Stock Shock: What Lies Ahead for Global Markets?

Wharton’s Jeremy Siegel and Moody’s Mark Zandi speak with Wharton Business Daily on Sirius XM about what’s ahead for global markets.

Uncertainties continue to multiply over the coronavirus outbreak. U.S. investors saw stock values plunge nearly 20% in the past three weeks. Cases of COVID-19, the new coronavirus, are proliferating outside China; at last count, the Centers for Disease Control and Prevention identified 647 cases in 36 U.S. states.

To add to the bedlam, during the past weekend a price war broke out between Saudi Arabia and Russia, leading to a 25% fall in oil prices. Question marks hover over its potential impact on the fortunes of energy producers.

These factors whiplashed U.S. markets this week, even as global stocks took a beating for similar reasons. Monday, March 9, saw a worldwide rout across markets, with values dropping in a precipitous one-day plunge reminiscent of the financial crisis a decade ago. By Tuesday, March 10, as the Financial Times noted, “Global markets stabilized from heavy losses as investors welcomed signs that policymakers would launch significant stimulus measures to soften the economic blow from the coronavirus outbreak.”

Though European markets recovered slightly that day, investors were still nervous about the nationwide lockdown in Italy, as that country sought to contain its COVID-19 crisis.

So what lies in store for U.S. and global markets in the weeks and months ahead?

Will the world economy sink into a recession? If so, will it be short and sharp — as some economists have predicted — or will we have to contend with a deeper, more protracted downturn?

Under either scenario, how should investors respond?

Should they “buy the dip,” as investment gurus often recommend?

Or should they batten down the hatches and lie low until the storms have passed?

Second, more stock market price corrections may occur, possibly heading into bear-market territory, where prices fall by 20% or more.

Third, more interest rate cuts are likely from the Federal Reserve.

Fourth, stalled hiring and layoffs could worsen unemployment to a point where the recession could grow severe. Siegel and Zandi also offered advice to investors on how they could respond.

Seeking Safety

Major stock indices — the Dow, Nasdaq and the S&P 500 — have shed some 18% in value since mid-February. Investors chasing safety thronged 10-year Treasuries, dragging yields down as they expected more interest rate cuts and offloaded corporate bonds, especially those of companies in travel and energy.

Earlier last week, the Federal Reserve tried to boost the morale of investors with an interest rate cut of a half a percentage point, but that brought limited cheer to the stock markets, as did the results of the Super Tuesday Democratic primaries. Central banks in Canada, Australia and elsewhere also cut interest rates, and G-7 finance leaders explored possibilities of coordinated actions in a conference call.

In order to contain the impact of the coronavirus crisis, Siegel and Zandi believe that governments should offer bridge loans and other forms of aid to small businesses; widen the unemployment insurance safety net; and maybe temporarily cut payroll taxes to give consumers more spending power. President Donald Trump said on Monday that he would work with Congress on tax cuts and other measures.
Looming Recession?

According to Siegel, “earnings [at companies will] be dramatically affected this year” as they grapple with declines in revenues and cost pressures. “We could have a 20% decline in earnings this year, which would be dramatic, and of a recession magnitude.” A recession is informally defined as two consecutive quarters of declining real economic activity, he noted. However, equity analysts “are always slow to put down earnings because they concentrate on micro factors,” Siegel noted. “They concentrate on firms. They are not really geared to try to project what’s going to happen [to the broader economy].”

Zandi said the stock markets “haven’t fully discounted … the possibility of a recession. But they’re on their way. You can see that in the equity market, and even more clearly in the bond market. Now 10-year Treasury yields are at record lows and falling. That’s a pretty clear window to what investors are thinking. If the pandemic is comparable to what the CDC seems to be suggesting will happen, it will be tough to avoid a recession.” The epidemic has resulted in closures of establishments such as schools and daycare centers, disrupted businesses and adversely affected their travel plans, he said. 
Positive Sign

The good news is, if a recession were to occur, the U.S. economy will enter it from a position of strength, said Siegel. As a case in point, he pointed to the latest employment report, which revealed a gain of 273,000 jobs in February, with the unemployment rate holding steady at 3.5%. “If a patient is going to get sick, what the doctors say is the most important thing is he goes into that sickness being healthy,” Siegel noted. “That will mean that he or she will recover the fastest. That is exactly what we see in the U.S. economy. The U.S. economy is going to receive bad bumps. There’s no question about it. But the fact that we are going into that as healthy as we can be is a very strong positive.”

Employment gains have been strong in the past two months — 225,000 jobs were added in January — but they have been “juiced” by mild weather and hiring by the Census Bureau, Zandi said. The jobs gains were disappointing in December at 125,000, to put that in perspective.

“If you abstract from the vagaries of the data, they were probably running around 125,000-150,000 per month,” he said. Job gains have ranged from 128,000 to 145,000 in the previous months, barring a jump to 164,000 jobs in November, according to Bureau of Labor Statistics data. “An employment gain of 125,000-150,000 isn’t bad … and that’s consistent with stable unemployment,” he said.

Still, if monthly employment gains fall below 100,000 on a consistent basis, unemployment will start to rise, Zandi warned. “Once unemployment starts to rise, even from a very low level, that’s the fodder for recession. People can sense that and they will pull back. Businesses will see that and they [too] will pull back. That’s how you get into a vicious cycle known as a recession. So, I don’t think we’re too far away from an environment where a recession becomes a real threat.”
Stock Market Outlook

According to Siegel, whenever investors consider long-term assets, they need to realize that “more than 90% of the value of stocks is dependent on profits more than 12 months out into the future.” He added that earnings reports may be “very bad” in this year’s second quarter and also perhaps in the remaining two quarters of the year, but they could change for the better after that. He noted that according to experts, viruses are self-limiting. “I’m looking at a pretty bad 2020, but I’m [also] looking for a bounce-back in 2021.”

