COVID-19 pt. 1: The Markets
Since a month or so the humankind entered a quite dangerous cycle of our history represented by the infamous Corona Virus or COVID-19. Going back in human history we’ve had our share of devastating diseases bringing the world to its knees and wiping out a huge percentage of the world population. Usually, scientists agree that there are two types to describe the spread of a virus or a disease — either an epidemic, which describes viruses/diseases that are contained in a certain geographical region like the Ebola in West Africa and the other is pandemic, describing a virus or disease that has spread outside the boundaries of a geographical region and is a threat to the people all over the world. The Influenza, Cholera, Bubonic Plague, Small Pox and HIV/AIDS were and still are some of the most destructive pandemics our world has seen. And now we are on the edge of yet another pandemic caused by the Corona Virus. However, this disease is far from the magnitude of the previously mentioned pandemics and we sure hope it stays this way and dies out rather soon. But this article does not aim to research diseases and their potential spread, but more to see how those types of diseases truly disrupt everyday life and the mechanisms on which our world is built.
In the era of technology and finance in which we are living now, such a disruptive force can really change our everyday life and can have a very strong impact on our future and we are not talking in terms of spreading, death tow and the possibility to get sick. We are talking about the foundations on which our life is built and those foundations today are finance. The world economy has grown so big that no one can actually track the beginning of everything. And our everyday life is strongly influenced by the changes in the local economy of each country as well as by the changes in the overall world economy. From our jobs to the provisions we need on a daily basis like food, water, electricity, heating and many more rely on the stability of the economy. And if we take a close look at the building blocks of that economy we can see that actually those buildings blocks have turned in to matchsticks and I can for sure say that matchsticks are way easier to be knocked over than building blocks. The overall economy has become extremely fragile due to the constant adding of matchsticks to that tower like new investment instruments, new services provided by institutions within the banking system or new speculative instruments. And the main problem with a matchsticks economy is that when you remove a match or something bad happens with it — it can disrupt the whole economic state thus disrupting our lives.
In the case of the COVID-19, a matchstick was not removed, but instead, the disease causes normal human emotions like fear which helped by the media becomes panic and since humans are at the core of today’s economic state, we have the ability to remove matchsticks, and this is what is currently disrupting the overall economy and the markets. Lets’ dig in on how the virus outbreak is affecting our everyday life and by this affecting also the economic state and the markets.
The fear of getting infected causes humans to avoid densely populated places like malls, cinemas or restaurants. It also provokes people to cancel their planned trip abroad or vacations. All of these actions taken by the people are basically removing matchsticks from our tower called economy. As you may know, the modern economy and the well-being of a country’s development relies on consumers and consumer spending. The more the money in an economy cycles the better an economy stands. But with people withholding from daily life activities the consumer spending is slowly moving down and the cycle of money is disrupted. This causes companies to start losing revenue and the expenses of a company start catching up with the profits, which causes the company leadership to look for alternative ways to cut-on expenses often leading to cutting on the workforce, meaning that people are left without jobs. To fight the pandemic in recent weeks many companies were pushed to close their doors and to expand their work within the boundaries of each employee home. Although it is a good approach, it is not sustainable and disrupts the overall working cycle which if prolonged could lead to a negative impact on said companies. People losing their jobs would also affect strongly the consumer confidence, consumer spending and the credit market, as people will cut on their expenses to balance and fulfil their everyday needs. I suppose you can already see how one by one we are removing matchsticks that sustain our economy and this is why media started talking about the world economy going in recession. However many factors are still unaccounted for and we haven’t reached that stage just yet, but the probability of tipping off into a recession rose significantly and continues to rise with the spread of the COVID-19.
We’ve already witnessed the effects of a recession during the 2008–2009 financial crisis and they were not good to a big portion of the world population. The fear and panic caused by the new pandemic now are already being priced in on the markets as we saw throughout the last couple of weeks and the markets are the strongest indication about the state of the world economy. The NASDAQ, S&P500, Dow Jones Industrial Average, DAX30, FTSE100, CAC40, Shanghai SE Composite Index, Nikkei 225, S&P/ASX 200 are already showing the effects of the hit the world economy is taking caused by the virus outbreak. The EUR and the USD have also been losing value as the outbreak progresses. As we can see the world economic state is at risk here, not just one country’s economy.
