Photo by Getty
I was in school when the UK stock market index FTSE All Share crashed in October 1987. This crash was as sudden as the current one, Marines Summerset Web, editor-in-chief of MoneyWeek, wrote to the Financial Times.
On October 15, the UK government released details of the sale of its remaining stake in BP (this was to be the world’s largest share listing). The price was set at 330 pence. No one was worried. By October 20, the price had dropped to 286 pence and Nigel Lawson solved the problem – using a slightly overdrawn force majeure clause.
On October 21, our economics teacher asked if any of us knew what had happened. We didn’t know. That’s right. What importance should the stock market level have for teens? This is just a reminder of how different the crisis is now. This is a real force majeure – understandable and affecting everyone.
Are we close to her already? Probably not. This failure was not caused by instability in the system, but it was certainly exacerbated by it. We went into it with overvalued values and excessive debt.
To justify the January 2020 market levels, we needed a strong economy and a wonderful reporting season. Instead, we are heading for a sudden and extremely bad global recession (maybe even a depression – a 10 percent drop in GDP), coupled with ruthless declines in expected profits (this is, among other things, one of the few sure things in life).
The more things get worse, the more confusing the attempts to evaluate in this market will be. Note also that despite all the drama and panic, the US market (and most others) still came back with only 15 months back to December 2018, when it was still a distant nightmare, despite the fact that the entire global economy now stopped almost immediately.
This is a reminder of how intense the upturn has been in the market over the last few years – and that there may be another downward path. This may be especially true of the US market, which remains the only one that does not trade significantly below the average estimates by most traditional metrics.
So, what can turn it all around? Another 20 percent drop that makes assets so cheap that everyone buys. Vaccine. Effective treatment. We all wake up and find that it was just a bad dream (we are isolated from the week – I already watch too much TV during the day). Or more certain when the recession ends, beyond the vague idea that it will last for about three months. From a positive point of view, we know more about this recession in terms of its causes and likely end than usual.
But I think the things we need to watch out for are coordinated government actions that are really so big that they cannot be ignored. There is already a lot in this direction. Interest has been cut everywhere, while pouring liquidity into markets.
The ECB has recently intervened again. The bank will “expand its balance sheet” (this is a euphemism for printing money) with more EUR 750 billion for the purchase of securities. The Bank of England then took a new step by stepping up its quantitative easing lower its base rate by another 0.15 points to 0.1%.
Three months ago, I was sure that interest rates in the UK would never be negative (the disadvantages are too obvious). I’m not so convinced anymore. But the real issue here is not monetary policy – which alone will never be enough. All the central banks can do is prepare things for large-scale fiscal intervention, and this process is underway.