponed, and with all games, professional and amateur, cancelled, and events such as the 2020 Tokyo Olympics now delayed. This is of course in addition to the growing shutdown in all other normal activities such as office-work, small-medium-large businesses, retail and industrial, schools, universities, parks, gyms and libraries etc.
The economic impact of all these shutdowns is tantamount to the shuttering of entire countries, and the economic and social impact of that is, at this time, simply incalculable. And so, while the governments are frantically announcing multi-Billion dollar rescue packages, and the US Federal Reserve, in concert with other major Central Banks are announcing multi-Trillion dollar liquidity injections into a shuddering and seizing-up global financial system, the investors are taking scant comfort from the tsunami of liquidity being unleashed, as they realize that the Corona Virus will exact its unprecedented price of social, economic and human devastation, before it is through, regardless of the check sizes of all the political and financial institutions combined. And that is worthy of running scared.