The next hit came to the Crude Oil price, but this hit was not caused by the virus as much as actions undertaken by certain countries. On Friday the OPEC meeting failed miserably and Saudi Arabia took the opportunity to start a price war against Russia after Russia declined to halt oil production due to concerns regarding COVID-19. This price war actually can be looked from two different angles. Obviously, Saudi Arabia is trying to take a chunk of the world oil market by dropping the price of Crude Oil heavily. This is the angle which the politicians and leaders of Saudi Arabia are playing. However, a low price of oil could potentially be used to fight the economic impact of the CoronaVirus. With low prices of oil, many companies can take a deep breath within those turbulent times as their production expenses are going down. Especially airline companies that took so far the biggest hit from the CoronaVirus spread will have a few moments of relief. However we should add here that sustaining such low prices on Crude Oil would be an impossible task for a prolonged time, so unless the outbreak is contained the positive effects of the lower prices on crude will eventually fade and the markets will most likely continue to fall heavily.
Now getting to the last point of our article regarding the current state of the markets, how investments are being moved and the most important — how we can protect our investments.
We’ve already seen the indices crash during the past week and the overall stock markets showing red throughout the days. The Forex market was not really different as well as the EUR and USD felt the effects of the virus outbreak. There is still no certainty on when the virus could be potentially contained, so we have to assume that the situation will not get much better in the upcoming weeks. It seems that the money flow has turned to safe-haven assets such as Japanese Yen and Gold. I expect to see this trend continuing as the situation progresses. We need to note here that all the new data that supports the overall economy is not yet published and has not taken into account the effects of the COVID-19, meaning that I expect a strong drop in Consumer confidence, Consumer Price Index and Consumer Spending in the following month. We might even see a slight rise in the Unemployment Rate and most likely a drop in the NFP, which would cause additional panic throughout the investment world and most likely have a negative impact on the markets. If the crisis deepens and we get closer to the recession the Unemployment Rate will most likely rise significantly and the GDP will start dropping. Although all of those statements currently are in an “IF” state, we need to be prepared.
We are in a very delicate situation now as central banks around the world used most of their hidden cards to tackle the effects of the Trade War and with the current negative rates they don’t have much room to operate making the virus even more dangerous for the world economy. Not only that but throughout last week we’ve seen the Bond market also getting strong hits with the US 10-year Treasury Bonds hitting a low of around 0.31–0.32% and the US 30-year Treasury Bonds dropping below the 1% mark. I’d say that currently, the Bonds market is no longer such a safe bet for investors.
The cryptocurrency market also felt the effects of the panic caused by the virus with both Bitcoin and Ethereum losing a lot of their value. However, I see two potential reasons for that, since as we know the cryptocurrency market does not have such a direct link to the legacy economic system. I believe that either whales are pushing the prices down, setting up the stage for a possible recession during which they’ll be able to jump back into the crypto market on a lot lower prices. Another thing that might be causing this drop is directly linked to the companies operating on this market. As we know those companies actually have one foot in the crypto sphere, but the other one is still in the legacy economic system as wages and resources are paid with fiat money. We might see a change into that in the near future, but for now, the situation is what it is.
So how can we protect our money and our investments?
For me, the best and probably one of the oldest ways to sustain the value of your money is to invest them in precious metals. We’ve already witnessed the Gold hitting the 1700$ mark and I believe it will continue to rise in the upcoming weeks, probably even months. We need to consider that at this price the Gold is not the best investments in terms of return, so I’d take my eyes off it and would move my investments in other precious metals that are currently trading way lower but have the potential for a nice rise like Platinum or Silver. Both of those precious metals are close to the lows of 2019 which makes them a lot better opportunity in terms of value. Although Switzerland was strongly impacted by the Coronavirus it seems that the Swiss franc is holding its’ stance against the EUR or the USD, so I’d also consider relocating some of my money to CHF and JPY. However, I would not take a big risk with them due to the possibility of the world economy going in recession. A big portion of my portfolio will be reserved for DeFi instruments and the crypto sphere as its’ connection to the legacy economic system is not that big and the exposure to processes such as recession are low. Moving money in a stable coin like DAI could balance your portfolio and keep it safe from sudden devaluations of the dollar. However, I would not let my DAI sit around and I’d most likely use it in a lending platform so I can gain a passive income from that money which is enough to cover the loss of value due to inflation. Of course, those are just suggestions on how I’d approach the current situation in order to protect my capital. As soon as the storm passes I’d hop back into the stock market and await the new bullish cycle to begin.
I’ve tried to cover most of the upcoming effects of the COVID-19 outbreak and the possible scenarios ahead as well as a few suggestions on how to prepare for a recession and future market crashes. We are still not there yet, but it is always good to be prepared for the worst-case scenario. Of course, many more things could happen which we can not take into account or predict so whatever you do — don’t forget to constantly follow up on the market’s development and adapt accordingly.