According to Siegel, stock prices were “already too high” in the weeks before the coronavirus outbreak began spreading worldwide. “We were riding too high in that momentum-driven market.” Estimates he made earlier this year about corporate earnings growing 5% in 2020 are no longer valid, he explained.

“That was without the virus. Right now we could get minus 20%. We could get minus 30%. We have not had a bear market since the Crash of 1929, which is defined as a 20% [decline from recent highs]. We could definitely have that. Would that shock me? Not in the least.”

To counter the impact of the coronavirus crisis, the Fed’s rate cut was “the right thing to do,” said Seigel. “Hundreds of billions of dollars of loans are pegged to the Fed’s prime rates, Libor rates, [and also] all sorts of business rates.” He noted that the rate cut of 50 basis points would translate into a proportionate fall in interest payments for small businesses such as restaurants. “It will help. It’ll give them a few thousand dollars more in these months.” He expects more interest rate cuts from the Fed in the future.

Zandi agreed that the rate cut was an appropriate step. “[But] I’m not sure about the execution,” he said. In hindsight, it wasn’t as effective as expected, he noted. The stock markets seemed to give it fleeting attention, and then they continued their free fall. “[It didn’t] go as well as I’m sure Fed officials had hoped.

The market sold off significantly. The Fed’s intent was to shore up confidence in the U.S. and it did the opposite. They kind of spooked investors, so if they had it to do it over again, maybe they do it a little bit differently.” Still, “the Fed doesn’t have a whole lot of room to maneuver here, given where rates are,” said Zandi. The low rates give the Fed little wiggle room to exert more influence with rate cuts.

Fiscal Stimulus

Given those limitations of monetary policy, the Trump administration should use fiscal policy to prime the pump, according to Zandi and Siegel. “[For instance], stepping up Small Business Administration bridge loans to small businesses that might have cash flow problems could very well happen,” said Siegel.

Added Zandi: “It’s about cash flow. Many small businesses don’t have those resources to weather a storm that lasts for more than a week or two.”

Siegel also called for “an emergency step [of] a tax cut.” That would leave more cash in the hands of small businesses and workers who may not get paid or get tips or be laid off. “I think despite the politics of the situation, both Democrats and Republicans are ready to do that,” he said.

“We already have some sort of a fiscal stimulus package that the Senate is looking at from the House. They’ve stopped this bickering back and forth. We may have to look for an emergency tax cut that that’ll give more cash to consumers.”

Zandi agreed. “A temporary payroll tax holiday is a tried and true fiscal stimulus,” he said. “It gets money to lower middle-income households so quickly. It shows up right in their paychecks.” Among the other measures he suggested was to expand unemployment insurance benefits, since many people may not be able to get to work.

Companies that need the most support include those in transportation and distribution, because “they are on the front lines of the hit to global trade” that the coronavirus epidemic is creating, said Zandi. Next in line would be the travel, hospitality and leisure industries, he added. Beyond that, almost every industry in areas where communities are shut down through quarantine or declared as disaster areas will be affected, he noted.

What Should Investors Do?

As stock prices seem low now, should investors try and pick up some on the cheap? Zandi and Siegel had different perspectives on that question. “Most people shouldn’t look [at the market now],” said Zandi. “They should have a long-term investment horizon of five or 10 years. These ups and downs are not relevant. They should just ignore it.”

Investors who are in their fifties and sixties, who are approaching retirement, should wait until the volatility settles down, said Zandi. “Then, it would be a good time to evaluate how invested you are in the stock market, given the volatility that exists there, because you’ll need that money for retirement sooner rather than later. Your horizon isn’t long enough to be investing a large share of your portfolio in stocks.” Zandi also advised investors to avoid trying to re-allocate their portfolios, trying to balance equities with safer asset classes. “[Do not do that] at a time like this,” he said.

“The markets are very volatile, and the S&P is already down almost 20%. I would caution [investors] not to do anything rash. This is a wake-up call for those who don’t like this kind of volatility and can’t live through it. When the dust settles, you can find investments that are more suited to your willingness to take risks.”

According to Siegel, “We all know which industries are going to suffer. I do want to warn people [to] get out of those in the stock market. Even though [those industries are] going to be hit, a lot of that hit has already been discounted in the prices.” He didn’t rule out stock prices in those industries declining another 5% or 6%. If people invest now in those industries, they will “most likely be rewarded a year from now with decent returns,” he added.

To be sure, uncertainty clouds the investment outlook. “Nobody knows how much earnings will be affected in 2020,” Siegel said. But beyond that, one might “assume that 2021 earnings will rebound to the same levels we saw in 2019. But virtually no one can buy at the bottom. Buying stocks at reasonable levels relative to history has always paid off for the long-term investor.”

The long-term prospects may well be why Chinese stock markets seem to be shrugging off the coronavirus impact and moving towards higher prices. Siegel noted that the Shanghai Composite Index is now higher than it was last November before China had had a single case of coronavirus. “How can that be? They’ve been in lockdown.

They’re going to have a recession,” he said. But even as China may be staring at a contraction in its GDP, the investors driving up the Shanghai index may have decided they are going “to look further out,” he said. “The experts say, and we know through experience that these viruses – they have their big impact, and then they’re self-limiting. And we bounce back in 2021.”

How close is the US economy to recession?

The Federal Reserve will be watching the labour market before pushing the panic button

Gavyn Davies

Jerome Powell, chairman of the U.S. Federal Reserve, pauses while speaking during a news conference in Washington, D.C., U.S., on Tuesday, March 3, 2020. The U.S. Federal Reserve delivered an emergency half-percentage point interest rate cut today in a bid to protect the longest-ever economic expansion from the spreading coronavirus. Photographer: Andrew Harrer/Bloomberg
Fed chair Jay Powell justified the rate cut on the grounds of the uncertainty sparked by coronavirus © Bloomberg

Two weeks ago, it would have seemed absurd to suggest that the US Federal Reserve would shortly introduce an emergency cut of 50 basis points in policy interest rates, with a further 50 basis points priced in by the forward market for the Federal Open Market Committee meeting later in the month.

