The sequence of a capital market crash
Moneywise is not featuring our 2020 hypothetical portfolio this month, as market values are significantly down from the beginning of the year.
There were concerns from numerous well-established influential financial luminaries, highlighted on Bloomberg and finance professional blogs and newsletters over the last few quarters with warnings such as: markets are overvalued; market rise is unsustainable; what is keeping the market going?
Various indicators and conditions included:
• Illiquidity in repo markets
• continued corporate stock buybacks generated by stimulus from the US repatriation tax package for foreign profits
• leverage to risk concentration
• ongoing credit issues
• currency and trade wars
• yield curve inversion
• US dollar shortages
• 2019 year-long massive inflows into US Treasury bonds, and record equity outflows during same
• lack of investor confidence and uncertainty
These continued mixed signals (plus more complex ones) notwithstanding, US capital stock markets continued to move upward to all-time highs.
Was there a tipping point? Though these conditions existed prior to the coronavirus catastrophe, with continued illiquidity in markets, massive stimulus through central bank intervention and little to no confidence in current trend viability, global markets turned downward.
Moneywise won't get into all the dynamics, such as the US/global system of repo and reverse repo positioning in the never-ending stream of the components of orderly capital markets. The sheer volume of complex strategies utilised by thousands of financial institutions is beyond one article's description.
Here are just a small sampling of the unprecedented (in our lifetimes) fallout.
• Globally, investors bailed out of anything that represented risk, moving their cash to the ultimate safe haven of dollars and US Treasury bills, notes, and bonds — those prices driven to their highest level ever over par, with lowest yields on record.
• Mortgages again sold to unqualified, higher risk applicants may default, as they did in 2008
• Thousands of firms who pledged stock at a certain valuation for loans, may have found their loan contracts in jeopardy when said valuations dropped like stones off a hill.
• Margin calls, capital calls — leverages compounded as stock values dropped, demands to recapitalise investment accounts increased.
• Corporations now cash scarce due to share buybacks, compounded by consumer isolation, have sought bailout from the US Federal Reserve's $2tn stimulus package. Public backlash is considerable. The bailout will happen anyway, as no country can afford to allow their trade lifeblood to falter, particularly, small businesses must be viable; employees need their jobs.
• Foreign markets scrambling to buy US dollars for their safe, redeemable value pushed the dollar ever stronger against other currencies.
• The concern, the volatility, the thoughts of safety, the get-out-while you can mentality all rising in correlation.
When everyone is selling, who will be buying?
As markets across the globe went negative, the increased selling across the spectrum, starting in the Far East on the Bloomberg Markets website — excellent as always — tracked global indexes descent in real time.
Then, as the selling wave appeared to stabilise, there was a significant reversal as investors thought patterns ascended — BTD “buy the dip” increased. Investors flooded back in on one crucial day, scooping up what were bargain values on great stocks — setting another precedent with the greatest Dow Jones Industrial Index one day rally on record.
But, it was not to last.
In a matter of days as US capital and global markets slid increasingly downward, the US economy (and others) reached the definition of a recession, as central banks increased liquidity with further backstop measures.
As this article goes to press, late on Thursday, global markets are further into negative territory.
Cash is still king
No matter the complexity in investments and capital markets, underneath it all the basics still matter. They always will.
Markets may rise, markets may fall, but at the end of the day they endure.
Commerce itself will never stop. Businesses have to produce. Consumers have to consume. Individuals have to work. Communities have to thrive. Country governments have to provide social sustenance and investment impetus. This is the first time for some of us to witness a major global market meltdown, compounded by possibly the epidemic of our lifetimes.
The value of contingency planning (and a cash cushion) is the most important action you can take for your family.
And, no matter what happens beyond our control, we have to focus on what we have: ourselves and our superior human capital, our drive to survive, our health, our faith, our families, our relationships, our community, and our country.
Listen to the caring voice of scientific reason and experience, Dr Anthony Fauci, who said “We'll get through this” in an uplifting coronavirus bedside message.
Let us not forget the millions experiencing social isolation at home and out of work. Our prayers for the thousands of healthcare personnel, individuals, and families fighting for their very lives.
Thinking of you all. Stay safe. God Bless.
This opinion written from a humble financial planner/layman's perspective who has witnessed/worked in finance environments.
• Bloomberg. “The Financial Market's Stress Is All About the Dollar”. The critical fault-line in the sell-off has been the sudden strength of the greenback, as banks and investors liquidate assets and scramble for cash by Marcus Ashworth (April 1).
• Traders Magazine. “Is the Coronavirus Really Behind the Stock Market Crash?” By Concoda (March 13).
• Dr Anthony Fauci said “We'll get through this” an in uplifting coronavirus bedside message, Dave Goldiner, New York Daily News (March 31).
• Martha Harris Myron CPA JSM: Masters of Law — international tax and financial services. Dual citizen: Bermudian/US. Pondstraddler Life, financial perspectives for Bermuda islanders and their globally mobile connections on the Great Atlantic Pond. Finance columnist to The Royal Gazette, Bermuda. All proceeds earned from this column go to The Bermuda Salvation Army. Contact: Martha.email@example.com