The Crash of 2020

Let’s be honest now: We all know this was going to happen at some point. If you lived through the dot com bubble, the housing crash, black Monday, and a whole host of other major market corrections, you know that the markets have been too good for too long, and some sort of correction would happen at some point. Most of us, however, didn’t expect it here and now.

As I write this (Noon Monday in London, so noon GMT) the markets are suffering greatly. The US market futures are all pretty much pegged out to the max before circuit breakers kick in to stop the decline, and the price of oil is down somewhere near 30%. That 30% is more significant that it is over 60% off the near peak prices that ended in 2014. It’s a big, big shift in the markets that nobody really saw coming.

The last couple of weeks the markets have been reacting to the Coronavirus / COVID-19 situation, which is still developing and seeming to take out more and more markets as we go. Italy has locked up a huge part of the country, and new cases are being spotted worldwide. There is great potential that this does become a massive global pandemic, and it would in fact be amazing if it does not. It has had huge impacts on global travel, global trade, and of course has a knock on effect to productivity and actual work done as each country has to deal with the effects. China is more than a month past the Chinese New Year break and industry still doesn’t appear to be back to anywhere near full swing. Worse yet, the markets that generally are buying what China produces seem to be heading towards a lockdown, and that makes it worse.

The oil situation is the topped, the pipe that has broken the camels back. Oil prices have been dropping with the virus problems, as demand has dropped. Over the weekend, talks between OPEC countries and Russia to limit supply to support prices broke down, and Saudi Arabia did what nobody though they would do: They immediately cut $6-$8 a barrel off the price of their oil, and have made moves to massively increase their production, further flooding the market.

The result is the price of oil crashing – and crashing into a market that has been through one of it’s worst weeks in years. Bond yields have dropped to effectively zero (and negative in some cases) which in turn may have a knock on effect to liquidity and the desire for investors to take on any risk at all.

What happens next?

Well, here’s the thing: In the US especially, the Fed and the White House have been pumping liquidity into the markets, particularly in the overnight lending market between banks. The fed has pumped over 500 billion into the Repo market, in no small part to keep problems here from touching the wider market. But the Fed can’t keep endlessly pumping money in without getting it from somewhere, and if they have to keep pumping it means the market itself is broken. There is no indication that there is anywhere to go.

Further, as President Trump pushed tax breaks for the rich, he has also piled on the US debt. Any move to try to shore up the economy will increase that debt, increase the deficit, and will almost certainly have to lead to higher taxes. This would prove to be very unpopular in an election year, as the President would have to admit a form of economic failure. It makes the current situation and uncertainly likely to continue through the year.

Moreover, we don’t know the full on effects of the COVID-19 virus. A 2 percent death rate and say even a 0.1% infection rate in the population you are still looking at near 1 million dead worldwide if this thing gets completely out in the wild. Beyond the suffering that comes from all this, you have to consider what this will do to markets that are closed. In the long run, will this end up turning the world back towards being “homers” who don’t travel as much? Will this be the cure from over tourism? I would say that anyone in retirement age groups would likely not want to take a chance travelling for the foreseeable future (and I mean a few years) as this virus will likely cycle around a few times through a few flu seasons.

We wait now to see the US markets open. This will be interesting, scary, and quite possibly a moment in history we will never forget.