Jay Powell, the Fed’s chairman, justified this week’s rate cut on the grounds of the uncertainty sparked by coronavirus. But normally, only in the case of a sudden, unexpected nosedive into recession, would such a turn of events make any sense.

As yet, there has been almost no stress in the financial system, usually the proximate cause of an economic crash. So what is happening?

It is always difficult to determine whether a recession is under way. Economic commentators frequently use a short-cut, which is to call a recession only after observing two successive quarters of declining real gross domestic product.

Since the first quarter of 2020 will probably record positive GDP growth, this definition will be triggered only if the second and third quarters are both negative. This cannot occur until the figures are published at the end of October. That is far too long to wait.

Alternatively, the generally accepted official announcement of a recession is done by the romantically named National Bureau of Economic Research dating committee, chaired by Robert Hall. This group determines that a recession has started by judgmental observation of some key monthly economic data releases.

In the past, its announcement has occurred between six and 21 months after the recession actually started. Again, this is useful for economic historians but not for today’s policymakers.

What are the alternatives that could help the Fed right now? Statistical models can provide probabilistic assessments that the economy is near a recession. At present, Fulcrum’s model assesses that the US economy is only 2 per cent likely to fall into a recession within the next 12 months.

But these and similar models often differ, and sometimes predict a higher chance of recession even when one does not occur. For example, the New York Fed’s model, which is based on the yield curve — a measure of the level of long-term interest rates relative to short-term rates — indicated a recession probability of 31 per cent, as of February. False signals are a familiar problem.

Economists at the Federal Reserve Bank of New York have recently tried to address these issues by examining many statistical and econometric methods that can help identify the start of a recession as early as possible in a downturn.

The signal likely to be preferred by policymakers in the real world, such as the Fed’s interest rate setting committee, is disarmingly simple and related to the labour market.

The New York Fed authors who developed this method point out that when the unemployment rate has historically jumped by 0.35 to 0.50 percentage points from its lowest level in the past 12 months, the US economy has almost always entered a recession.

It really is that simple. The authors say their method is also reliable and stable for the US economy, even in real time.

On this extremely intuitive rule, there has been no indication lately that the US is yet in recession. The unemployment rate has dropped to 3.5 per cent, the lowest reading in the current cycle and one of the lowest in the postwar period.

The good news is that it can therefore be quite clearly concluded that the US economy was not in recession, or even near recession, when coronavirus arrived in the country in February.

The bad news is that the virus has shown in China, South Korea, Italy and elsewhere that it has the potential to cause extremely disruptive and recessionary forces in any economy where it takes hold (see box for recent GDP forecast revisions).

Although monetary policy should not be the first-order response to coronavirus, it can nevertheless help stabilise markets. The question now is how long the Fed should wait before firing the last of its precious monetary ammunition.

Without clear evidence of a recession, a little patience in the FOMC meeting may be needed.


Possible revisions in GDP forecasts following coronavirus shocks

Macroeconomic forecasters have already decided to revise downwards their GDP growth forecasts for 2020 following the China PMIs for February and the much greater spread of coronavirus in many advanced economies.

Kristalina Georgieva, the director-general of the IMF, has warned that her organisation will reduce the global growth forecast for the 2020 calendar year to below last year’s 2.9 per cent rate.

Many of these revisions are not yet published in full, but we can estimate the likely eventual extent of the changes in consensus forecasts by examining early releases from market economists, including JPMorgan and Goldman Sachs, and also the results of the latest Fulcrum modelling.

Indicative estimates (prepared by Rahil Ram at Fulcrum) suggest that forecast GDP growth for the major advanced economies may be revised down 0.6 percentage points to only 0.8 per cent in calendar year 2020, with Japan clearly experiencing a two-quarter recession, and the EU very close to it.

The US, by contrast, is still expected to maintain positive quarterly GDP growth throughout the year.

Growth in the global economy, including the emerging markets, has been revised down by more than growth in the advanced economies.

Based on the recent PMIs, Chinese GDP growth is likely to be revised down by as much as 2.0 points to 4.7 per cent, with global GDP growth revised down by 1.2 points to only 2.3 per cent.

These results would represent the lowest global growth rates since the Great Recession in 2009.

The writer is co-founder and chairman of Fulcrum Asset Management

Dow Escapes Bear Market With a 6% Rally

The blue-chip index is now up 20% from its low, qualifying as a new bull market

By Anna Hirtenstein, Caitlin McCabe and Chong Koh Ping  

U.S. stocks soared higher Thursday, even after data showed the ranks of unemployed Americans surged in the past week, signaling that investors remain hopeful that a $2 trillion stimulus package can help save the country’s weakening economy.

The Dow Jones Industrial Average climbed 6.2%, putting the blue-chip index more than 20% above its recent low, a move that starts a new bull market and marks the shortest bear market in the index’s history.

The S&P 500 gained 6.1%, and tech-heavy Nasdaq Composite added 5.6%.

Investors had been jittery leading up to the release of the latest unemployment benefits data, unsure of how severely the coronavirus pandemic had ripped through the U.S. labor force. Futures tied to U.S. stocks had declined steeply earlier in the morning, yet pared their losses after it was announced that an unprecedented 3.28 million workers filed for unemployment benefits—five times the previous record high.

The surge in all three indexes after the opening bell marked the third time this week that U.S. stocks opened higher, following a month of steep losses and wild turbulence as the fallout from coronavirus worsened. And even as Thursday’s jobless claims revealed that the economic toll of the outbreak is as severe as anticipated, some investors were already looking ahead to the ultimate passage of the largest fiscal stimulus package in the U.S. in recent memory.

