‘We don’t predict the severity of a recession, we wouldn’t know an accurate way of predicting that,’ an Intensity spokesperson tells Metro.co.uk. ‘We’re not prejudiced, we have a big data model and we take it all in.
We let the data talk. ‘If our forecasts aren’t moving, if nothing starts changing, if people hold to their policies, we’re confident that’s what they’re marching towards.
‘We blind backtested with historical data to test. We’re far more accurate than the Fed.’
Remember the 2008 financial crisis? Well, the next Great Recession began this past week, as the U.S. virtually shut down its economy to prevent further spread of COVID-19.
President Donald Trump’s Friday declaration of a national emergency seemed almost anti-climactic. Meanwhile, stock exchanges have been indicating a coming recession for two weeks, as stock prices have gyrated wildly, falling 20% until a partial recovery on the heels of the President’s announcement, according to analysis of data for the Dow Jones Industrial Average on Yahoo Finance.
After the Federal Reserve’s emergency cut on Tuesday of 50 basis points, or half a percentage point, of interest rates failed to stem declining equity prices, the Fed followed with another cut on Sunday evening.
This time it lowered rates to 0% (an additional 100 basis points), alongside pumping $700 billion of liquidity into the economy. In spite of those dramatic moves, the stock market plunged further on Monday as investors questioned whether further rate cuts will stimulate people to buy new homes or automobiles, or companies to increase their capital spending
First, the NBA suspended its season, followed in rapid succession by the NHL, the MLS, the MLB, and most recently, the PGA’s cancellation of the 2020 Masters golf tournament. Then Broadway closed down, followed by cancellations at nearly all major venues. Businesses told their employees to work from home. In Minneapolis, the normally-packed Mall of America parking garages are virtually empty. In New York City, Mayor Bill de Blasio just limited all restaurants, cafes, and bars, to takeout and delivery.
The head of the International Monetary Fund has warned that the global economy risks a return of the Great Depression, driven by inequality and financial sector instability.
Speaking at the Peterson Institute of International Economics in Washington, Kristalina Georgieva said new IMF research, which compares the current economy to the “roaring 1920s” that culminated in the great market crash of 1929, revealed that a similar trend was already under way.
While the inequality gap between countries had closed in the last two decades, it had increased within countries, she said, singling out the UK for particular criticism.
“In the UK, for example, the top 10% now control nearly as much wealth as the bottom 50%. This situation is mirrored across much of the OECD (Organisation for Economic Co-operation and Development), where income and wealth inequality have reached, or are near, record highs.”
She added: “In some ways, this troubling trend is reminiscent of the early part of the 20th century – when the twin forces of technology and integration led to the first gilded age, the roaring 20s, and, ultimately, financial disaster.”
She warned that fresh issues such as the climate emergency and increased trade protectionism meant the next 10 years were likely to be characterised by social unrest and financial market volatility.
“If I had to identify a theme at the outset of the new decade, it would be increasing uncertainty,” she said.
With disputes still raging between the US and Europe, she said “the global trading system is in need of a significant upgrade”.
Trump vaunts his China trade pact – but some say it’s too little, too late
Georgieva said uncertainty affects not only businesses but individuals, especially given the rising inequality within many countries.
She said that “excessive inequality hinders growth and … can fuel populism and political upheaval”.
Eric LeCompte, the head of debt charity Jubilee USA, said: “The IMF delivered a stark message about the potential for another massive financial disaster that we last experienced during the Great Depression.
“With inequality on the rise and concerns of stability in the markets, we need to take this warning seriously.”
We Could Be Nearing The Second Great Depression
It brought to mind an essay I read last week from my favorite central banker, former BIS Chief Economist William White. He was warning about potential currency wars, aiming particularly at the US Treasury’s seeming desire for a weaker dollar. Ditto for other governments around the world.
The Repeat of the 1930s?
Do I think it will happen in any significant way in the next few years? It is not my highest probability scenario. But imagine a recession that brings the US deficit to $2 trillion, possibly followed by a governmental change that raises taxes and spending.
This could bring about a second “echo” recession with even higher deficits. This would force the Federal Reserve to monetize debt in order to keep interest rates from skyrocketing, thereby weakening the dollar.
Couple this with a concurrent crisis in Europe, potentially even a eurozone breakup, resulting in countries all over the world trying to weaken their currencies with the potential for higher inflation in many places.
In such a scenario, is it hard to imagine a desperate president and Congress, toward the latter part of the next decade, regardless of which party is in control, instructing the US Treasury to use its tools to weaken the dollar?
Can you say beggar thy neighbor? Can you see other countries following that path? All as debt is increasing with no realistic exit strategy except to monetize it?
Stock Market Crash is So Bad it Could Start a New Great Depression
Recession Vs Depression
A recession is defined as a period of six months or more of economic slowdown. To be specific, two straight quarters of GDP decline. That’s where we’re heading right now. Morgan Stanley said recession is the new normal:
Recessions are usually temporary. We’ve had 33 of them since the mid 19th century.
A depression is much worse. It is defined as a severe downturn spanning numerous years. We’ve only experienced one – the 1929 Great Depression, and it lasted ten years.
What Happened In The Last Depression?
