Before, you start reading on the main topic, i would like to make an analogy.
The reason World War I started is extensively credited to the assassination of Archduke Franz Ferdinand.
It’s assassination is considered the fuse that would light the fire that would culminate in World War I.
Europe had many problems between it’s nations before the assassination, things weren’t going well diplomatically and there was a huge pressure on aliances systems and so on, it was just waiting to happen and the murder of the archduke just made it possible.
Having that in mind:
The coronavirus was just the fuse that would light the fire to the recession.
Relevant things that were happening before the coronavirus:
- Corporate profits were already in a recession.
- Huge piles of corporate debt, we are at the end of a credit cycle, meaning people and corporation will have to spend less to cut back on debt.
- The P/E ratio of the S&P 500, for example, had valuations comparable to previous markets just before the crash, like 2000 and 2008.
- The Fed already wasted almost all of it’s ammo, reducing it’s ability to keep the economy going, the stock market has been relying for years on the Fed to keep the party going, now that they realize they are on their own, investors could finally realize every price is pretty much inflated.
- Even though interest rates are historically low, the inflation rate is low, even with a low unemployment rate. This definitely means there is some core problems with the economy since it is a clear show of how much pressure the Fed, consumers and the producers are putting to stimulate growth but it’s still lackluster and clearly show signs of contraction.
- Millennials and Generation Z are becoming more important every year for the economy. They are probably the most indebted populations there are, reducing their ability to consume, work and to defend themselves against a recession.
- Even though we have unemployment at record lows, Americans suffer from low wages, almost no working rights, and low capabilities to consume since household debt is at record highs (can’t stimulate growth in the economy if all the households are using their paychecks is just to stay afloat and live up to the next paycheck, leaving little room to actually consume).
So, you have that in mind, and also a Bull Market that has been going since 2009, for 10 years, when the average is 8.
So, if it wasn’t coronavirus it would be something’s else, but let’s examine it’s economic impact.
- The virus will cause a huge supply shock because of low volume of commerce since China is basically on quarantine and the world depends on China to many of it’s goods.
- On the side of the consumers, you can cut rates as much as you want, but a huge household debt won’t disappear out of nowhere in these lackluster wages workers are given, have that in mind, the virus is another incentive to consume even less.
- These halts on supply on demand can cause huge problems on corporations that today are up to their eyeballs in debt, failing to pay short term debts, causing a huge death spiral.
- The outbreak is not even a it’s peak and already caused a huge economic impact that will only get worse.
- You can’t compare virus outbreaks to previous outbreaks. Because the variable (the virus itself) is completely different from previus outbreaks. People keep comparing this COVID-19 with the SARS in 2003 and they compare how the market reacts back then and think things are going fine. In 2003 the world was much less dependent on China commerce, the Stock Market was just beginning it’s Bull Market that would end in 2008. Today we are on all time highs and very much depend on China for global commerce, this virus is much more capable of infection than SARS were, meaning it’s economic impact is far greater than any outbreak there.
So yeah, I don’t see the next month with good eyes.
Also, one last thing to make things clear:
You don’t do a emergency cut of 50 bps on a national interest rates if you think the economy is strong and have good foundations, you do it because shit is going down fast and the gears of the economy are starting to break down even faster and you are trying to keep it going by cutting the rates.
English is not my first language, my bad.