The Senate on Wednesday approved the relief plan, which would provide direct payments to Americans and loans to large and small companies, among other measures. The House is expected to consider the bill Friday. If approved, it would head to President Trump.

“Investors believe data like today will make it more likely that the House will pass the stimulus bill,” said Jeffrey Kleintop, chief global investment strategist at Charles Schwab & Co. “The deeper and the worse the numbers are in the near term, the more possibility there is for a [fiscal] response, which powers the rebound on the other side.”

If the Dow industrials are to reach a bull market Thursday, it would occur just three days after the index reached its recent low. The S&P 500 and the Nasdaq still remain far from a possible bull market.
Gains throughout Thursday morning were broad, with all 11 sectors of the S&P 500 up for the day. Dow heavyweight Boeing Company surged 13% on news that the aerospace giant could receive billions of dollars of assistance from the stimulus deal.

The S&P 500’s energy sector also continued to see sharp gains Thursday. Marathon Oilsurged 11%, Exxon Mobiljumped 2.8%, and Chevrongained 8.5%. Stocks in the sector had been particularly battered by weeks of market downturn, pushed lower, in part, by evidence that the pandemic is leading to an unprecedented decline in energy demand.

Still, oil prices slid Thursday. Brent crude, the global gauge of oil prices, dropped 2.7% to $29.19.

Even as investors looked ahead to the stimulus bill, there’s no guarantee that it will be enough to blunt the economic fallout from the coronavirus outbreak. Nearly 70,000 people have been infected by the virus, and more than 1,000 have died. The U.S. now trails only China and Italy in the number of confirmed cases, even as emergency measures to contain the outbreak has shuttered businesses and sidelined workers.

“The reality is that there’s still a lot of uncertainty to the degree to which the virus disrupts economic activity. Markets are digesting that,’’ said Anthony Rayner, a multiasset fund manager at Premier Miton. “There’s almost a point where the more policy makers do, whether it’s monetary or fiscal, the more people panic in a way.”

Federal Reserve Chairman Jerome Powell said Thursday morning that he expected economic activity to decline “pretty substantially” in the second quarter, following estimates from economists last week that U.S. GDP could shrink during the period far worse than it did in the Great Recession.

The central bank is taking unprecedented action to help ensure economic activity can resume as soon as the coronavirus pandemic is under control, Mr. Powell added in a rare television interview on NBC’s Today show.

Still, some market observers cautioned Thursday that the U.S. stocks rally could likely be temporary—especially as more economic data emerge. Analysts also expect a sharp decline in corporate earnings in the month ahead.

“The market is showing a little bit of relief, but frankly, that doesn’t mean that it’s going to persist,” said Solita Marcelli, deputy chief investment officer for the Americas at UBS Global Wealth Management. “We still have a lot of things that are unknown.”

Investors moved into government bonds Thursday, causing the benchmark on the 10-year U.S. Treasury to retreat to 0.826%, from 0.854% Wednesday.

Outside of the U.S., the pan-continental Stoxx Europe 600 rallied 2.6% after declining for part of the day. The European Central Bank “broke new ground,” said Florian Hense, an economist at Berenberg Bank in a note, after it gave itself more flexibility on its additional €750 billion ($821 billion) bond-purchase program.

Meanwhile, most major stock markets in the Asia-Pacific region closed lower. Japan’s Nikkei 225 lost 4.5%. Singapore’s FTSE Straits Times Index shed 1% after the country forecast that the economy could contract by up to 4% in 2020 in its first full-year recession since 2001.

