The coronavirus panic gripping markets, with US stocks falling the most since 1987’s Black Monday and threatening a new credit crisis, is being fueled by a global failure of leadership.
Take President Donald Trump. He had a chance last night to reboot his handling of the rapidly unfolding virus crisis and end the market sell-off. Instead he made several unforced errors, blamed other countries for the disease’s spread, bragged unconvincingly about his crisis-handling, and unveiled plans that fell far short of what experts or the market wanted. It was a debacle encapsulating the worst of his presidency, writes Jonathan Bernstein. Stock futures collapsed even as he spoke, and major indexes plunged today, falling deeper into a bear market and triggering circuit breakers for the second time in a week.
This must be especially painful for Trump, who has claimed credit for every stock-market gain, notes John Authers. He’s now learning why other presidents avoided this: When you claim it on the way up, you own it on the way down.
Trump apparently thinks minimizing the virus’s threat and dribbling out economic support will turn markets around. But investors foremost want him to take the health crisis seriously, writes James Bianco. Other countries have gotten to this point more quickly. Tim Culpan suggests there are stages of virus response like the stages of grief. Later stages include acceptance and aggressive action, as we’ve seen in Taiwan and Italy. The US is still wallowing in the early stage of denial, making the crisis much worse.
And the measures Trump did lay out were inadequate, writes Noah Smith. We need bigger loans to businesses than Trump proposed, along with paid sick leave and drastically expanded virus testing and care. All of that and more was in a Democratic relief bill Trump and Republicans immediately rejected, worsening the market sell-off.
What’s more, Trump’s controversial European travel restriction is almost certainly pointless now that the virus is already here, writes Justin Fox. Even at their most effective, such bans simply delay transmission.
Trump has also floated bailing out affected industries such as cruise lines and shale frackers, businesses far from critical to the functioning of the nation’s economy. Frackers in particular need consolidation, given sagging demand for their product, writes Liam Denning. Supporting them through this crisis is a kind of corporate socialism the Soviet Union would have envied.
Some global leaders are rising to the occasion. Germany’s Angela Merkel, for example, has emerged from weeks of politically necessitated hiding to talk seriously about the challenges of the disease, writes Andreas Kluth. These two have long had opposing management styles, to put it mildly, and it’s never been clearer.
The time between this bear market’s onset and the most recent market peak is the quickest since 1929, James Bianco notes. This is a terrifying comparison, but also a telling one. Back then Franklin Delano Roosevelt successfully calmed the nation by prioritizing honesty, action, and teamwork, writes Cass Sunstein. We’re a long way from FDR.
The European Central Bank didn’t help by failing to deliver an expected interest-rate cut this morning, as its president, Christine Lagarde, apparently surrendered to the hawks. What’s worse, she also delivered red meat to the sovereign-debt bears, shrugging as yield spreads jumped for Italy and other European economies, note Marcus Ashworth and Mark Gilbert.
With one tossed-off sentence — “We are not here to close spreads.” — Lagarde dismantled the sense of safety her predecessor Mario Draghi had provided when he protected the debt of EU member states, writes Ferdinando Giugliano. Good thing there’s no kind of market crisis going on!
At least somebody on Liberty Street in New York knows how to respond to a crisis. For several days now, the Treasury bond market has been doing very weird things, with rates swinging wildly and occasionally rising even as stocks crash, which seldom happens. It turns out forced selling has created something of a liquidity problem in the bond market, Brian Chappatta writes, so the New York Fed leaped into action with a promise of $1.5 trillion in bond-buying.
This very briefly eased the pain in stocks, but soon investors were back to clamoring for more. One thing the Fed should do right away is slash interest rates to zero, writes Tim Duy. There’s no point in keeping its power dry, now that the economy is likely in recession already.
Still, it’s good the Fed has committed to supporting the repo market that greases the skids of commerce, writes Brian Chappatta. This should help keep a market crash and recession from turning into a full-blown credit crisis. Because there probably will be unpleasant knock-on surprises, writes Matt Levine, as leverage and positions built up in the good times suddenly unwind.
As for stocks, the duration of this bear market probably depends less on panic than on expectations of the damage about to be done to earnings, suggests Nir Kaissar. Profit forecasts are already being slashed dramatically, notes John Authers. Expectations are for a v-shaped recovery, but a credit crunch could blow up those expectations.
The Volatility Index is screaming this is like 2008 all over again, writes Barry Ritholtz. That’s either reason to freak out, or an early buying signal. Good luck guessing which!
(Bloomberg)
