Less Panic, More Logic - Part 2

We are all watching an extremely volatile market and environment right now. There's a lot of panic I am seeing, as I write this from Milan, Italy in the middle of a national emergency lockdown wondering how they haven't yet figured this out by now and what will happen next. But let's break it down and hopefully I can help you understand the rationale.

This is my second article update on these topics (you may visit my Part 1 first coverage on these topics here) as a means to make sense of all the information on the effects of this COVID-19 virus affecting the global economy, and ultimately affecting our lives, our businesses, and our hard-earned savings. Me personally, at this point, I am trying to get my head around how big is this really going to be and I’m trying to sway away from super negative information and think logically.

Much of this discussion below is centered on the impact of the economic impact of the virus. My concerns are first and foremost to those affected and it's paramount to anything else that’s happening. This is a very serious global issue and I wish for everyone a healthy recovery.

Please note, I am not a virus expert. I am reading and watching the experts, and learning as quickly as possible about a subject I don’t know anything about. The information moves faster than I can even type this article. But hopefully, I can help by translating how this outbreak is affecting the world and our personal money.

Markets

In the markets, there’s a lot of panic buying and selling at the moment.

Despite all the Federal government (FED) intervention as a response to their own version of panicking, last week they came in with an emergency rate cut. And yet the markets are still spiraling all over the place. Realistically, they have to keep doing what they have been doing for a long time, to keep a bubble going, or else the entire economy can bursts. 

There is so much information moving around the world about China and realistic numbers and I cannot even keep up anymore. What’s important though, the markets are really starting to react to this situation, as the uncertainty is becoming quite real. And the FED went through its own version of panicking and began to implement these emergency tactics but cutting rates last week. 

 The Virus

They are saying that shutting down and quarantining people is what maintains the spread, as the virus needs to work its self through on people and through its course. Avoiding contact between people would eventually reduce that impact once the virus dies out.

There’s a lot of evidence to say it’s not so bad, this virus as the fatality rate is a lot lower than other flu viruses. But this pandemic has a lot of serious complications where people have to be hospitalized overwhelming the medical system everywhere by now as it's requiring a lot of resources to maintain and this is putting fear on people so the travel is being affected massively. As in the example of Italy, where I see it with my own eyes, the fear brought upon the nation, resulted in a massive exodus this past weekend, thereby causing the opposite effect of trying to contain the virus in one place. 

There's a lot of information out there and conspiracy theories (don’t even get me started on that), although at this moment, we have no way of know what can be true with respect to where this virus came from, surely these theories must be investigated after the fact. Mainstream media and press are saying things that don’t seem to align with what may actually be going on in China. The thing is, people hear things and they want to believe what is convenient, rather than what is reality. Please remember one thing, China’s entire economy is based on producing material through factory workers, and being in quarantine is risking losing market share of production to another source which is really going to hurt their economy. I will remain cautious when announcements from China tell us that their workforce is back in action without a viable vaccine in place. Power has a funny way of dismissing logic.

Global Trade

Ok, so how does all of this relate to the rest of us who haven’t been in contact by the virus? Let’s look at how much the world depends on China for everything, a brief analysis on supply chain. Imagine how many things that run downstream to create a complex product like a mobile phone. How many parts and pieces are affecting China’s economy now and we’re not talking about just one town here that has been quarantined. To put it in perspective, more than the entire size population of USA, are on lockdown inside their cities right now. So from a supply chain management situation, the products that are coming out of China are then impacting not just in the USA, but the entire world.

And even if you somehow could solve the supply chain, if China goes back to work tomorrow and they can keep making stuff, how will they ship those items when everyone is concerned that the virus can spread from surfaces too (even though these things can be managed through effective disinfectants, but psychologically it will prevent people from buying)? It may or may not be true if this is a realistic scenario but it almost doesn’t matter because if people are afraid that it might be real then obviously this affects the supply chain.

So let’s not deny the fact that this virus is becoming quite the burden on a global growth that it may not be sustainable for Central banks to bail out through stimulus. Central banks have fueled the markets for so far and for so long, everyone is used to it and the attitude is that every time we got news in the past, Central banks will come and save us by printing money out of thin air driving higher asset prices, the economic Band-Aid. Can they continue to do this? Maybe this type of intervention may not work this time as the Band-Aid rips.

On the other hand, it could play out and be over and we could expect massive stimulus that will fuel and drive a massive recovery. Markets are conditioned for stocks to rally with stimulus, there may have a sell-off but it should recover.

