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The Next Great Depression?
published in Italian on March 23rd, 2020
Unfortunately, Covid19 can no longer be stopped and millions of people are at risk of dying globally. The human suffering will be enormous, both in terms of human losses and the limitations imposed to reduce the spread of the virus.
In Europe and the United States, the total damage of closures and bankruptcies is expected to become apparent in April, when the numbers of overall unemployment start to arrive. For the United States alone, economists forecast between five hundred thousand and five million new unemployed in the next six months.
The coronavirus pandemic could prove to be the worst economic disaster that has ever hit the modern financial world.
Attempts to stop the spread of the virus have led to a global state of emergency, with mass closures of activities (voluntary or not) worldwide.
Thousands of people have already been laid by companies that have not been able to pay for them for the duration of the crisis, and the stock market has suffered unprecedented losses.
To avoid mass panic, Donald Trump even asked his officials not to publish data on the newly unemployed. By comparison, the worst month of the economic downturn and recession of 2007-2008 saw unemployment reach an overall high of 800,000 in one month. While this potential new depression is unlikely to arrive at the 24.5 percent unemployment rate of the Great Depression of the 1930s, Treasury Secretary Steven Mnuchin informed Congress that unemployment could reach 20 percent this year.
Just three weeks ago, I never thought I would write something like this, but the economic shock will be extreme and unemployment in every nation will rise violently. The shock will be so severe that it will leave politicians (global, national, and local) with no choice but to convey far more stimuli than those currently under discussion. The monetary, fiscal, and financial policy will be stretched to its limits, and public debt will increase everywhere.
The perception that spending can lead to a recovery in a recession is the theory proposed by the Keynesian economy, considered the mainstream of the discipline. According to the theory, articulated by John Maynard Keynes in the 1930s, it is the demand that drives the economy. If an economy slows down, either through the difficult “animal spirit” of investors or through a virus, it is massive spending that boosts growth. This expenditure is typically made by public debt.
Small Switzerland started with a combination of Helicopter Money, expanding the possibilities of reduced employment to the entire Swiss labor force, and public debt, guaranteeing financing to every company in need of liquidity.
Indeed, not all countries will be able to afford what Switzerland has done. In fact there will be very few.
Critics of this theory argue that it is the production that drives the economy, not demand. Spending does not create precious resources, only savings. The aim of the recovery should be to let bad investments fail naturally, by cutting spending and managing debt so that productivity can increase. Or, economists warn, in the long run, expense on the debt will destroy the country.
I believe that at this stage, regardless of the different monetary and fiscal policies at stake, governments will only succeed in containing a financial crisis that will be brutal. Ordinary people will stop spending and change their habits by postponing all unnecessary spending. This will cancel not only individual companies but entire sectors, creating a further effect of economic slowdown additional to the shutdown.
But as in any crisis, it will be necessary to know who will be able to benefit from the opportunities that each crisis creates. Humanity will go ahead and adapt as it has always done. New industries will be born, digitization processes will accelerate, globalization will stop in part, and local companies will benefit, who knows what else will be positive in the long term.
Today, however, and very concretely as investors (and well-informed family fathers) we can only:
• Reduce risky positions (if we had any) when the market reacts positively to the palliative care of governments and central banks.
• Reduce the position on ETFs that replicate market performance by favoring instead investment managers capable of generating alpha (the positive difference between their performance and that of the market) that select securities (both equities and bonds) that generate cash and will be able to survive the Great Depression 2.0.
• Pay particular attention to your currency exposure, remembering that in crises, refuge currencies appreciate (perhaps by investing a little something in CHF or SGD).
• Diversify your deposit by investing in Gold/Silver and why not a little something in Bitcoin (cash 2.0 / digital gold).
• Make small, fast trading operations on volatile securities, perhaps (for those who are capable) using derivative instruments.
• Remember that cash is king and that even the Grade Depression 2.0 will have an end. Then the financial markets will rise again, creating opportunities never seen before to those who were cash before the crash (which has not yet invested in its brutality).