9 Things You
Should Know About the 2020 Stock Market Crash
By Mike Whitney
March 16, 2020 "Information
Clearing House" -
1– Investors are cashing
in and heading for the exits
According to Bloomberg News: “Investors made their
biggest dash for cash in history” in the last week.
“They channeled $137 billion into cash-like assets
and a record $14 billion into government bonds in
the five days through March 11…..(while) money
managers are liquidating en masse.” (“Investors
Liquidate Everything in Record $137 Billion Cash
Haul”, Bloomberg)
Why are investors exiting the
market?
Because the psychology that
drives business investment (“animal spirits”) has
been dramatically impacted by the coronavirus.
Expectations for future prosperity have been
dampened by the fog of uncertainty. When uncertainty
prevails, confidence wanes and investors cash in and
get out. Coronavirus is fiendishly designed to push
stocks and bonds lower in response to the staggering
deluge of bad news.
2–Stocks have been
walloped, but consumer confidence is just now
starting to drop
According to the University
of Michigan, consumer sentiment fell from 101.0 to
95.9 in February. These calculations were made
before the “Thursday’s stock-market plunge — the
worst since 1987 — and the rapid shutdown of
university campuses, public schools, major sports
and entertainment venues over the last 24 hours….
the data suggest that additional declines in
confidence are still likely to occur as the spread
of the virus continues to accelerate.” (Bloomberg)
Stocks will undoubtedly
reflect investor pessimism in the months ahead,
pushing prices lower while the virus spreads.
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3–
The Fed’s $1.5
trillion liquidity announcement triggered an
impressive 2,000 point rally, but the policy
badly misfired
On Thursday, the Fed
announced that it would provide more than $1.5
trillion in short-term loans to repo market traders.
Fed chairman Powell believed that this would ease
tighter lending conditions in a market that is a
critical part of the system’s financial plumbing.
Surprisingly, the demand for these short-term loans
was weak and the Fed only provided a meager $119
billion. In short, the Fed did not accurately
identify the source of the problem which obviously
lies elsewhere.
In order to conceal its
mistake, the Fed launched another round of
Quantitative Easing on Friday. According to the Wall
Street Journal: “The Fed announced Friday morning
that it would purchase later in the day roughly half
of some $80 billion in Treasury securities that it
had said Thursday would be purchased over the next
month.” (Wall Street Journal)
In other words, the Fed fired
its $1.5 trillion policy bazooka at the repo market
and missed the target entirely. The next day, the
Fed resumed its QE money printing operation and
investors piled back into stocks. This hit-or-miss
approach shows that the Fed does not completely
understand the issue it is dealing with.
4–The real economy was
weak even before stocks started crashing
This is an excerpt from an
article at Marketwatch by economist Stephen Roach:
“The problem also lies in weak real economies that
are far too close to their stall speed. The
International Monetary Fund recently lowered its
estimate for world GDP growth in 2019 to 3% —midway
between the 40-year trend of 3.5% and the 2.5%
threshold commonly associated with global
recessions.
As the year comes to a close,
real GDP growth in the US is tracking below 2%, and
the 2020 growth forecasts for the eurozone and Japan
are less than 1%. In other words, the major
developed economies are not only flirting with
overvalued financial markets DJIA, +9.36% and still
relying on a failed monetary-policy strategy, but
they are also lacking a growth cushion just when
they may need it most. In such a vulnerable world,
it would not take much to spark the crisis of 2020.”
(Marketwatch)
Since the recession ended in
March 2009, the US economy has experienced the
weakest recovery in the post-World War II era. Now
the American people will be facing an extended
period of economic contraction in which deflationary
pressures lead to a sharp rise in unemployment,
homelessness, and financial insecurity.
5– Gold took a beating in
last week’s selloff
Typically, gold is a “flight
to safety” asset that does well when markets are
crashing, but that rule did not apply last week.
According to the Wall Street Journal: “Gold…suffered
its worst week since 2011, dropping 9.3% and wiping
out all its 2020 gains. Silver, a more volatile
precious metal, tumbled 16% and is down 19% for the
year.” (WSJ)
At the same time, ultra-safe
municipal bonds and risk-free US Treasuries sold off
hard. The reason safe haven assets sell during
periods of stress is because of margin calls, that
is, when a broker demands additional capital from an
investor to maintain his current position in the
stocks he bought with borrowed money. When stock
prices fall sharply, many investors have to sell
their good stocks (gold, US Treasuries) to support
the bad. That is why gold got hammered last week. It
is an sign that many investors are severely
over-stretched and nearing the end of their
resources. Many high-stakes speculators are now in
big trouble.