More Than 3 Million in U.S. Filed for Unemployment Last Week: Live Updates

Right Now
The Labor Department released data on last week’s unemployment claims, some of the first hard data on the pandemic’s economic toll.
Here’s what you need to know:
More than three million file unemployment claims, the most ever in a week.
Credit...Bryan Anselm for The New York Times
Nearly 3.3 million people filed for unemployment benefits last week, sending a collective shudder throughout the economy that is unlike anything Americans have experienced.
The numbers, released by the Labor Department on Thursday, are some of the first hard data on the economic toll of the coronavirus pandemic, which has shut down whole swaths of American life faster than government statistics can keep track.
Just three weeks ago, barely 200,000 people applied for jobless benefits, a historically low number. In the half-century that the government has tracked applications, the most applications filed in a single week had been fewer than 700,000.
“In the whole history of initial claims, there’s never been anything remotely close to that,” said Ben Herzon, executive director of IHS Markit, a business data and analytics firm.
As staggering as the figures are, they almost certainly understate the problem. Some part-time and low-wage workers don’t qualify for unemployment benefits. Nor do gig workers, independent contractors and the self-employed, although the emergency aid package being considered by Congress would broaden eligibility. Others who do qualify may not know it. And the sudden rush of layoffs led to jammed phone lines and overwhelmed computer servers at unemployment offices across the country, leaving many people unable to file claims.
The worst could be yet to come. Mr. Herzon said he expected a similarly large number next Thursday, when the Labor Department releases its report on new claims filed this week.
The Fed chair says the United States may be in a recession already.
Jerome H. Powell, the Federal Reserve chair, said during a rare television interview on Thursday that the United States “may well” be in a recession already, but that it should get the coronavirus under control before getting back to work.
“The first order of business will be to get the spread of the virus under control, and then to resume economic activity,” Mr. Powell said, speaking on NBC’s “Today” show. “The virus is going to dictate the timetable here.”
Mr. Powell’s comments contrast those of President Trump, who has suggested that he wants many Americans to get back to work as soon as Easter, less than three weeks away, and that efforts to slow the spread of the virus by shuttering large parts of the economy should not be worse than the disease itself.
European stocks fall despite progress with U.S. rescue package.
European stocks were trading lower on Thursday, even after lawmakers in Washington advanced a highly anticipated $2 trillion rescue package to bolster the American economy.
Major markets lost about 2 percent by midmorning in Europe, after a mixed day of trading in Asia. Futures markets were predicting Wall Street would open lower too.
Investors had already bid up shares in previous days after the United States began preparing a spending and support plan to help households and companies cope with the coronavirus outbreak.
The Senate passed it late on Wednesday, and it was expected to get approval by the House and President Trump shortly after.
But questions remain about the timing of the support plan and whether lawmakers should do even more, and that left investors nervous. Prices for longer-term U.S. Treasury bonds were up, sending yields lower and suggesting investors were looking for safe places to park their money. Oil prices, a proxy for the outlook for the world economy because they indicate demand for fuel, fell on futures markets.
In Asia, Japanese stocks fell strongly after authorities announcement more confirmed coronavirus infections there, and the Nikkei 225 index fell 4.5 percent.
Other markets moved modestly. Hong Kong’s Hang Seng Index was down 0.7 percent. South Korea’s Kospi index fell 1.1 percent despite the country’s central bank announcing further action to keep its economy supplied with money.
An F.A.Q. on the stimulus bill and your pocketbook.
How much money will individuals get — and how will it be distributed? How are unemployment benefits changing? Are gig workers included?
The Senate unanimously passed a $2 trillion economic stimulus plan on Wednesday that will offer assistance to tens of millions of American households affected by the coronavirus. Its components include payments to individuals, expanded unemployment coverage that includes the self-employed, loans for small businesses and nonprofits, temporary changes to withdrawal rules from retirement accounts, and more.
The House of Representatives was expected to quickly take up the bill and pass it, sending it to President Trump for his signature.
We collected answers to common questions about what’s in the bill.
Trump weighs postponing tariff payments to help businesses.
The Trump administration is considering postponing tariff payments on some imported goods for 90 days, according to people familiar with the matter, as it looks to ease the burden on businesses hurt by the coronavirus pandemic.
Some businesses and trade groups have argued that the levies President Trump imposed on foreign metals and products from China before the outbreak continue to raise their costs and weigh on their profits as the economy is slowing sharply.
But even after the global pandemic hit the United States, Mr. Trump and his advisers have denied that cutting tariffs would be one of the measures they would undertake to buoy the economy.
The White House now appears to be considering a proposal that would defer tariff duties for three months for importers, though it would not cancel them outright. The administration’s consideration of a deferral was reported earlier by Bloomberg News.
It is not clear which tariffs the deferral might apply to, or if the idea will ultimately be approved. But the proposal appears to be separate from a plan announced on Friday by the U.S. Customs and Border Protection that it would approve delayed payment of duties, taxes and fees on a case-by-case basis.
The coronavirus pandemic sweeping the globe with lethal and wealth-destroying consequences has proved so jarring to the powers-that-be on the European side of the Atlantic that they have discarded deep-set taboos to forge atypically swift and pragmatic responses.
“This pandemic is really like a war,” said Maria Demertzis, an economist and deputy director of Bruegel, a research institution in Brussels. “In a war, you do what you have to do.”
The British prime minister, from the party of Margaret Thatcher, has effectively nationalized the national railway system, while forsaking budget austerity in favor of aggressive public spending.
Germany has set aside its traditional detestation for debt to unleash emergency spending, while enabling the rest of the European Union to breach limits on deficits.
The European Central Bank has transcended a legacy often marked by calamitous inaction in the face of crisis to produce something that has frequently seemed impossible: a decisive and timely response.
Beyond the current moment of emergency, some argue that the crisis will be squandered if it does not prompt meaningful change in the structure of economies after life returns to normal.
They portray the rescues as an opportunity to transform the nature of the state’s role in the economy.
“It’s about changing the way we do capitalism,” said Mariana Mazzucato, an economist at University College London.
The oil keeps flowing. Where can it go?
The world is awash in crude oil it doesn’t need, and is slowly running out of places to put it.
The coronavirus pandemic has strangled the world’s economies, silenced factories and grounded airlines, cutting the need for fuel. But Saudi Arabia, the world’s largest producer, is locked in a price war with its rival Russia and is determined to keep raising production.
So storage facilities around the globe are filling up. Huge tankers filled with crude are anchored off coastlines, with no place to go.
“For the first time in history, we are seeing the likelihood that the market will test storage capacity limits within the near future,” said Antoine Halff, a founding partner of Kayrros, a market research firm.
As storage space becomes harder to find, the prices, which have already fallen more than half this year, could drop even further. And companies could be forced to shut off their wells.
The crucial question is not how bad economic numbers will get in the next few months. What matters is whether this will be a severe-but-brief disruption to economic life, from which the United States and other major economies can quickly recover, or the beginning of a long, scarring depression.
To reach the more optimistic outcome, the U.S. government is trying to build, at great speed, a three-legged stool. All three components need to come together to make it plausible to return to prosperity reasonably quickly once the coronavirus outbreak is safely contained.
First, the nation needs to ensure that those who lose their jobs do not experience personal catastrophe with long-lasting effects. Second, it must ensure that businesses with sound long-term prospects don’t collapse in the interim. Third, the system of borrowing and lending needs to remain functional to avoid a freeze-up of credit that would make the other two goals impossible.
The $2 trillion relief package that is on the verge of passing Congress and a series of extraordinary actions by the Federal Reserve constitute the United States government’s efforts to bolster each of those legs.
London hotels, starved for business because travel has ground to a halt, are being enlisted to provide temporary shelter for homeless people to isolate themselves during the outbreak.
The mayor of London, Sadiq Khan, booked 300 rooms for 12 weeks in two hotels that are part of the InterContinental Hotels Group. The move aims to secure places for homeless people to self-isolate as coronavirus cases in Britain surpassed 9,500 on Thursday. Another 200 rooms were booked with other hotel groups.
Matthew Downie, director of policy at Crisis, a national homeless charity, welcomed the effort but said it was nowhere near the scale it needed to be. The number of homeless people across England surpassed 280,000 in 2019.
India, on nationwide lockdown, unveils $23 billion relief package.
On the second day of India’s nationwide lockdown to reduce the spread of the coronavirus, the government announced a relief package of 1.7 trillion rupees, or $22.6 billion, to ease the economic pain that it will cause India’s 1.3 billion residents.
The centerpiece of the plan unveiled on Thursday is an increased ration of free food for the 800 million poorest Indians. The government will give each family an additional 5 kilograms of rice or wheat and 1 kilogram of pulses per person per month for the next three months. The food would supplement existing food allocations poor families already receive.
The most vulnerable people — poor women, farmers, widows, and senior citizens — will also receive small direct cash transfers to their bank accounts.
The extended lockdown is expected to be particularly hard on poor workers, most of whom feed themselves from their day’s earnings. With everyone ordered to stay inside and virtually all businesses closed, these workers no longer have a way to make a living.
For medical workers and others on the front line of the coronavirus response, the government said it would provide 5 million rupees, or about $67,000, of health insurance coverage.
For wealthier workers employed by corporations, the central government will make all the required contributions for the next three months to their state-sponsored retirement accounts.
Reporting was contributed by Vindu Goel, Neil Irwin, Tara Siegel Bernard, Ron Lieber, Peter S. Goodman, Patricia Cohen, Ben Casselman, Geneva Abdul, Amie Tsang, Carlos Tejada, Alexandra Stevenson, Su-Hyun Lee and Heather Murphy.

