Paris is not so romantic anymore. Is it? Manhattan sleeps very early now. Doesn’t it? Giving hugs and kisses is considered a sign of ignorance now. Isn’t it ? Sitting near your grandparents is looked upon as a risk towards them. Right? Well I read this somewhere today or something similar to it and it imprinted in my mind forever. The world has run out of gas, it feels like, and even that on a deserted highway millions of miles away from a gas station. CoronaVirus has gripped our lives. We woke up in 2020 like we are still sleeping through a nightmare.
Some say that the world is going to end and others say that it a wrath of God. Well, I would refrain from commenting on the world ending or the wrath part because that would involve an emotional statement and at a time like this, as an investment banker, my duty becomes to guide the people as to what I foresee. And my expertise lies in finance and by default the field of investment banking on Wall Street is very intertwined with watching political economy and its volatilities unfold, globally.
So many questions come to mind at once. Will this affect the globalization of the past 25 years ? Will it tilt the balance of economic power away from one region to another? Will America weaken and China or Russia strengthen? Will it create a new trading or cooperation block/s in the world ? Will the world see new currency dominate instead of the Dollar? Will the education system shift from the brick and mortar to an online distance learning based platform, albeit slowly? Will the democracies that will or have failed to protect their people lose value in the eyes of the voters? Will the selfish countries be isolated by the world communities based on their memories from the time of CoronaVirus and non cooperation? Well the questions are endless and most of the answers will be nothing more than speculations. So let us stick to facts. Facts that can be calculated 12 months forward based on numbers in light of 50 years backwards.
Will the world economy collapse soon? No. But if this ordeal continues for another 6 months then we are looking at some very grave consequences. Consequences that this world is not prepared for. Before I go on with my topic, let me shed some light on the facts where people compare this to the events of 2008 world financial crisis. 2008 was a car crash. This could be a train wreck. 2008 was a sudden event built up over a period of a few years based on just one financial product and that product was high risk mortgage securities. It was not an Armageddon. It did not affect the logistics. World tourism. Petrol prices. Airline industries. Textiles around the world. So on an so forth. This affects 193 countries. And all of them at once and in every aspect possible not just financial.
The world GDP as we stand right now is approximately $88,081 billion dollars or $90 trillion. The 1st 3 months since including February and March, we have lost $3.2 trillion in global GDP. World capital markets have lost double that amount. Corporations that declared their earnings or will do so will do it including the month of January when it was not so bad and February when it started to get bad and March where it has become a pandemic. These figures will not look as bad for the next quarter which includes July, August and September. Apple alone is facing a revenue loss of $1 billion a day because of its stores closure around the world. Airlines in Asia alone have swallowed a loss of $129 billion dollars. This loss can never be made back because airlines are already a high debt low profit margin business. Tens of airlines will go bankrupt within the next few months.
America being the biggest economy will pull so many other countries down with it but before it pulls others down, IF this pandemic continues for the next 3 to 4 months, America will see damage to its economy that will be absolutely irreversible. 70 million people are working from home right now. Working from home very soon is going to change into staying at home without work.
The highest unemployment claims came in last week in America, 3.2 million jobless claims. This can increase to a number anywhere between 8 to 12 million within the next 6 months. 12 million jobless claims or even 6 million, half of it, which can be filed next month, spells disaster for America. Why? Because out of work America means mortgage default on homes.
America has approximately $15.8 trillion in mortgage debt. $11.1 trillion or the highest portion of the debt is in home loans. $3 trillion is in commercial properties. $1.6 trillion is in multi family units or what you may call apartment buildings. And $254.1 billion approximately in farm loans. Add to it the national American debt which rose by another $3 trillion in 60 days to above $23 trillion because of the $2 trillion relief package announced by Trump. $2 trillion cannot and will not help America more than a few months, not even 2. It will require a package of $6 to $10 trillion. Which will take the American national debt to its highest level ever. Money that America does not have or maybe has spent on wars, $14.8 trillion, instead of domestic spending or savings.
Back to the mortgages. Out of work Americans means no mortgage payments. No mortgage payments on top of a sinking economy due to deserted roads, no retail, no food, no travelling, no tourism and no money, will create a snow ball of foreclosures. Foreclosures unlike the 2008 bad loans. Here it will be the people with the best credit history and decades of great payment history will be declaring bankruptcies. Corporate earnings for the next 2 quarters dwindling will force companies to lay off people. That will be an icing on the cake. American capital markets may have a few Dead Cat Bounces (quick upward rallies) but the future of it is dependent upon the corporate earnings not Trumps’ plans to inject funds. No corporate earnings like earlier means no investor confidence and no investor confidence means a bleak outlook for the markets.
OIL AND OTHER COMMODITIES
No airlines. No cargo ships. No cars on the roads. No winter where oil is needed as energy. A war of production between Russia and Saudi Arabia which has absolutely backfired in their faces because neither of them foresaw the CoronaVirus spreading to this magnitude within weeks when they were fighting over production numbers in Vienna three weeks ago. 100 million barrel a day world consumption has already dropped to 89 million barrels a day. To add insult to the injury, KSA announced that it will increase its daily production from 9.7 million barrels a day to 12.8 million barrels a day.
