RECESSION FOR CHINA, DEPRESSION FOR THE EU AND USA?
March 22, 2020 5 Comments
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March 22, 2020 5 Comments
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“It is likely that the next step for the markets is a fall to 40% should no cure be found in 60 days.”
We agree that the virus is the trigger not the cause. My take on it is that markets have way more to go down further regardless of whether a cure is found within 60 days or not. Of course markets will not go down in a straight line (although so far that has been the case) but in my opinion the 33% so far is the midpoint between the top and the bottom. I’m guessing around 70% loss. I do believe in mean reversions so just as prices of commodities hover around their values, stock markets behave in the same manner. They had been going up and deliberately kept inflated to extremes over an extended period of time so now markets will fall below their values for a period of time. The seven stages of stock market after the euphoria stage are:
Anxiety -> Denial -> Fear -> Desperation -> Panic -> Capitulation -> Despondency.
I think we are somewhere between denial and fear so we have long ways to go. No V-Shape recovery if a cure is found though markets will temporarily bounce back.
“What is also coming clear is the loss of jobs should no cure be found within 60 days.”
Here in the US people that I know have begun losing their jobs which reminds me of what it looked like in 2008. Employment picture is about to change drastically. Negative real interest rates had kept money losing capitals continue operations because those capitals were able to receive funding. For example fracking, will not survive this time around and then we’ll have trillions in investment grade bonds that will be downgraded to junk. Once that happens no vaccine is going to prevent further downward pressure just as the Fed was unable to with its shock and awe.
China is not immune to depressions. Once the rest of the world falls into depression China will be dragged down with it. This is the calm before the storm.
Thank you Brian.
Hi Cameron, it will be interesting to see if that 70% fall is reached. I hesitated to reply until it became clear whether the two houses of Congress would agree an emergency package. Futures before the market opened were limit up but now down 3% because they can’t agree a package and it seems won’t until Friday. So this week will be rough for the US markets Should they pass a cash injection this may provide a temporary floor. If it does, then the next leg should occur when the market realises that floor is not holding, then we could see a fall to 70% provided markets are not closed down or the FED starts buying up large amounts of shares alongside everything else.
The lack of floors, or the insertion of temporary floors, is why I place the emphasis on a cure, complete or partial. 60 days is the mid-point for the lock down in most countries. I am not sure economies can withstand more than a 3 or 4 month total shut down without major structural damage. The economy will be on the floor and government finances exhausted.
With regard to your seven stages I would put it currently between fear and desperation. Panic shortly if a cure is not found. As I was saying to anti-capital, this plague has undermined the house of capital and we should be discussing the future as well.
Couple of minor issues:
“The same disorder was found in US treasury bonds. Now mark, these are the highest quality bonds.”
No, they are not. US Treasuries lost their S&P Triple A rating in 2011, although Fitch and Moody’s didn’t downgrade. Germany, Australia, Canada, Switzerland, Denmark, Norway, Sweden, Singapore, Luxembourg have the triple A from the big three rating agencies.
Secondly, you refer to a first wave of the market collapse, and then a later wave of collapse caused by a lack of liquidity. Where is there any evidence of that? 2008 was not caused by a lack of liquidity, by a shut-off of the sources of credit, but by mounting losses in the asset backed (mortgage) securities sector coupled with a decline in profitability and the blowout of oil prices.
The US Fed responded in 2008-20?? with massive amounts of liquidity supply which did very little to alter the course of the downturn.
Some of those same programs have been reactivated– commercial paper credit facility; the currency swap lines with other central banks.
Lack of liquidity truly is a symptom, not a cause.
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