This is the era of The Sudden Stop.
Coronavirus = uncertainty.
Uncertainty leads to cognitive dread. This can fuel anxiety, and with it, all sorts of issues such as not sleeping, grinding your teeth, being ratty, depressed, unable to cope. It can drive you mad.
M.A.D. It could stand for ‘My Anxiety Disorder’ or ‘Money Anxiety Disorder’’Market Anxiety Disorder’- you get the picture.
Nouriel Roubini – aka Dr Doom for his prediction of the 2008 global economic crisis – has been warning of a global recession.
Mohamed El-Erian, currently Allianz Chief Economic Advisor, is another well known and sought after voice in this space.
He says resist buying stocks as they continue to slide – stating that this time ‘it is different’ to the usual way these things play out – outlined here:
Economic and corporate shock. Global growth slows. Costs go up. Supply chains are disrupted.
Financial disruption. Illiquidity. Stress selling. The need for market funding kicks in.
A bottom is reached: in finance first, then in the economy.
This time it’s not only figuring out where the bottom is, but what happens next. Because disruptions to corporate earnings and economic growth from “shock” events such as the coronavirus tend to stick around longer than more fundamental downturns. This is why El Erian is urging investors to resist buying the dip.
Recovery is about addressing the underlying issue, which is the virus.
Central banks have been resisting stepping in. Whatever they do will be ineffective if the underlying issue – coronavirus – is not addressed.
Yes coronavirus is a problem. But could it be part of a bigger global solution – albeit at a huge price?
At the centre of what I mean by the era of The Sudden Stop is our interconnectedness, especially when you consider our deeply integrated global supply chains, and social media’s role in spreading ‘news’ and information. Markets are falling, pensions set to take a hit. Manufacturing in China has plunged. Events are being cancelled.
Life in villages, towns and schools in certain places is grinding to a halt.
Could it be that we stop. We stop buying needlessly. Traveling thoughtlessly. We stop because we have to, or are scared – for now. And carry it through to the next phase?
Could it be, to echo sentiment regarding market reaction, that this time it’s different?
Uncertainty is different to risk.
Risk you can measure and protect against, uncertainty you cannot.
American economist Frank Knight made this distinction in 1921. A more recent example is what the former US defence secretary Donald Rumsfeld famously called “unknown unknowns”.
Uncertainty means you cannot plan, prepare, protect or predict.
What the world is going through right now shall pass – we don’t know when or how. One thing we can control is how we behave in future – stopping to think before going back to the way things were.