6—Stock buybacks have
plunged
Stock buybacks have been the
jet-fuel that has kept the equities markets soaring
to record highs before the latest virus-driven
downturn. Even before the latest ructions, buybacks
had significantly slowed to 2013 levels wracking up
just $14 billion in January, a 30% decline from a
year before. And while there are no estimations of
buyback activity during the last few weeks of March,
it is impossible to imagine that cash-strapped CEOs
would even dream of pumping more money into shares
that are falling faster than anytime since 2008. And
while there is a remote possibility that the US
economy will avoid recession, there’s only the
slimmest chance that revenues, earnings or future
expectations will give corporate bosses the
wiggle-room they need to repurchase their own shares
rather than stockpiling the cash they might need to
maintain operations during some very tough times
ahead.
Bottom line: It will be very
hard for stocks to rebound in an environment in
which buybacks have significantly declined or
vanished altogether.
7– Stocks have already
dropped sharply, but the credit crunch still lies
ahead
A credit crunch refers to a
decline in lending activity when funding suddenly
becomes available. Currently, the markets for
corporate debt have frozen due to investor
skepticism that these same corporations will be able
to repay the nearly $10 trillion of debt they
wracked up during the “easy money” days of the last
decade. Many of these corporations used the money
they got from bond market to enrich themselves
through executive compensation and share
appreciation. In other words, CEOs sold bonds to
credulous investors who thought they were buying the
debt of responsible, well-managed companies when, in
fact, 30% of corporate debt was deceptively used for
buybacks, that is, it was used to line the pockets
of executives and shareholders rather than boosting
productivity, increasing worker training or R&D, or
building new factories and equipment.
Corporations have been
engaged in the same illicit scam mortgage lenders
were involved in prior to the Crash of ’08,
transferring trillions of dollars to wealthy
executives via financial products that public really
didn’t understand.
Many of these companies are
presently unable to get the money they need to stay
afloat because the market for corporate debt has
shut down. This means, they will not be able to
refinance their debts which will force them into
bankruptcy triggering a cascade of defaults that
will severely hurt their counterparties, their
lenders and the broader economy. When credit becomes
scarce, the economy contracts.
8– The IMF warned that the
Fed’s easy money policies would lead to another
crisis
This is an excerpt from
Chapter 2 of the IMF’s Global Financial Stability
Report:
Accommodative monetary policy supports the economy
in the near term, but easy financial conditions
encourage more financial risk-taking and may fuel a
further buildup of vulnerabilities in some sectors
and countries. …In a material economic slowdown
scenario, half as severe as the global financial
crisis, corporate debt-at-risk (debt owed by firms
that cannot cover their interest expenses with their
earnings) could rise to $19 trillion—or nearly 40
percent of total corporate debt in major economies,
and above postcrisis levels.”
The Fed’s monetary policies
ignited a corporate borrowing binge that has put the
country’s financial future at risk. The US is now
facing a catastrophe that is entirely attributable
to the “emergency rates” and the relentless meddling
of the Central Bank.
9– The American people are
not ready for another recession
According to Zero Hedge:
“Almost 60 percent of Americans have less than $1000
in savings for a rainy day fund or an immediate
emergency….”
“Four in ten Americans can’t
cover an unexpected $400 expense according to a
report from the Federal Reserve Board.” (CNN)
“78% Of Workers Live Paycheck
To Paycheck,” says Forbes
“58 percent of Americans had
less than $1,000 saved,” says Yahoo Finance
“Only 37% of Americans
believe today’s children will grow up to be better
off than they were,” says Marketwatch
According to Pew Research,
“Majorities predict that the economy will be weaker,
health care will be less affordable, the condition
of the environment will be worse and older Americans
will have a harder time making ends meet in the
future than they do now.”
Finally, according to a
MassMutual US survey, “54% of respondents think the
American Dream (defined as financial security for
themselves and their family) is no longer
attainable.”
The majority of Americans
never reaped the benefits of the economic recovery
and they’re certainly not ready for another
debilitating slump. As the data show, most people
are living on the edge already and barely hanging on
by the skin of their teeth. Another downturn will
put them into freefall which will dramatically
increase homelessness, food insecurity and
destitution. The federal government should be
looking for ways to soften the blow now instead of
waiting for the markets to crash and the economy to
shrivel. Forward-thinking leaders should be able to
see the handwriting on the wall and realize that we
are fast approaching zero hour, a crisis the likes
of which we haven’t seen since the 1930s.
Mike lives in
Washington state. He can be reached at fergiewhitney@msn.com.
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