The COVID-19 outbreak has put shocked the world in three major ways, one is demand, one supply and the other is the price of oil dropping to low not seen in years. This is anticipated to see a massive purge of capital and unemployment in the second quarter. This is according to the CIO at Saxo Bank, Steen Jakobsen, who commented that; “In over 30 years of doing this job I have never seen three simultaneous blows to the economy. I am again reminded of 2008, where small events like BNP Paribas closing their high-yield fund, Bear Stearns closing redemptions on its hedge funds in 2007 and ultimately the failure of Lehman Brothers catapulted markets into a fitful, systemic meltdown that quickly disrupted the economic backdrop as well.”
Steen Jakobsen added that, “The markets were extremely difficult to trade in this period, just as it was difficult to comprehend all of the moving parts of the broader economic fallout.” Jakobsen is of the opinion that the current disruption currently being seen has surpassed that seen in 2008 and that the world is now finding itself in a time that markets can rapidly change more in a day that seen in the past.
Steen Jakobsen elaborated that; “A bull and bear market can happen inside of a week. The behaviour of markets this year is completely without precedent and reflects how illiquid markets are. Funds, banks, investors and even companies suddenly see not only a dramatic mark-down of asset prices, but wild swings in correlations across portfolios and swings in P&L.”
During times like these, markets are always those that are most vulnerable to swings when operating with pricing structures that are discontinuous. Explaining, Steen said; “The shakeup we are seeing here in Q1 will change the landscape of investment and risk tolerance going into 2021. But it will also change the long-term allocation model away from a 60/40 bond/equity allocation – or similarly heavy-fixed income-weighted risk parity principles – to proper hedging through commodity exposure (inflation protection) and long volatility (fat tail-discounted price action protection).”
2020 is an Economic Bust
The big whammy to the economy, according to Jakobsen, is that policymakers will have to dig into their pockets to deal with the global recession in hopes of stopping it. Commenting, he stated; “The market is on the brink of spinning out of control as credit, which is everything in today’s market, has dried up — such that US mortgage yields are rising even though 30-year US treasury yields have collapsed. In other words, the market is tightening terms on credit even as the Fed tries to ease by cutting rates.”
The question is whether that system is too unbalanced or broken that is has to get fall even more before correcting itself. However, Saxo Bank has total confidence that after policy measures are put in place in 2020 that the will prompt inflation forces to even things out.
Closing on his comments, Jakobsen said, “The global bull market of 2009-2020, the longest in history, just died of coronavirus. In its wake, we have the weakest economic and political structures since the 1930s. Buckle up, it’s going to be quite an adventure — one like none (save perhaps for the very oldest of us) have seen in our lifetimes.”
Tom Arran
