2009 vs today

back then

As a result of what I can only describe as massive industry-wide bank fraud, the world woke up one day to realize that major American and European banks were, in effect, bankrupt.  They were stuffed to the gills with virtually worthless securities that the American financial firms had manufactured and sold among themselves and to the rest of the globe.

The really bad news came not exactly from that but from the essential role banks play in world commerce.  Buyers’ banks routinely issue letters of credit to sellers’ banks, guaranteeing prompt payment for stuff when it’s delivered–including a provision that the issuing bank will cover any amount the buyer is unable to pay.  What good does that do the seller, though, if one or both of the banks go belly up while goods are in transit?  So suppliers stopped shipping.

Large companies, armed with supply chain management systems flashing red signals about inventory buildup–and regretting they’d ignored these signs in 2000–determined not to make the same mistake again.  They shut operations down and laid off tons of workers.

The world economy came to a screeching halt.

Many of the I-say-fraudulent-but-no-bankers-went-to-jail securities were based on highly dubious home mortgage loans the issuing banks had made to collect up-front fees and immediately fobbed off to others (the ultimate “dumb money” was, as usual, EU banks).  Those mortgages promptly blew up when economies shifted into neutral, causing a deep housing/construction crisis.

All in all, this was the worst economic calamity since the Great Depression of the 1930s–worse than 1973-74, when the World Bank had to be called in to rescue the UK; worse than the oil shock of 1978; worse than 24% short-term interest rates of 1982; worse than the internet meltdown of 2000.

COVID-19

COVID-19 is certainly a less calamitous situation economically (meaning, writing as a PM, not as a human being) than any of those listed in the previous paragraph.   In many ways, it’s much more clear-cut, too.  But it has its own complications.

–compared with a cyclical business downturn, it’s probably harder to say how much stocks will fall due to COVID-19 but easier to figure how long a time, my guess: about six months, before economic activity will be on the upswing again

–many veteran equity portfolio managers and securities analysts (particularly on the sell side) have been fired over the past decade.  What we’re left with is bots trading on newsfeeds generated by: writers who have lost their industry sources and presenters on financial shows playing acting roles as financial professionals.  Because of this, other than when trading generated by company financial announcements, it looks to me like daily price moves are not as fact-informed as they used to be.  Resulting large moves and swift reversals driven by machines operating on faulty information make short-term trading more perilous (even) than in the past.  They also make it more difficult to “read” the traditional signs of a market bottom.

–the final complicating factor is the potentially dangerous head-in-the-sand approach of the executive branch to COVID-19.  It’s a scary vibe of incompetence.  Although I have no idea how to quantify this, it must be a factor in the intensity of the current selloff.

 

 

 

 

 

 

 

 

 

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