The Bear Market That Changes The World
Late on Monday, FNArena Editor Rudi Filapek-Vandyck sent out his Weekly Insights email to FNArena subscribers. In it, he describes the 2020 financial markets' meltdown as the "Bear Market That Changes The World".
Given extraordinary circumstances the world around, FNArena has decided to open up the Editor's assessment to the broad investment community while also pulling forward the publication of this story by three days.
Take a step back from the day-to-day share price movements and news flow, and what we are experiencing is truly a watershed moment. Eleven-twelve years ago, I sat down one afternoon and wrote we are all experiencing a seminal moment in modern history.
As things unfolded, that was certainly an accurate description. We've seen studies and books since, and a few Hollywood movies and documentaries. Everybody now knows the "GFC".
What I did not foresee at that time, is that Bear Stearns, Centro Properties, Lehman Brothers, Allco Finance and CFDs would merely turn into the warm up act of a much bigger event twelve years later.
Yet here we are, it's 2020. We've had three mini-Bear Markets every 2-4 years, but also steadily growing debt (just about everywhere), record low interest rates, government bonds in negative yield territory, businesses that borrow money to buy in their own stock, a sharply widening gap between Haves and Not Haves in society, and a prolonged era of fragile and slow global growth. Not to mention the demographic changes, the technological disruption and the significant growth in easily accessible passive investment instruments.
The bottom line is that if we combine all these factors together, we end up with an increasingly fragile system. One that continuously runs the risk of falling apart. Which is why central banks have intervened so many times over the decade past.
We cannot genuinely blame them. There seemed no other option available back in 2008. And neither was there a reasonable way out in the twelve years since as the situation required more and more liquidity and ever lower cash rates and bond yields.
One of the inescapable observations is that central bank interventions are requiring more extreme actions at every point of the system threatening to break down.
This week the US Federal Reserve pretty much went all-in. Interest rates are at unimaginably low level; the cuts have been massive, fast, and unprecedented. And other central banks will be following the Fed's example. Won't be long before the RBA is buying bonds and mortgage-backed securities, and controlling the yield curve in a similar manner as has been happening in Japan for years now.
And yet, it won't be sufficient. We know this, because that's what financial markets are telling us. Of course, central bankers will continue to put in their best to prevent the world from melting down, but this year's problem is not one of credit and liquidity. That's just the sideshow.
This coronavirus pandemic is creating problems both on the demand side of economies -as consumers are hoarding and staying inside- as well as on the supply side where businesses have stopped operating or cannot get anything across the border.
A significant intervention from elected governments (i.e. fiscal stimulus) is thus required. So far they are getting the message, slowly, and coming to the table, though it's not yet with that same urgency as we have witnessed from central bankers. Let's hope this is about to change, and soon too.
Repeating the voice of many other experts: this is not an opportune time to act cautiously and with hesitation. This emergency requires bold and significant action. Governments need to be prepared to go all-in too. Financial markets are not simply a reflection of what is happening in economies around the world; they equally have an impact on these economies and on the businesses and consumers within.
Won't be long, I reckon, before we read about government bailouts for badly hurt, too big to fail, crucial businesses. Lower rates and increased liquidity don't create demand for, say, airplanes. That's up to airlines, and they are in deep trouble. No customers, no demand, no cash flow. Many might go out of business. How many will still be making payments to Boeing?
Visions of 2007 and 2008 are starting to re-appear. This time it won't be just banks. But equally so, governments won't be able to save everyone.
And yet, ultimately the global recession that is causing this Bear Market cannot be fixed without containing the virus pandemic. Here, I believe, the biggest problem is potentially the US, the world's largest economy. There still is a lot of confusion about covid-19, but we do know it can quickly spread exponentially.
What has become crystal clear already is that in countries where governments and citizens are quick on their feet to take precautions (other than hoarding toilet paper) the spread of the virus remains limited and hospitals are not at risk of overcrowding.
Both Singapore and Hong Kong had experience with SARS, so no coincidence they have both managed to avoid extreme lock down and overcrowding-situations with deadly casualties as is the case in Italy, Spain and, increasingly, in other countries throughout Europe.
We yet have to find out how effective the approach to date in Australia will turn out, but thus far indications are we are nowhere near the same limited growth curve of covid-19 spreading as has happened in Singapore and Hong Kong.
The real worry is the situation looks a lot less promising for the US.
The simple truth is authorities in the world's largest economy are unprepared for what is happening around the world. Do note I said unprepared. Not ill prepared.
The US is unprepared. Which should hardly come as a surprise. I don't care about anyone's political colour or preferences, but if you haven't figured out yet this President is incompetent, all bluster and no substance, then there is seriously something wrong with you.
He cannot even read properly from the autocue when speaking to the nation. Last Friday, the US President was mailing out price charts of the US stock market with his signature on it. The latest scandal is Trump offered to buy "exclusive" access to a covid-19 vaccine developed by German biotech CureVac.
The heart shudders to think of the many devastating consequences of what will happen to the US population and its economy if the spreading pandemic leads to similar crises as we are witnessing in Italy, and before that in China. Once upon a time the US had experts in charge of infrastructure to deal with pandemic outbreaks. Not any more.
Revered writer of financial and contemporary chronicles, Michael Lewis, wrote The Fifth Risk in 2018. It reveals how the Trump administration has consistently undermined, emptied and underfunded essential government services since taking over from Obama in early 2017. That is going to show up big time when the proverbial hits the fan.
They say in politics every population gets the leaders it deserves. That's definitely one thing the world can throw back at America: hey, you voted for the guy, now you're going to have to deal with the consequences.
The problem here is that the rest of the world did not vote for the guy, but there won't be any escaping the consequences if, as I suspect, the spreading coronavirus is yet to fully take off inside the world's largest economy.
Recessions are no fun. Neither are Bear Markets. Which is why Market Rule Number Ten by Wall Street legend Bob Farrell reads "Bull markets are more fun than bear markets".
Incidentally, Bob Farrell's Ten Timeless Rules For Investors also identified three stages for the typical Bear Market. First there is the savage sell-down, then comes the Sucker's Rally, the final stage is the tortuous grind to ever lower levels.
Central bankers around the world are trying really hard to pull this Bear Market into phase two. But they will need governments to cooperate and coordinate.
Gosh, the thought that global wealth and health now lies in the hands of this administration in Washington makes me genuinely depressed. Let's hope I am just being silly.
But let there be no mistake: the answer to the question of how do we ever get out of this mess is still the same: with more money. Loads of more money. This time governments around the world will join in with central banks. This is why this Bear Market is changing the world in front of our eyes.
All of us ain't seen nothing yet.
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