Coronavirus and the Money Men

The world’s stock exchanges, banks and financial institutions allegedly have at their disposal phenomenal technology power, enormous volumes of information and data and some of the smartest (certainly the most expensive!) minds.  It’s often said that share prices (indices) don’t respond to events, but are determined in advance on the basis of what is going to happen. In turn, it is frequently said that share prices will always reflect the common set of knowledge that is freely known to all.   With that said, it might seem strange to many that the stock markets of the world could be thought to have reacted so very late to the coronavirus pandemic risks.

I should mention here that in a past existence, I worked in investment markets in London, employed by the Private Banking division of a major bank for eleven years after graduation. This time period included the 1987 stock market crash. I will never forget the hours spent on phones talking with desperate, fearful investors  looking for reassurance and guidance as to what they should do. At that time, our advice was that investors shouldn’t panic and sell, but should sit tight. Most were persuaded and thankfully it paid off as the old high levels were regained over time.

This time, however, there are aspects that look mysterious to me, making me skeptical that there may be strong forces that have worked very negatively towards the small investors. First intelligence about the covid-19 virus was received in America and around the world in mid-January. The stock market didn’t waiver and continued to be buoyant right up to 20th February. Only then did it start to fall. We now know that during that period there were fairly significant sales by senior political figures in America who were privy to briefings on the situation. After falling around 12% by 28th  February, the price then recovered more than half that drop by 4th March. Only then did the market turn genuinely negative, becoming something of a rout in the speed prices dropped.

Two weeks later, the stark reality of what the world faced became apparent. I was frankly shocked to see many financial pundits suggesting that the fall in the market had basically completed the ‘fastest bear market ever,’ was now oversold and a golden buying opportunity. Until 26th March it bounced quite strongly higher (giving one of the biggest market rises in a century). Since then, as day after day horrific news emerges around the world and as the full implications on the world’s economy are still not fully fathomed prices have drifted back down.

My suspicion lies around those two rallies in particular. In recent years, certain safeguards in the financial markets have been diluted. These included very strict limits on the ability of financial services companies and banks being both investors in markets for their own sake and market makers for the public. There have also been relaxations in the rules on the levels of gearing that financial institutions are allowed to use. Gearing means that if I have $1m dollars, I might buy $10m value of shares, putting up the $1m as margin (security) for the deal. After some time, if market prices increase by 10%, then I double my money. However, if  prices drop by 20% I not only lose my $1m completely, but I’m obliged to hand over another $1m within a certain amount of time. if I don’t have another $1m I’m busted, bankrupt and the bank has a hole of $1m in its balance sheet.

Margin calls would explain the sharp drop in prices of gold and bitcoin – assets that should have been seen as safe havens in the market storm. Investors had to sell whatever they could to meet the calls. However, I’m also suspicious that those faced with horrendous margin calls played a part in pumping the market back up, even though there was no fundamental basis on which it should rise. This would have enabled them to exit their positions without, at least losing everything. However, this would amount to a fraud on unwitting smaller investors.

It’s very early in the whole scenario, but the media has contained no hints or suggestions of any financial organisation in the world hitting a crisis of liquidity. In the current scenario the last thing any government in the world would want would be panic and a run on banks because of fear over the security of people’s deposits. nevertheless, around the world, banks and financial institutions have been riding a rise in market values that has tempted them to lend very heavily. We’ve already seen banks in India have to be rearranged under the weight of bad debts.

Reports from London reveal that bankers’ annual bonuses were paid out in February and March. So, yet again the ‘fat cats’ are likely to have walked away smelling of roses while leaving the common man to pick up the pieces. The British government had to step in this week and order them not to pay out enormous amounts of money in dividends to shareholders – money that may be desperately needed in the coming months to help out small businesses and distressed borrowers.

There are many ways that the world seems to have learned little from the financial crash in 2008 at the government level or at the level of the man in the street. It’s been a time of improved prosperity for some years. Yet, data suggests that 40% of people in America, just before this virus hit, would be incapable of absorbing a $400 financial hit. And, all this time, they’ve lived in a bubble where marketers and the government encouraged them to consume and consume, as though it was their duty to keep the economy merry-go-round moving.

The reality is this is going to be massively more than a $400 hit for millions. And the financial implications are going to be stark and painful. In a separate article I’m writing I’ll share that whilst this will be painful enough for people living in prosperous economies, the knock on effects for people in developing countries will be devastating, returning millions to poverty and even causing widespread deaths (that won’t show in the coronavirus statistics)

These are dark times, made worse by the hubris and greed of a system that so many said was broken and running on borrowed time. The cause of the carnage in the system might not have been foreseeable (a matter of debate), but many warnings were there. As we hunker down in our billions, locked in our homes to escape this evil deathly disease, we need to spend some time reflecting on the diseases in our world and society that played a part in unleashing it and making its impact way worse. This, believe it or not, is also an opportunity to give thought to the sort of world we want.

For the corporate executive who assessed winning and losing in the world by how much he/ she ducked and dived, out-grafted, out-earned and out-spent his peers – how does that big house (with big mortgage), top of the range SUV, cupboards full of suits, 10 pairs of jeans, bags, shoes etc etc feel now? Are they your source of happiness today and in the future? That car can’t move (in many countries today and maybe more soon). They don’t feed your family and they won’t save the relatives and friends you may lose to this virus. Keeping up with the Joneses is judged by very different criteria today. And maybe all those baubles were simply the superficial rewards for being loyal and dutiful cogs in other people’s bigger games.

A final thought – how busy in February and March were the secretive bankers in the Bahamas, Malta, Gibraltar and the other tax havens? Because it may be that the most powerful had already cleared a lot of their chips (and those of their companies) off the table in full awareness of the imminent storm. That was, just before they issued the layoff notices to employees in thousands.

I’m no communist, or even a socialist. However, we’ve known for long enough that rampant and unchecked capitalism was destroying our world. This may be the pause needed to decide what we want instead. So that we can build a more fair, inclusive and empathic world.

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