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Commentary on financial market developments – March 2020


  • Pandemic
  • oil price war


Equity markets declined in double-digit percentage terms in March. The exception was Chinese equities, but they have fallen more in previous months. The cause of the stock market sell-off is well known – the coronavirus pandemic.

This time, in this monthly report, there is no point in listing everything that has happened, how the disease has spread gradually to Europe and then to the USA, and how the various governments are reacting. Firstly, everyone has information from the media and secondly, the situation is constantly changing.

Therefore, we will rather focus on the general phenomena that accompany all economic crises. It is clear that the coronavirus pandemic will result in a global economic crisis, but of course we do not know how deep this crisis will be.

In general, it is good to remember that stock markets always outstrip economic reality. When investing in shares, we are buying the future. We all know the present, we know or can find out which companies are doing well and which are not. But the future is unclear, we don’t know which companies will succeed and which will not, we can only guess.

The current coronavirus pandemic will affect virtually all sectors, some in the first wave, others indirectly. And investors are reacting in advance. Sectors such as transport and tourism are at risk in the first instance, but all sectors are at risk indirectly. A downturn in economic activity always leads to rising unemployment, debt repayment problems and a fall in purchasing power and consumption. This will secondarily affect virtually all sectors, starting with the cyclical ones, led by the automotive and aerospace industries and the construction industry. Only neutral sectors such as the port and pharmaceutical industries or countercyclical sectors such as the arms industry or the gambling industry, which unfortunately may even temporarily increase their profitability, may be spared.

Every economic crisis inherently leads to fears for the future. Fears lead to the fact that almost no one is willing to go into debt; on the contrary, companies and people tend to get rid of their debts. This leads to a demultiplier effect where the debt bubble starts to burst and money is withdrawn from the economy. In a vicious circle, this leads to a further decline in economic activity, more redundancies and the situation worsens.

As a side note, let us point out that an economic boom works in the same way, only in the opposite direction. Everyone believes in a better future, takes out loans, invests, and the amount of money in the economy keeps inflating and asset prices (stocks, real estate, etc.) rise to absurd heights. The bursting of bubbles and economic recessions are thus normal to a certain extent and are a recovery process, although they are, of course, hard on people, and especially on the most vulnerable – the poorest.

Governments and central banks in all countries will now try to reduce the impact of the crisis on the economy. They have two basic tools to do this: fiscal and monetary policy. Fiscal policy is the tool that governments have in their hands. Fiscal expansion, in short, means cutting taxes and increasing government spending to make up for the shortfall in corporate investment and household consumption. The price for this is a widening of the public deficit. Monetary policy, then, is an instrument controlled by central banks. Monetary expansion means trying to pump new money into the economy by cutting interest rates and by directly buying securities for the central banks’ balance sheets. The price of such a policy is then, in the long run, rising inflation and also the invisible nationalisation of the private sector (central banks hold the securities of otherwise private companies).

The key question in the current crisis is how badly the economy will be hit and how much the spiral of debtors’ bankruptcy will be triggered. Indeed, in the crisis, at the level of individuals, firms and countries, those who are highly indebted are the worst off, then those who have no reserves and, conversely, those who have no debt and large reserves are the least off. Unfortunately, the bankruptcy of each debtor means handing over a ‘black Peter’ to his creditor, who suddenly has an uncollectable debt and thus loses part of his assets. The question is whether he will be able to withstand this, or whether he too will fall into bankruptcy. This is how the situation chains up to the level of the States.

Unfortunately, after the financial crisis, the level of national indebtedness has deepened considerably, and it is questionable whether further indebtedness is possible and sustainable. A negative example of this is Italy, which, firstly, has been badly affected by the pandemic itself and, secondly, has very unhealthy banks and very indebted public finances. Its problems can be partly bailed out by the euro area, but the question is whether it has the space to implement this help, because it may be passing the ‘black Peter’ just one level up to the whole euro area.

However, it seems that economic growth and its maintenance is such a strong policy that even this crisis will result in a further increase in national debts and a swelling of central bank balance sheets. It is only a question of how long this behaviour is sustainable and when the ‘jug’s ear will be torn off’.

At an individual level, however, we could pause in the current situation and take stock of our relationship with our finances and our economic behaviour. The current crisis, like all previous ones, reveals that in times of economic uncertainty, those who are debt-free and have reserves sleep better. Or more simply, good times are supposed to lead to an increase in reserves, which are used up in bad times. Unfortunately, too many people have gotten into the habit of going deeper into debt in good times to make even more money and wanting a quick bailout in bad times. The result of this is that our economic growth, while wonderful, is virtually constant and is driven by constant debt. This means we are consuming our children’s future and depleting resources faster than is healthy.

This commentary on markets is different than other times, ending with reflection and moralizing:-). It is the opinion of the author, who is certainly not imposing on anyone, he just wants to show how much our economy is promoted by debt and our dependence on its constant increase. So the key question to ponder is: In good times, can we/will we manage to tighten our belts a bit and build up reserves?

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