2008 once more? The world may be headed for another global economic crisis

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February 25, 2020 3:15 AM

Given the current economic situation—mainly, the US-China trade war, and the breakdown of corona virus—the world may be headed for another global economic crisis

trade, usIt is, perhaps, significant that the long rally in US equities since the taper tantrum in 2015 was interrupted only when Trump began braying about a trade war with China in 2018.

At the end of last week, I was pondering over how the “respectable” crop of the-world-is-ending analysts seemed to have gone remarkably quiet in the past several months—the crazies, of course, are always there on the internet, forecasting, for instance, that gold will hit $2,500 in 2020, and $3,000 in 2021. I also noticed that gold has crossed $1,600 an ounce for the first time since 2013, representing a huge (37%) jump from its low of $1,170 in August 2018.

Over the weekend, gold continued to shimmer and US Treasury yields slid sharply—both clearly a flight to safety—and, finally, US equities took a hit.

Has the real impact of the corona virus started?

For some years now, many analysts have believed that the next major global crisis would start in China, because it was suspected to be hugely overleveraged; equally, if not more important, nobody knew what was really going on. However, with central banks keeping the money feed so easy, markets all over the world kept rising.

Judging from the way equity markets are behaving today, could that time have come?

It is, perhaps, significant that the long rally in US equities since the taper tantrum in 2015 was interrupted only when Trump began braying about a trade war with China in 2018. The Dow fell 15% in a couple of weeks, highlighting the fact that the health of the US economy—and certainly US equity markets—is very tightly linked to the China relationship.

With the trade war having gone on slow, equities once more jumped on the low interest rate train, and the Dow continued to rise, reaching an all-time high of just shy of 30,000 a couple of weeks ago, a rise of over 40% in the two years since the “start” of the trade war.

But, now, with this new game in town—and huge amounts of anecdotal evidence pointing to a squeeze on, and in some cases, a complete collapse of global supply chains—perhaps the day of reckoning is here. And, given that there is still a huge amount of uncertainty about whether the virus is contained, and the rate of its continuing spread across the world, it would stand to reason that the decline—in markets at least—would be much worse than what we saw when the trade war broke out.

Thus, 25% seems a shoo-in—this would take the Dow to 22,000—and it could certainly be even worse. The 2008 financial crisis saw US equities fall by 50%, and I think we have to be prepared for as much (taking the Dow to 15,000). What is worse, this time, is that most global central banks (not counting the Fed, fortunately) have zero room to cut interest rates. Equally, the tightening of supply chains suggest that domestic prices in many countries would rise, making it that much more difficult for central banks to come to the “rescue”.

All this suggests that the impact on sentiment, and the real economy could be even worse than in 2008-09.

For India, specifically, there could be three different impacts. First of all, of course, is the supply chain effect. Our largest imports from China include electronic equipments (smartphones, etc), machines, engines, pumps, organic chemicals, fertilisers, iron and steel, plastics, and medical and technical equipments. Thus, any or all of these could see hold-ups in shipments resulting in shortages and/or price rises. There are already reports that pharma raw materials are being held up, and there are anecdotal reports of sharp price rises in the sector.

The second impact would be positive for companies that compete against Chinese manufactures; I checked with a friend of mine who is in that situation, and while he is too much a gentleman to celebrate anyone else’s difficulties, he did say that February has been a bumper month for sales. The question, however, is how long that will continue if the overall economy comes under a global squeeze (on top of its already self-inflicted blows).
And, finally, since clarity and transparency are now at even more of a premium than in “normal” circumstances, India’s backsliding on its data integrity, the stone wall of economic planning from the government, and the increasing political unrest suggest that India may suffer more than most.

The rupee has wobbled a bit, but, thus far at least, remains underpinned. How long this will last is anybody’s guess.

The writer is CEO, Mecklai Financial. Views are personal.

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