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.
Bear Market Diaries is back!
This reminds me of those surveys asking what people thought was the greatest movie ever made. The answer is always something that was made in the last 10-15 years because people's memory and knowledge of history is not what it should be. In the early days of modern capitalism there were regular and frequent catastrophic recessions/depressions. Over time we've become better at managing them. While every recession has a deep impact on some members of the community, for the vast majority of the public the GFC (and all the other events in Australia since the depression) was a non event - they kept their jobs, paid their bills and went about their daily lives as usual. Let's keep things in perspective.
You lost me when you politicised this. Nothing but fear mongering and showing your true political colours. Thi sis only na opinion piece, yours but not mine nor at least half the worlds population. So how about getting more interested in helping not making it worse?
"this year's problem is not one of credit and liquidity. That's just the sideshow" Liquidity is not even a sideshow here.
Ever the optimist, hey Rudi ?
Please keep the sensational doom and gloom out of this heightened-sensitive time. There is simply no value or purpose in it. Lets ban high-frequency trading as well!!
Hi Rudi et al, When reading your comments about Donald Trump I felt sure you would run the risk of alienating some of your readers. Which it appears you have from reading some of the comments. But unfortunately world markets and economies are very much linked to geopolitics and the policies of governments, particularly major world economic powers such as the USA. That is why I believe you were justified in examining the role and ability (many would say inability) of the current US President. Fortunately for those who agree with your assessment of President Trump, which I do, the voters of the United State (or at least those who bother to vote) will have a chance to pass judgement on their leader later this year. Can I conclude by thanking you for your candid views on current and likely future events, even if some may find them depressing coming as they may as "inconvenient truths".
Rudi buckets Trump. He must be watching Pelosi, Biden and Sanders wearing rose-coloured glasses. In times of crisis, it's better the devil you know than senile devil you don't. Just love it when stock tipsters become political experts.
Thank you for an insightful article. Totally agree with everything you say. Trump also sacked a pandemic ready unit in the White house immediately after he took up his office. It may have come under the clearing of the swamp that he promised during his electioneering.
What ever you may think of president Trump so be it. It's at times like this the best leaders will shine , and the people must feel at ease and confident with the person they elected. So the next few months will tell. I have always respected and admired Rudi , he is a very clever man and knows his business. I hope to read some articles from people like Rudi and other analysts backing our own prime minister Scott Morrison , who I think is doing a great job. He had the banking enquiry to deal with, housing market fall, drought bushfires and now the virus. So come on people enough about the virus , lets be positive and give more positive comments let's look at the brighter side of this event. Imaging if the opposition were in control with Shorten and Bowen , (good luck). Let back Scott and get ready for the next election and hope for a brighter future.
Clearly there are people here who think that Trump is competent. That is their right. Rudi on the other hand is wrong in thinking that Americans deserve Trump because they voted for him. Hillary got 2 million more votes than Trump. Because of the vagaries of the electoral college, Californians for instance have no more say in the election of POTUS than Australians. The problem for both Australia and the US is that their respective governments were unprepared and caught flat footed. Neither could ramp up testing fast enough. Both delayed taking drastic steps for too long. Both governments had cut back on the organizations responsible for dealing with this type of emergency, in spite of the fact that WHO had advised last year that a devastating virus disease was highly likely sooner or later. It is reminiscent of PM Morrison declining to meet a group of ex fire chiefs who were warning of an oncoming devastating fire season.
Agree with everything you say. But am interested in how the detractors think it is going to play out any differently. Trump has declared COVID-19 a "hoax", that "the US has only 15 cases", that it will die as spring arrives and that a vaccine is very close. Meanwhile the country is being overrun ... doubling every 3 days isn't it. And regarding "optimism", how could anyone looking at the facts be so at the moment?!
Wow! Let's thank Trump for everything he did. Imagine Jerome Powell had acted 12 months earlier on Trump's bluff to drop interest rate to zero. The market would have been 50% or more lower now and The "D" word would have been headline everywhere today.The Trump squad will continue to vote for him, a genius on everything! Speaking of K Rud's roles in GFC, Scomo just looks in pale. Those who denigrated Rud had forgotten it was him who saved you, me and the country by guaranteeing the deposit in the bank.