Market Meltdown
Market Meltdown
By Todd Strandberg
It has been absolutely stunning to behold the meltdown on Wall Street. Over the past few weeks, I have witnessed financial events that most economists would have never thought possible. All this activity reminds me of the insanity that occurred in the 2008/2009 Great Recession.
Treasury Secretary Steven Mnuchin raised the possibility with Republican senators that U.S. unemployment could rise to 20% without government intervention because of the impact of the coronavirus. The unemployment scenario raised by Mnuchin would be a dramatic turn from February, when U.S. employment surged. The jobless rate fell back to a half-century low of 3.5% as average hourly earnings climbed a steady 3% from a year earlier.
“Social distancing,” the now-prevalent practice of maintaining approximately six feet of distance from all persons, has been a death knell for businesses that service large groups of people. Airline bookings are down 70%, sit down restaurant traffic is down 95%, movie ticket sales are down 97%, and the cruise-lines industry is halting operations and mothballing ships as they face the biggest challenge since 9/11. In a growing number of cities, food-serving facilities are only allowed to provide delivery or carry-out services.
The economy is like some sharks. If it stops swimming, it dies. I would liken the decision to shut down a vast swath of the economy as airplane pilots announcing he is going to turn off all engines because air traffic control (ATC) announced that the fuel is contaminated with a gritty substance that can damage the engines.
The largest drop in oil demand in history is underway due to the coronavirus. When the price of oil crashed after Russia refused to work with OPEC in cutting the supply of oil, US oil producers got slaughtered. The stock price of Occidental Petroleum was cut in half in a single day. Many of the shale oil companies saw 60-70% declines in their stock value.
Ford, General Motors (GM), and Fiat Chrysler announced plans to close all factories in the United States to protect workers from possible coronavirus infection. The shutdown will last until the end of the month, but the virus will still be here in April. The closure will have a massive impact on the economy.
The downfall of the Boeing Company shows how fast good times can turn bad. The stock price for Boeing was right at $400 per share for several months. The firm repurchased over $100 billion in stock, which helped maintain that high stock price. After the coronavirus triggered dozens of plane cancellations, Boeing’s stock price declined by 75%. Fitch downgraded the company’s debt to BBB, and there are now rumors that Boeing is seeking a “Short-Term” Bailout. A firm that started the year with a $200 billion market cap has now dropped to a modest $57 billion.
The White House is working on a $1.3 trillion rescue plan, which includes sending two large checks to many Americans and devoting $300 billion toward helping small businesses avoid mass layoffs. Priorities laid out in a two-page Treasury Department document also include $50 billion to help rescue the airline industry and $150 billion to prop up other sectors, which could include hotels.
The coronavirus is going to be an absolute disaster for the federal budget. During a good year of economic growth, we still added $1.4 trillion to the national debt. If the early financial numbers are a reflection of the national economy, we are headed for a major recession. Tax revenue is about to plunge, while demand for unemployment insurance and food stamps are set to soar. It is very likely that we will have a $4- to $5-trillion deficit in the coming year.
The U.S. government now owes over $23.5 trillion in debt, or about $71,000 for every man, woman and child living within its borders. It has risen $3 trillion since President Trump took office in 2017 and is almost double what it was just 10 years ago.
The real flood of money is taking place behind the scenes. Federal Reserve head Jerome Powell has committed the Fed to loan agreements of a trillion dollars a day. As I’m writing, he has made repo commitments that total $6.45 trillion. The Fed is buying up bonds, stocks, and mortgages at 100% face value even though many of these assets have gone down in value. Powell can hold onto the bad loans forever.
There is some early indication that bond traders are starting to realize the impact of all this dollar- printing madness will have on the markets. The 10-Year bond got as low as 0.4% on March 9th. It has now soared back up to 1.26%.
My greatest financial fear is that the world will wake up some day and realize they made a huge mistake by making the dollar the world’s reserve currency. It amazes me that every time there is a panic, the greenback is the preferred choice compared to all other major currencies.
Common sense tells me that there is no way for us to pull out of this financial nose-dive. Since God is in complete control, a miracle cure for the coronavirus could suddenly appear and, within a year’s time, traders on Wall Street would dust off their Dow 30,000 hats.
“God has not given us a spirit of fear, but of power and of love and of a sound mind” (2 Timothy 1:7).
— Todd