COVID-19 will not kill progress

Last night on Wall Street.

Last night on Wall Street, the CBOE Volatility Index (often used as a proxy to gauge equity investor ‘fear’) closed at an all time high of 82.69.

In the past, the index had risen as high as 89.53, however this was an intraday high, whereas on that day it closed at 79.13.

That day is now known as Bloody Friday, 24 October 2008, and was the day Iceland was bailed out by the IMF and Alan Greenspan likened the GFC to a once in a life time ‘credit tsunami’.

Markets went into free-fall.

So, as the immediate past Chair of the US Fed, his comment was enough to convince markets that the global recession that was going to happen, was actually happening.

On the following Monday, Asian stock markets cratered and around 22 banks were bailed out in the U.S. That day is now known as Black Monday.

Fast forward to yesterday.

The U.S. pre-market was already a bloodbath.

After opening well down, key Indices fell by more than 7%, triggering a market halt, with NASDAQ and the DOW falling by around 12%. At 13% a second halt is instituted. That was narrowly averted.

Whilst there was some recovery, it was a case of too little too late and the VIX closed at an all time high.

It’s not just COVID19!

That is, COVID-19 has been the catalyst to crystallize fears of a global recession. But there are many more elements that have been brought to a head as a result of this pandemic.

QEI+NIR

QE Infinity has resulted in zero and negative interest rates in most of the developed world, along with a massive aggregation of central bank balance sheets, well over the US$20 trillion mark (across the Fed, ECB, BoJ and PBOC).

Corporate debt becomes an issue when there are less earnings with which to pay interest and amortise the principal.

Oil struggles

The re-balancing of oil production capacity in the U.S. does not appear to have endeared the U.S. to Russia, nor Saudi Arabia, and the supply floodgates opening in those countries suggest they are seeking to damage the U.S. shale industry. Meanwhile, Aramco still makes money at production costs of around the $10/barrel mark. Ouch.

Trump’s trade war killed global growth

The trade war has fundamentally changed the global landscape, economically and socially. This is perhaps the largest contributor to where the global economy is (not) today.

Climate change events

The risk of what might happen if climate change is not addressed was painfully demonstrated by the Australian and Californian bush fires.

In other words, COVID-19 was the last straw on a faltering camel’s back, and on one level has been the catalyst for a long needed reset to financial markets.

And, the reset, for the above reasons is probably far from over.

Today?

The Australian market popped just under 6%. Premature? Dead cat bounce?

However, the Aussie dollar is currently trading in the high 50s, a level not seen since 2001. Low rates for longer but just as importantly, soft data out of China.

What now?

We protect and help our families, friends and the wider community in the face of this nasty virus. That’s what’s important.

Yes, we are still filling and closing deals (NextLevelCorporate is about to announce closure of an equity fundraising for a killer big data start-up) and clients and companies are still addressing real world problems with real cool solutions - that will not change.

It can be hard at times, but progress means what it says.

Stay safe. Stay tuned.

Mike.