Coronavirus shutdowns cause glitches in gold market

This week saw a record gap between physical prices in London and futures in New York

Henry Sanderson

FILE PHOTO: Gold bars stacked in the safe deposit boxes room of the Pro Aurum gold house in Munich, Germany, August 14, 2019. REUTERS/Michael Dalder/File Photo - RC2Z4F9PG6QG
Demand for physical gold has 'overwhelmed the system' © Reuters

Supply chain shutdowns caused by coronavirus have led to unprecedented disruptions in the gold market, as traders fear they cannot get hold of enough bullion to settle futures contracts traded in New York.

The price of gold futures traded on Comex in New York, and expiring this month, widened to a $70-per-ounce premium above the London physical gold market on Tuesday, the highest spread on record.

Analysts said it reflected concerns over strong retail demand for gold combined with the closure of Europe’s largest gold refineries in the Swiss canton of Ticino, which borders Italy, where the virus has killed thousands in Europe’s worst outbreak.

By Wednesday, the premium had narrowed to about $22, after Comex’s owner, CME Group, introduced a new futures contract with more flexibility on delivery.

But analysts said the dislocations remained unusually large, for an industry that has long prided itself on its liquidity and ease of trading. The gap between the spot and futures markets is normally a couple of dollars.

“Getting physical gold to the right place at the right time is now suddenly a problem,” said Bjarne Schieldrop, chief commodities analyst at SEB, the Nordic bank.

In the past four weeks, a daily average of $84bn of gold has been traded in London between big bullion banks such as HSBC and JPMorgan, with a peak in early March of more than $100bn, according to the London Bullion Market Association.

The London banks often use futures traded on Comex to hedge their physical trades to customers, but that relationship broke down because of a shortage of 100-ounce gold bars that are required to settle futures contracts in New York. A reduction in flights is also making shipments of gold difficult, traders said.

“Normally the futures market and spot market trade close together,” one trader said. “If they go too far apart you enter in an arbitrage with confidence you can physically settle the trade and not lose money. Now without the ability to move metal around you don’t have the same confidence.”

The glitches prompted CME Group to announce a new gold futures contract on Tuesday evening that could be settled against delivery of 400-ounce or 1 kilogramme gold bars, in addition to the usual 100-ounce requirement.

Until now, the 400-ounce gold bars commonly used in London have had to be melted down and recast as 100-ounce bars to be accepted by Comex. Now they can be sent straight to New York to settle trades.

“This time of unprecedented market conditions has led to growing demand for a broader range of delivery needs for our clients worldwide,” said Derek Sammann, global head of commodity and options products at CME Group.

Gold hit $1,636 a troy ounce on Tuesday, an 8 per cent increase since trading began on Monday, as investors looked for safety amid growing fears that monetary-policy interventions to combat coronavirus — including a pledge from the US Federal Reserve to buy unlimited amounts of government bonds — will lead to inflation. On Wednesday mid-afternoon it was trading at about $1,600.

Demand for physical gold has “overwhelmed the system,” said Willem Middelkoop, founder of the Commodity Discovery Fund. “This wouldn’t have been a problem if the refiners in Switzerland were in business but they are out for the first time in over 100 years.”

Hate Work Travel? That Could Be a Problem for Warren Buffett

Berkshire Hathaway is betting U.S. airlines will overcome coronavirus, but some fear it could permanently reduce demand for corporate travel

By Jon Sindreu

Warren Buffett’s Berkshire Hathaway is the largest shareholder in Delta Air Lines and the second-largest in United Airlines, American Airlines and Southwest Airlines.
Photo: Nati Harnik/Associated Press .

Warren Buffett is betting that U.S. airlines’ coronavirus woes are only a short-term downdraft. Others in the industry are fretting about a long-term danger: that companies ditch tedious work off-sites.

Over the last few days, Delta Air Lines,United Airlines, American Airlinesand Southwest have all slashed routes in response to arguably their greatest crisis since 9/11. Even in countries where Covid-19 isn’t yet widespread, authorities are discouraging people from flying and companies are banning nonessential travel.

Mr. Buffett’s Berkshire Hathawayis the largest shareholder in Delta Air Lines. It first invested in 2016, but used the February selloff to add to its position. The conglomerate is also the second-largest shareholder in United, American and Southwest Airlines.