The Great Depression of 1929 was triggered by the infamous Black Thursday stock market collapse.
The events that followed defined the depression. 15 million Americans (25% of the country) were unemployed, banks collapsed, and world trade dropped 65%.
Small Business Owners Face Bankruptcy
The stock market crash is a wakeup call. But the real economic impact will come from the closure of small businesses. Peter Tchir wrote the following in his newsletter this week:
This is the real problem facing America now. Bankruptcy, unemployment, and delinquencies. These are things that depressions are made of.
The next Great Recession has already begun
The question now is how long this recession will last. In economists’ terms, will it be a V-shaped recession, an U-shaped recession, or an L-shaped recession? Let’s examine these possible scenarios.
A V-shaped recession would indicate a sharp downturn for the next several months, followed by rapid growth in early 2021. In this case, the economy would follow a pattern similar to the early 1950s, when the American economy dipped down for 12 months, followed by 12 months of recovery. If the U.S. gets coronavirus under control through swift containment measures, then that offers the greatest probability of a V-shaped economic rebound in 2021.
The Great Recession that started in 2008 followed an L-shape as it took nearly four years for recovery to pre-2008 levels. Drawing out the response to COVID-19 may simply increase the odds that the U.S. plunges into the much more severe L-shaped recession, which lasts a long time with only mediocre growth on the rebound.
Rather than trying to avoid a recession by keeping things running in a pseudo-normal manner and thereby accelerating the spread of coronavirus, the Trump administration should take the bitter medicine now of pushing for self-quarantines. In doing so, it may save the health of the American people and the American economy.
How ugly could it get? Trump faces echoes of 1929 in coronavirus crisis
The early signals from the coronavirus crisis point to a scale of damage unseen in the modern U.S. economy: the potential for millions of jobs lost in a single month, a historic and sudden plunge in economic activity across the nation and a pace of sharp market swings not seen since the Great Depression.
As the coronavirus outbreak ravages a paralyzed nation, Wall Street suffered another brutal bloodbath on Monday with the Dow Jones Industrial Average diving around 13 percent in its worst percentage loss since 1987’s “Black Monday” crash. A reading on business conditions in the New York area plunged a record 34.4 points to -21.5 in March, suggesting a recession is underway that could be sharp and deep as revenue quickly bleeds out of major industries from airlines to hotels, restaurants, bars and sports leagues.
The Standard & Poor’s 500-stock index, the broadest gauge of U.S. companies, fell 12 percent. It has shed $6 trillion in value since peaking in February, slamming retirement accounts for millions of Americans in ways that could have psychological ripples for many months to come. The last time the S&P had three days of similar wild swings was 1929, on the eve of the Great Depression.
The S&P is now only around 300 points away from wiping out all its gains since Donald Trump won the White House in November 2016. President Trump himself, one of the grandest boasters of the strength and resilience of markets and the American economy, appeared to capitulate on Monday with a more somber tone reflecting the immense magnitude of the challenge facing the nation.
“We have an invisible enemy,” he said, acknowledging that the virus could push the U.S. into recession. “This is a bad one. This is a very bad one.” Trump urged Americans not to gather in groups over 10 and to avoid bars, restaurants, food courts and other public spaces.
The VIX, a gauge of fear and panic on Wall Street, hit 82.69 on Monday — bringing it to territory unseen since the worst of the financial crisis in 2008. Oil prices tanked 10 percent — after a severe plunge last week — as traders bet the virus will ignite a global recession that sharply reduces demand for fuel.
The massive sell-offs have led to suggestions by market professionals that regulators may have to take dramatic steps seen during the Great Depression and after the 9/11 terrorist attacks. That could include shuttering Wall Street — perhaps for days — until more is known about the direction of the coronavirus spread in the United States and until Washington comes up with a massive, bipartisan policy response to shore up flagging industries and direct money straight into the pockets of American citizens losing work as they remain shuttered in their homes at the direction of the government officials.
For now, Securities and Exchange Commissioner Jay Clayton pledged to keep markets open, despite the waves of panicked selling. “Markets should continue to function through times like this,” he told CNBC. Still, many traders expect that if the market plunges several more thousand points, and trips more circuit breakers that temporarily halt trading, the administration could be forced to simply shut Wall Street down.
“With new measures being put in place by the hour, the federal government at some point will have to consider a modern version of the bank holiday imposed by the Roosevelt administration back in 1933,” RSM Chief Economist Joseph Brusuelas wrote in a client note. “That four-day holiday was put into place to restore confidence in the banking and financial system. Perhaps the governing authority should consider a 10-business day holiday until Congress can act.”
Wall Street analysts are already assessing the damage done to the economy thus far: stark and likely to get far worse, very quickly.
“Movie box-office revenues are down more than 60 percent in data through March 15 and more than 70 percent relative to the average of recent years,” JPMorgan analysts wrote in a research note. “Broadway box office revenues were already down about 20 percent relative to trend in data through March 8, and are presumably set to be down essentially 100 percent after theaters closed last Thursday, a result we also expect to see for professional and college sports revenues.”
Restaurant bookings were collapsing in many cities and may now plunge to zero. Streets are increasingly empty as citizens follow government warnings to slow the spread of the virus.