Keep in mind that KSA cost per barrel at the well is the lowest in the world, $2.4 cents. But add all the other costs to it, and the fiscal breakeven comes to $83 dollars a barrel. Russia on the other hand has a cost per barrel at the well for extraction is, $22 dollars a barrel, add the fiscal breakeven, because not all of Russia’s income comes from oil sales, like KSA, Russia then stands at a cost of $43 dollars a barrel. Oil trading near its 52 weeks low of very low $20’s, no future demand immediately, high output numbers, high debt situation of KSA, Russia and other oil producing countries, we can expect bankruptcies coming around the world.
Oil trading in low teen numbers for a long period of time can cause devastation to the concept of PetroDollars. The concept that keeps the Greenback alive. PetroDollar evaporates into thin air like the petrol itself when left out of the tank.
If Petrol trade is delinked from the Dollar, that would be death of American currency stability. It might be a great news for many other countries but not for the ones whose income depends on oil sale. Copper, Silver, Gold, Platinum, and many other metals are human intensive extraction processes in confined places, may it be the mines or the refineries. Some of the biggest refineries of metals like Platinum are based in Europe, many in Italy. A slowing demand, no extraction, and no refinement will not increase the prices but lower them because of one factor being absent, the demand.
EUROPE AND ITS ECONOMIES
If anyone thinks that European Union is immune to economic shock, they need to just realise that except a few strong economic powers like Germany or England or France, most have a very fragile economy. Greece and Italy and Spain and Portugal have barely come out of their debt trap. But the problem is that the strongest economies of Europe are also under the grip of this virus.
Germany being the King of Europe has been hit the hardest when it comes to loss of economic activity. We are looking at a financial contagion more dangerous than the viral contagion because by the time we recover from CoronaVirus, economies would have been so weak that recovery will take years. Most of the world runs budget deficits and Current Account Deficits. Its like having a bad heart, weak kidneys and getting Corona-Virus, if one puts it in non-financial terminology.
Almost $20 trillion dollars is the European GDP which represents 23%+ of the global GDP. If one thinks that 23% of ones’ body can be effected by cancer and the rest of the body will remain healthy then needs an Psychiatrist more than an Oncologist. This world cannot assume to have a healthy global economy without a healthy European economy.
In my opinion, EU is more important to the global GDP than China. Because of its maturity of markets and a strong financial system based on hundreds of years of foundations. China lacks both these qualities. China is emerging, Europe already has. A fall of European economy along with a slowdown in the American economy plus a laggard India and over production based China with no buyers in sight, it is a recipe for a soup laced with unseen traces of cyanide.
POLITICALLY AND SOCIALLY Well, regimes standing on long overdue promises, huge percentage of population below the poverty line, a neglected healthcare system and mere past focus on sending based growth, will come falling down. Every country is not as disciplined or controlled as China. China has a grip on its population. Many others do not. The country that would be hit the hardest would be India in this region. I had written an article almost 9 months ago predicting the slowdown of the Indian economy to a dangerous level already.
Many had questioned the article for a few months until it all started to come true. It was the most in-depth article I had ever written on the Indian economy. I had taken the entire Indian economy apart, thread by thread and put kit back together with- out a sewing machine. And nowhere in my wildest dreams had I incorporated economic shocks of CoronaVirus for an Indian economy. It gives me no pleasure to predict doom for any country, even India because my differences are loud and clear but they are with the bigoted regime of Modi and his sidekick Amit Shah. The people of India have just as much place in my heart based on “humanity” as the entire world is, minus the RSS and BJP hate mongers.
Elections in countries like ours, Pakistan, will no longer be based on the promises of roads and bridges. Hospitals and heath care system will be demanded by the voters. Educational system betterment will be asked for. Corona will force the leaders to listen to the voters. Something that has never happened in 73 years in Pakistan. This time is the time when the voters will have the say and not the vote taker. Election debates will be based on healthcare and education. Again I say, if the cure is not here by August, the world can see an Armageddon, a size that the world has never witnessed before in a 100 years or so.
So the conclusion is that IF this continues till August, we are in a depression that this world has not seen earlier not even in the 1929, 1929 was not even 5% as dangerous as the coming one because there was not much to lose at that time, GDP was minuscule. There were no Trillion dollar companies. Globe was nowhere near to be connected enough to have a global economy. Comparing 1929 to 2020 I like comparing the injuries of a person falling off a sidewalk and the other falling off a 10 story building.
Hope you got the picture.You see when I see or forecast something really terrible based on research and numbers, I do not get feared. Why ? Because if it is that evident then it is going to happen, then do what you can do to protect yourself and remain calm. If nothing can protect you then no need to worry because that will only create anxiety and anxiety lowers your immune system and a weak immune system in the CoronaVirus days is more dangerous then a future based financial Armageddon, because that is in the person wit a job to pay for future and this is today. Take care of your today. Yes I thin k if we do not have a cure within the next 6 months, we are looking at an economic disaster that this world has never seen before. The world debt alone is $194 trillion dollars, add to it $29 trillion of the American debt, plus the $15 trillion of Mortgage debt and then add the Corporate debt which is not included in it plus much more, and then realize that no person with a job to pay for all these debts. House of cards will be coming down. And the cards may be made out of solid steel when they fall on our heads.