Stepping Back From The Chaos: The Coronavirus Cycle Of Crisis In Perspective

Stepping Back From The Chaos: The Coronavirus Cycle Of Crisis In Perspective By Daniel R. Amerman, CFA via Gold Seek

The United States is currently reeling, as much of the nation shuts down in the attempt to prevent the spread of the coronavirus. We can only hope for the best when it comes to the containment of the medical crisis, and the lives of so many people in the U.S. and around the world.

At the same time, the economic future of the nation – and financial futures of the savers, investors and retirees of the nation –  is rapidly changing in multiple ways. One aspect is that a recession has almost certainly already started. How bad it gets depends on what path the nation follows with CORVID-19 over the coming weeks and potentially months. While that path can’t be known yet, there is a good chance that the shutdowns will produce a particularly severe recession.

Yes, there is ongoing carnage in the global equities and oil markets as a part of what is happening, but if we step back the daily chaos – major and long term changes are occurring, even if there is a reversal of course for the shutdowns in the coming weeks. Once a national or global recession gets started and much of the economy shuts down – history shows us it takes time to get things going again. We also know that aggressive governmental efforts will be used to aid the process.

One example of extraordinary and persistent change is the illustration above of what could happen to budget deficits. The green bars are the extraordinary projected budget deficits over the coming ten years – before the crisis. The red bars are one possibility for the cost of the stimulus to contain the economic damage from coronavirus crisis this year and get the nation going again over the next several years. In combination this could quickly double the national debt, sending it over $40 trillion before the year 2030 – meaning a staggering increase even before the peak pressure hits the system when it comes to making maximum Social Security & Medicare payments to the peak number of Boomer retirees.

When it comes to investment prices and financial planning very little is likely to be insulated from what is happening. Stock prices, bond prices, home prices, investment real estate prices, precious metals prices, interest rates, inflation rates and financial stability itself (particularly in Europe) are all in play. This is true not just in the current headlines, but in terms of fundamental changes over the coming months and years.

This analysis is not intended as a critique of the actions that are being taken to contain the spread of CORVID-19 in the United States or elsewhere around the word. There are many lives at stake, and the advantages for human life are enormous when it comes to “flattening the curve”, and preventing an overwhelming of the medical system that far outstrips the number of ICU beds and respirators. We are in the early stages, and what lies ahead for the nation in terms of health cannot be known at this time, nor the economic costs.

That said, arguably every element of the financial futures of the savers and investors of the nation are currently in play. We know already that many things have changed, and what many people would have ignored as being “unimaginable” even a few months ago, may be dominant events when it comes to their actual future standard of living and financial security. Four particularly important considerations are briefly analyzed below.

This analysis is part of a series of related analyses, which support a book that is in the process of being written. Some key chapters from the book and an overview of the series are linked here.

Consideration One: Elevated Markets Because Of Very Low Rates

The first and perhaps most important consideration is that the coronavirus economic and market shock is not slamming into normal markets, but quite the reverse. Instead of normality, we had abnormally high asset prices for stocks, bonds and homes that are the result of extraordinary Federal Reserve interventions. Indeed, at this stage and even including stocks, the major asset markets at still at far above historic averages – no fundamental repricing has yet occurred.

As can be seen in the graph above from Chapter One of the book (link here), in order to contain crisis, the Federal Reserve first slammed interest rates down when the tech stock bubble popping resulted in a recession, and then the Fed slammed interest rates all the way down to zero percent to help contain the Financial Crisis of 2008 and the resulting Great Recession.

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