Crisis 2020 began with coronavirus and, as quarantine measures are lifted, the global economy is expected to recover, which inspires optimism in investors in the stock market. Believing that everything will end quickly is helped by statements by the US Federal Reserve, which promise to give the markets as many trillions of dollars as needed. No one should bet against the United States, and with this statement, few are willing to argue, even Warren Buffett is actively promoting this idea.
But the truth is that according to all forecasts, the global economy is sliding into recession, and sooner or later it will catch up with the stock market. In this article, we will talk about the fact that the crisis could not even begin, and we are at its earliest stage. All the worst is yet to come and no Fed can do anything.
Do you know the history of the once largest US investment bank Lehman Brothers? The history of Lehman Brothers began in 1850 and it successfully existed until our century and in the early 2000s was one of the three largest banks in the United States. But something was wrong with them: the bank issued loans worth $ 680 billion, despite the fact that its assets were 30 times less and amounted to only $ 22.5 billion.
Obviously, Lehman Brothers were at a standstill and 15 September were forced to declare bankruptcy, after which the American stock market collapsed by 33%:
The collapse of Lehman Brothers is considered to be the main cause of the financial crisis of 2008 and its starting point. But is it really so? The S&P 500 shows that before the Lehman Brothers went bankrupt, the stock market was unstable for 427 days and during that time lost almost 20% percent:
And Lehman Brothers acted as the so-called catalyst that pushed the market into the abyss.
What if, today the situation is developing in a similar way? It is generally accepted that the cause of the current crisis is the forced freezing of the global economy as part of the fight against a pandemic. But what if this is just the initial stage? That is, the coronavirus exposed the existing problems, and now the market needs a catalyst, its 2020 Lehman Brothers, which, for example, could become Goldman Sachs?
Another leading global investment bank, founded back in 1869 and now predicting the end of the crisis and market recovery throughout 2020. And although the projectile should not fall into the same funnel twice, and at the current speed of printing dollars, the Federal Reserve will be able to pour an extra trillion dollars into Goldman Sachs if necessary, nevertheless Berkshire Hathaway sold 84% of its shares in Goldman Sachs.
Warren Buffett, who had already received a loss of $ 49 billion, arranged for the sale of airlines. Now he has lost faith in Goldman Sachs and got rid of shares, which he took at a very good price in 2008. And as we know, Buffett's investment strategy does not imply the ownership of companies whose business is at risk.
And what is most interesting, Buffett constantly insists that he should not be put against America, because nothing can stop her. But now the situation is such that we ourselves stopped the train of the economy, took it off the rails and sent it to a standstill, so the markets can be unpredictable. Agree that the position is rather ambiguous, exemplary such as that of the Federal Reserve System.
On Friday, May 15, the Federal Reserve published its financial report about the current state of affairs, and those who were not too lazy and rummaged in these 78 pages could get a little depressed. After all, there are such wonderful phrases as the possibility of falling real estate prices, especially commercial, and land for farmers, because they were very overpriced even before the start of the story with coronavirus.
These were the report data, that is, the document. And here is what said the head of the Federal Reserve Jerome Powell in an interview on Sunday May 17th. The Fed has unlimited resources for lending to the economy, and no one should bet against the United States. The hint is clear: the one who won’t buy will lose, and the investors again brought their money to the market, and the key indices returned to drawing green candles.
But for some reason everyone didn’t hear or didn’t want to hear Jerome Powell’s words, as in the second quarter the country's GDP will fall by 30%, which is not worth waiting for a quick V-shaped recovery. And the vaccine will not appear for a long time, because if it is successfully developed, it will take a lot of time to produce tens of millions of doses.
And markets continue to ignore the fact of the fact that US retail sales fell 16% in April. This is the main driver of the country's economy, and the fact that there are no sales indicates a failure of the idea of helicopter money. They were handed out to people, and now the authorities are deciding whether to throw another $ 3 trillion of new dollars into the economy, some of which will be used for repayments to the population. But there are no bad people: people understand that now those who had savings before the crisis feel good. Therefore, they are in no hurry to spend the money received from the authorities and prefer to limit themselves to the necessary, and put off the rest.
And we also really like how the news about unemployment in America is presented in a positive way. For example, in the previous week, only 3 million US citizens lost jobs. This is not a terrible 6 million per week, as it was in March, and for the next reporting period, only 2 million applications for unemployment benefits are forecasted. The fact that this indicator is decreasing is really good, but why doesn’t anyone say that the number of unemployed is confidently crawling [19459 038] to 40 million people? And after all, these people are still without work, and we did not see anything like it during the two previous crises.
Meanwhile, the assets of the Federal Reserve approached $ 7 trillion:
And as you can clearly see on this chart, if during the 2008 crisis the Fed began to save the markets after they collapsed, that is, the worst thing happened, now the Fed is ahead of the curve, redeeming everything it sees due to unlimited quantitative easing . And as a result, government debt turned on the fast and the furious and headed for the $ 25 trillion mark:
We will not now to say that the markets will collapse in two weeks or the dollar is doomed. Those who make such statements, for the most part, speculate on the attention of others and do not represent or do not want to imagine the real consequences of what will happen if, for example, the United States takes and defaults. Anyone who is waiting for something like this, does not have time to open a specially prepared bottle of champagne, as a neighbor comes out the window, and an SMS will arrive on the phone to dismiss.
But with the current financial indicators of the world economy, you really need to do something, and since they have already started playing the card with coronavirus, it’s logical to go all the way and pierce all the bubbles. This is unlikely to be done now, while people are in quarantine, the public outcry can be too big. But after the situation is supposedly stabilizing, a new Lehman Brothers may well appear, which could not cope with the consequences of the pandemic and launched the “domino effect”.