Coronavirus, Finance and stoicism, financial markets.
Financial Markets

Too Much Debt, The Fed, Coronavirus, and Financial Markets

Too Much Debt

For those who know me well, and before I started this blog, I have been talking since 2018 about 2020-2021 as the potential period when the global economy could start a recession, even possible depression. Of Course, I couldn’t know by then what trigger or black swan event could be, but when you observe the data from a historical perspective, it was “easy” to realize what the “structure problem” was for the global economy; too much debt.

 

So the original problem that the global economy had in the past, it was not only un-fixed, but increased terribly and widely.

 

Think about it; if in 2007-2008 the main problem was too much debt, and now this number has increased dramatically all around the globe since then, what could you expect to happen by now? 

As far as the US stock market is concerned, it has lived the most significant bull period in history, and this growth has not always been because of the positive results of the real economy, but because of the Federal Reserve policies in most cases (Europe has been even worse about it).

 

 

Some Economic Data

US Trade Deficit Contracts 6.7% as Earthquake; Falling imports are also likely to head to deficits, which could hurt both consumers and business spending.

As far as the US Labor Market is concerned, the last data about employers adding almost 300,000 jobs has been a little bit encouraging, noticing that still, the US economy seems stable and robust, despite the Coronavirus.

The main concern from governments and investors right now, is how the Virus spread could affect the global economy and the future prediction of growth, so far:

1. Significant factories in China are closing down or fighting and struggle to survive.

2. The number of Airlines that have stopped and paralyzed their commercial flights is scary (a sector that was already struggling, especially in Europe).

3. Supply chains around the globe (especially in China and Asia) have been compromised, slow down its core activity, and in some cases demanding their workers not to go to work.

 

Coronavirus, Finance and stoicism, financial markets.

 

 

Financial Markets In Danger

The threat of a potential global recession has made all the participants of the market try to get to “safety assets” and try to contain the situation.

For the last two weeks, the financial markets have gotten significant volatility with the sudden virus news. Most of the stocks plunged, and most of the investors seemed to be in a hurry for allocating the capital into government bonds. 

The levels that the yield on the 10-year Treasury has reached are part of history now, and it was unimaginable to fall below 1%, in the past.

This whole situation is a demonstration of the “phase panic” that the market is going through right now. 

Oil prices have fallen 33% for the last two months, and they have dropped 10% over the previous two weeks because there was not an agreement between the primary producers to reduce the supply in these current circumstances when the demand is low and to go lower and lower consistently. 

The Fed Reaction To Coronavirus

Another aspect that has been a big surprise for many has been the reaction of the Federal Reserve to try to contain somehow the potential damages that the Virus could cause to the health of the economy. 

So many people inside the financial markets are wondering why the Fed cut interest rates by 50 basis points if the economy would theoretically be so “healthy.” And why the Federal Reserve is seeking to preserve the financial market asset prices at all detriments when it is not even its function and obligation.

 

Coronavirus, Finance and stoicism, financial markets.

 

 

Conclusion

There are two kinds of scenarios when a strong economy goes into problems: first one, it turns from healthy to mediocre and bad, slowly. The second one, it becomes awful, rapidly.

Between those both scenarios, I couldn’t say which one could happen; some people say that it could be easily the second one, some others say that it could not happen that bad. 

In my opinion, no one really can know because there are a considerable amount of factors interacting with each other, and many things can change along the way. However, the Federal Reserve, even though still there is no evidence of economic data that could lead to a recession, has taken a surprising action related to interest rates to try to avoid an economic slowdown. 

 

Will the Fed decision save a potential downturn in the US economy?

 

No one really can know, but for sure, there is a lot of worry about, and the possibilities are vast. Indeed, from the perspective of a business owner, consumer, investor, and government, things look worrying.

 

The real question is if Coronavirus will make the whole financial system and the economy to live a period of severe pain, and how long could it last. 

 

One thing is for sure; the Federal Reserve has finished all the possible short-term tools and mechanisms that could have to contain the economy from Coronavirus. and to boost the economy and the financial markets. 

 

Check out another article about Coronavirus if you have not gotten the chance to read it; Coronavirus, Viruses, and Spanish Flu!

 

I hope you have found this article valuable!

FinanceandStoicism.

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