It is ironic that Mr. Buffett of all people is behind these bets. In his 2007 letter to Berkshire Hathaway shareholders, he famously said that a durable competitive advantage in the industry has “proven elusive ever since the days of the Wright Brothers,” making it “a bottomless pit” for shareholder capital.

Perhaps the legendary value investor just can’t resist scooping up cheap shares: U.S. airline stocks have traded at record-low valuations relative to the broader stock market for some months. But the industry has also changed.

Since the 1990s, when US Airways burned Mr. Buffett, carriers in the U.S. have clocked a decade of profits. Redesigning their networks, limiting capacity growth and using segmentation strategies to boost premium and ancillary revenue have served to offset airlines’ natural tendency to overestimate the benefits of expansion.

The recent moves to cut capacity are a sign of the new discipline. The current crisis may even end up helping the most financially solid carriers, such as Delta, if it sinks over-indebted challengers like Norwegian Air Shuttle.That said, if the global economy falls into a recession, not even best-in-class operators will escape the cyclical nature of the business.

Mr. Buffett and others tempted to bet on a speedy rebound also need to monitor a long-term threat posed by the coronavirus epidemic. Some aerospace analysts fear that it could permanently change attitudes to videoconferencing and virtual meetings. Efforts by companies to contain the virus have included asking employees to work from home and canceling off sites and client meetings in favor of teleconferences.

Such practices, though long possible, have often clashed with corporate culture. If this changes, there could be a structural reduction in corporate travel—which is where airlines make their margins. It could also dent long-term demand for aircraft and hit plane makers Boeingand Airbus.

Indeed, shares in upstart videoconferencing firm Zoom Video Communications are up 60% this year, compared with an 11% fall in the S&P 500, in part because of expectations that they will reap gains from the outbreak.

Investors may be overestimating how much a viral outbreak can shift ingrained habits. The notion that remote working would reduce demand for corporate travel and big-city living was popular 15 years ago, but personal relationships in business have proven more difficult to dispense with than most expected. Far from dispersing people, the 21st century tech economy has appeared to concentrate them in fewer places.

Still, recent improvements in videoconferencing could feasibly tip the balance. Many have experienced asinine corporate trips with colleagues. The nightmare scenario for airlines—and Mr. Buffett—is that they use the coronavirus as an excuse for enduring corporate change.

The Wealth and Health of Nations

The COVID-19 outbreak's implications for the global economy are highly uncertain but potentially disastrous. To understand the risks, one should remember Adam Smith's insight about the true engine of wealth creation, the division of labor, which itself is dependent on the size and extent of markets.

Willem H. Buiter

buiter9_Luciana GuerraPA Images via Getty Images_ftsestockmarketuk

NEW YORK – COVID-19’s implications for the global economy are highly uncertain but potentially disastrous. As of March 5, the World Health Organization had identified 85 countries and territories with active COVID-19 cases – an increase from 50 countries the previous week.

More than 100,000 cases and 3,800 deaths have been reported worldwide, and these figures almost certainly understate the scale and scope of the outbreak.

To understand how the epidemic could cause a global recession (or worse), one need only Adam Smith’s Wealth of Nations, Book I, Chapter Three: “That the Division of Labour is Limited by the Extent of the Market.”

It is already clear that the pandemic could cause a negative supply shock if the amount of available labor were to decline rapidly because working-age people have fallen ill (or died) from the disease.

Worse, unchecked fear of the contagion could lead to the suspension of critical supply chains.

The media are already paying plenty of attention to cross-border supply chains involving China, South Korea, and other frontline countries; but, with links to firms all over the world, these hubs represent just the tip of the iceberg.

Moreover, domestic supply chains are just as vulnerable. As the coronavirus spreads, a larger number of links between buyers and sellers – intermediate and final – will be disrupted.

More to the point, “the extent of markets” will shrink, and the gains from the division of labor – one of the main drivers of the “wealth of nations” – will steadily be curtailed, because more resources will be needed to produce domestically what was previously imported more cheaply from elsewhere.

A return to subsistence production or autarky, even if it is only temporary, would be immensely damaging economically.

On March 3, the British government published an “action plan” that seems to contain a reasonably coherent strategy for heeding Smith and addressing the public health crisis at the same time. The authors call for a sequenced four-stage response: contain, delay, research, mitigate.

But, judging from the coronavirus’s spread in China, South Korea, and other heavily affected countries, the United Kingdom’s chance for containment has passed. On March 4 alone, COVID-19 cases in the country jumped by 60%, and the virus claimed its first life the following day. Many of these new cases (including that of the patient who died) did not involve travel abroad, which suggests that community transmission is already underway.

That puts the UK in the “delay” phase, where the top priority is to identify cases early and isolate them. Heightened public awareness can help here. The goal is to buy time until the warmer months arrive, or until a vaccine has been developed (the “research” phase) and widely deployed.

Once the epidemic has taken root in the UK (and other countries accounting for most of global GDP), we will have fully entered the “mitigation” phase, where the priority is to provide essential services and help those most at risk.

At this stage, the danger is not just that real GDP will grow at a slower rate, but that output and production will enter a material and persistent decline, owing to the disruption of established channels for market transactions.

In this scenario, the initial (Smithian) negative supply shock would soon be compounded by Keynesian demand shocks. The decline in aggregate demand would start with those who are too ill to work or otherwise prevented from working, but it would be magnified by an uncertainty-driven increase in precautionary saving, as well as a fall in capital expenditures.

Worse, the new climate of uncertainty could well last for years, depending on whether the coronavirus becomes a recurrent problem.

With interest rates already so low, further cuts by central banks are among the least effective instruments available for mitigating such economic conditions. Otherwise viable enterprises whose purchasing orders are interrupted for weeks or even months could face bankruptcy.

