22 March 2020: Update on the outlook posted on 24th February (below) – From Dr. Shandi J Modi, IDEAglobal with a contribution by Lord Meghnad Desai on India

US-Led Market Meltdown Virtually all the specific forecasts from the 24th February outlook (see below) have occurred and/or have been exceeded. The basis of my view “then” was the shutting down of the global supply chain from China and global under appreciation of its implications to economic and financial fundamentals, at that time.

The additional spread of the Covid-19 virus to Europe and now USA and the shutting down of virtually all economic activity in these continents, means that the equity valuations inherent in global stocks today will adjust from now towards a drop of between 40 and 50 percent from the levels of February 21, 2020.

This will be led by US stocks and triple B credit market adjustments, reflecting the fundamental devaluations of these credits to the USA lockdowns. We should expect the ugliest seven to ten trading days of downward price adjustments in the next two weeks not seen since pre depression. In this environment there is unprecedented systemic risk. If swap lines are not adequately supplied, then the dollar can continue to be squeezed higher.

The fiscal and “targeted” monetary responses we’ve seen so far, will inevitably have to be scaled much higher and quickly to manage deteriorating fundamentals and psychology.

India is the next country to watch and is about to see an increase in Covid-19 cases.

Prime Minister Modi has tried out a one-day curfew on Sunday 22 March and Kejriwal has extended the Delhi curfew till 31 March. This may start a competitive curfew extension by different states. This is in anticipation of a longer lockdown which will become necessary. India has a much weaker health infrastructure with many homeless people and with low standards of public hygiene. There are signs that India could end up within days at the stage where Italy is today. The economic impact of an acceleration of Covid-19 deaths in India are serious but difficult to calculate for a few days yet. The capacity of the system to tackle a crisis of this order is lacking. As the world’s fifth largest economy, a longer lockdown will inevitably accentuate the deeper global recession underway.

On a positive note, the Paris climate targets which appeared to have been missed “forever”, four weeks ago, are clearly now in sight with the natural waterfall in emissions we have seen as the world economy shuts. Policy makers have a once in a lifetime opportunity to secure the climate future of our planet with strategic and tactical embedding of low or zero carbon covenants-metrics into governments bailouts of corporations and financial institutions.

24 February: 12-year bull cycle is over - From Dr. Shandi J Modi, IDEAglobal

The 12-year bull cycle is over. I see a big 20 percent plus drop, systemic risk due lack of liquidity, and added fast decarbonisation of assets by big funds.

Catalyst is corona virus, which will cut growth significantly more than priced in, like China to 3 percent in 2020, Europe in recession, and USA to at best 1.5 in 2020.

Policy response will be same as 2008. Pushing on a string. This time, credit defaults will be huge reflecting the record leveraging of bbb rated corporate bonds. Gold, dollar, us, Swiss, and other choice treasuries, and natural capital assets are the locations for money allocations. This time, the USA will not be able to fund adequate swap lines to provide adequate cushion for the world. The dollar could easily be 10 percent higher.

By Dr. Shandi J Modi, IDEAglobal