It could be very much possible that this could be the most mispriced risk in the history of our financial markets (well said by Erik Townsend). And I can't help but think about the benefits of all of this on our planet and curbing our Climate Change problems, but that's for another discussion.

Energy Markets

Maybe it’s not as bad as some people fear maybe some of the fears are a little bit hyped up and unrealistic. It doesn’t matter. If people are afraid to fly, then that has a crippling effect on the entire travel industry, it completely annihilates demand for jet fuel, affects the crude oil market. Fears are not based on rational logical concerns, so many flights have been canceled all over the world. This may create a ripple effect and may have a crippling economic effect. The commodities markets are telling an ugly story already.

China, being the biggest customer to Saudi Arabia, recently cut its demand by 20%. Geopolitical tensions will increase as producers may employ their power to use energy as a political and economic tool for control over the market share, which is happening right now in fact (certainly has happened before) and we have seen the Crude Oil plummet 30% today.

Wealth Gap

Sorry for a bit of technical jargon, but I should cover a bit about the wealth gap problem. What we know about Monetary Policy quantitative easing (QE) is its good for asset prices because the way QE works is, as we know it, is they buy bonds with the money printing they create out of thin air. The money flows through institutional investors who hold those bonds which puts a whole bunch of money in their pockets and what they do with it is buy other investments like stocks, which is what drives the stock prices up (& this is how the rich keep getting richer increasing the wealth gap in case you were wondering).

Intervention is needed so badly. Instead, the money should be utilized for education/development etc. Everybody is assuming that it’s going to keep working this way indefinitely. But people are already starting to ask: why all these trillions of dollars being created and are not taxed. It’s time to stop giving that money to rich people and start using this money to bail out Main Street not Wall Street (macrovoices). 

Enter the Paradigm Shift

A complete revamp of this cycle is in order (Ray Dalio). Maybe this virus responds is what gets you there. Assuming printing and creating money will not stop in order to maintain order in the economy, but what needs to be done is to use all of that money to respond to the virus and directly monetize an emergency response to a pandemic outbreak. This then potentially sets a new precedent where future intervention becomes more like an aid support, money flowing to social programs, and universal basic income, healthcare improvements, research and development, infrastructure improvement for everybody and relaxation of university debts etc. all of these coming together from the aids of money printing of central banks. 

Perhaps a response to the virus may just be the pivotal event that gets us out of this old school economic blanket and into a new style with less greed.

And by the way, if you are worried about inflation, well as long as you do QE, it has proven that it does not create inflation inside the economy. However, if you start putting all this liquidity into the hands of Main Street, then we may start to get inflation on all those items that we have in the basket that we’re measuring inflation with.

What happens when we get inflation and this becomes too much? Historically the approach has been to raise interest rates (was ok in the past when the level of debt was a fraction of what we have today). However, with the amount of debt that we now have today, you cannot raise interest rates substantially, especially not during a crisis, the federal government reserve would go bankrupt and it would be impossible to roll their debt over.

It’s really hard to say where things are moving, but it may be that inflation sparks the beast. As long as we have a deflationary backdrop, you can solve almost any problem by conjuring money out of thin air, a trick that central banks have gotten pretty good at in the last 10 years. It works for a while sure, but it’s when inflation hits, is when we start to have a problem. Nobody knows or can predict when this may happen, but we should consider if it does then how will this affect your buying power, especially if you are close to retirement.

Conclusion

The takeaway from all of this is that we should expect to see more volatility, but it's now more important than ever to analyze your situation. What is your game plan? What is your strategy? Me personally, I am not inclined to shut myself in and result to “see what happens” attitude, nor am I "drastically selling" mentality. This doesn’t have to be a catastrophe to your finances. I am motivated to find what the best strategy is. And if there are some practical solutions that can be done, then we will research it and we will implement it for ourselves and our clients, effectively adapting and rebalancing portfolios….but surely not to live in fear or panic.

There are so many ways to protect your wealth and control the risk, but it's important that you have this discussion with someone inside the financial industry, an expert, someone who's been through it all. The outcome will be applicable to your individual circumstances and you will take away a well thought-out plan to implement your personal strategy. Having this discussion will not only help you improve your financial literacy, but it will most certainly offer more control of your finances.

And if you don't make this your responsibility, then who will?

Elena LPris

Wealth Management & Protection Consultant

[email protected]