Central banks, financial regulators, and other policymakers must not only make credit available on easy terms, but also incentivize (or instruct) lenders to keep coronavirus-affected borrowers solvent.

Central banks’ balance sheets offer the means to fix the holes in corporate and household finances. And while such an intervention would inevitably produce a number of zombie firms that eventually would have failed even without the epidemic, addressing that issue is best left for a later day.

Finally, governments should be prepared to pick up the wage bill for workers who are ill or quarantined. And conventional fiscal stimulus (intelligently targeted public spending and tax cuts) can be used to address the shortfall of effective demand.

Policymakers have the economic tools they need to minimize the damage caused by the coronavirus.

But even with those measures in place, the global economy may not be able to avoid a bleak scenario – one resembling a depression more than a recession.

Willem H. Buiter, a former chief economist at Citigroup, is a visiting professor at Columbia University.

Retirees Getting Screwed — One Last Time

by John Rubino

To understand the impossible situation in which most retirees find themselves, let’s begin with interest rates.

When governments raise or lower the cost of credit, they’re communicating with the rest of us.

Higher interest rates send the message that “cash is more valuable, so save more and spend less.” Lower rates say the opposite: “Cash is cheap so borrow and spend.”

Over the past few decades, governments have borrowed ever-greater amounts of money to fund promises ranging from global military empire to cradle-to-grave entitlements. To make these mounting debts manageable they’ve lowered interest rates to encourage individuals and businesses to borrow and spend, thus generating higher tax revenues.

The resulting surge in borrowing has produced a series of ever-more-extreme booms and busts, with each bust requiring even lower interest rates to re-ignite growth.

Why does this hurt retirees? Because as a person approaches retirement age they naturally want to shift more of their nest eggs into fixed-income investments like bond funds and bank CDs. These instruments pay interest and carry relatively little risk, which makes them a safe way to generate income in retirement.

Most of today’s 70-year-olds were told back in their younger, high saving days, to expect an interest rate of 6% or so on their money. So they accumulated amounts that, when earning 6%, would produce enough to live on in retirement.

But a funny thing happened on the way to that perpetual income stream: Interest rates just kept falling as governments, even during economic expansions, needed artificially-low rates to stay solvent. So retirees who expected to live on fixed incomes found that that was impossible.

Not to worry, said governments and many financial advisors, just shift into assets like junk bonds and equities that are only slightly riskier but generate way higher returns, frequently 10% or more per year. Many retirees, seeing little alternative if they wanted to avoid going back to work, did as they were advised.

And now, of course, those “high return” assets are collapsing, sucking retiree nest eggs into a black hole from which they might never escape.

Meanwhile, about your pension

Teachers, firefighters and other public sector workers depend on (frequently very generous) pensions for their main retirement income. But the managers of those funds face the same dilemma as individual savers: They have a return target that they have to meet in order to pay out the promised amounts, but as interest rates plunge the fixed income part of their portfolios isn’t doing its job.

In response, most pension funds have loaded up on stocks and junk bonds. And — because they’re institutions with more flexibility than individual savers — they’ve also embraced “alternative” investments that promised even higher returns. From a February Institutional Investor article:

Pensions Love Alternative Investments More Than Ever
Pension funds remain committed to increasing their exposure to private equity, real estate, and other alternatives, according to a new report from Willis Towers Watson’s Thinking Ahead Institute.  
“The asset allocation to real estate, private equity, and infrastructure in the 20-year period has moved from about 6 percent to almost 23 percent,” according to the report.  
“Alternatives have been attractive for return reasons, offsetting their governance difficulties.”  

Assets of the 22 pensions funds studied in the report increased in 2019, from $40.6 trillion to $46.7 trillion. The average global asset allocation for the seven largest pension markets was 45 percent in equities, 29 percent in bonds, 23 percent in other asset classes, and 3 percent in cash. 
When it comes to alternative investments, the Thinking Ahead Institute said pensions are getting more creative to better align interests between allocators and asset managers and to expand access. Many are doing more co-investments, for example, where they are putting up money alongside private market managers. Others are exploring innovative vehicle structures, such as interval funds, which offer investors periodic liquidity.  
“There is an acknowledgment that there is a way to get better access to private markets ideas,” said Delaney. “Historically, it’s been a relationship business, with the best PE funds always being oversubscribed. Broader access to these double-digit returns is a good goal.”

Now, well…

U.S. public pension funds face nearly $1 trillion in losses -Moody’s
(Reuters) – The market crash and the economic fallout from the coronavirus have led to nearly $1 trillion in investment losses for U.S. public pension funds, Moody’s Investors Service said on Tuesday. 
The credit rating agency said the funds are generally facing an average investment loss of about 21% in the fiscal year that ends June 30, based on a March 20 snapshot of market indexes. 
The severity of the spreading COVID-19, the disease caused by the virus, and government-ordered shutdowns in various U.S. states have weighed heavily on Wall Street, with the Dow Jones Industrial Average erasing over three years of gains in one month. 
“Without a dramatic bounceback of investment markets, 2020 pension investment losses will mark a significant turning point where the downside exposure of some state and local governments’ credit quality to pension risk comes to fruition because of already heightened liabilities and lower capacity to defer costs,” Tom Aaron, a Moody’s vice president, said in a statement.

The big, horrifying takeaway here is in the pension fund allocation figures: 45% in equities, 29% in bonds and 23% in alternatives. Which means the relatively risky stuff — which is currently tanking — is nearly 60% of pension fund assets, while the fastest-growing category, alternatives, frequently contains the most illiquid assets.

Imagine these pension funds trying to cash out of private equity deals or big pieces of real estate in this market. They may be able to escape, but only with big losses.

Many if not most pension funds are now unable to pay beneficiaries their full benefits. So today’s retirees — the people who worked hard, played by the rules, and took advice from the experts — lose coming and going.

All so governments could keep borrowing.