Updated: May 2, 2020
Many people are familiar with the word ‘crisis’ and generally it has a very negative meaning, the term usually comes together with fear, unrest and despair in the thoughts of the average person. This is a side effect of human psychology, ignorance and insufficient financial literature.
In the Chinese language the word ‘crisis’ is composed of two characters, one representing ‘danger’ and the other ‘opportunity’.
The term originally has a neutral meaning; to separate, distinguish, decide, settle, direct and judge. A crisis can be seen as "a moment of truth" where a decision must be made that has a major impact on the future.
A crisis is any event that is going (or expected) to lead to an unstable and dangerous situation affecting individuals, groups or societies. It’s often linked to psychological stress and goes along with a frightening experience. A crisis is often the result of a complex system that functions poorly (the are two types of systems: a complex system and a simple system, a simple system can’t go into crises).
A society, city, country or whole society will only use the term ‘crisis’ when an immediate decision is necessary to stop further poor functionality of the system. As there are different structures and systems in this society there also are different types of crisis that can occur, each of them has the same basic characteristics. Crisis characteristics:
· Creates uncertainty
· It’s seen as a threat
· Need for a change
This leads to the next chapter, information about the corona virus and the different types of crises known to mankind.
Health Crisis – COVID 19
What is a Coronavirus?
Coronaviruses are a family of viruses that cause disease in animals. Seven, including the new virus, have made the jump to humans, but most just cause cold-like symptoms and are known to affect your lungs and airways (respiratory system).
Coronaviruses are responsible for up to 30% of common colds. Corona is Latin for “crown”. This group of viruses is given its name due to the fact that its surface looks like a crown under an electron microscope.
The virus can be passed on through:
· Coughs and sneezes
· Using contaminated items
The symptoms include:
· Fever / high temperature
· Coughs – shortness on breath
The name of the virus
The name for the virus and the diseases it causes have been announced by the World Health Organization (WHO) and the International Committee on Taxonomy of Viruses.
The disease is called coronavirus disease. It is abbreviated as COVID-19.
How did the outbreak start
On 29 December 2019 Chinese authorities identified a similar cases of pneumonia in the city of Wuhan in China. Wuhan is a city with 11 million residents and is the capital of the Hubei Province. These cases were soon determined to be caused by a novel coronavirus that was later named SARS-CoV-2.13.
The first cases of COVID-19 outside of China were identified on January 13 in Thailand and on January 16 in Japan. On January 23rd the city of Wuhan and other cities in the region were placed on lockdown by the Chinese Government.
The outbreak of Covid-19 has spread to most of the world, it is one of the most serious public health crises in decades. It has spread far wider than Ebola did in 2014, and the World Health Organization has designated it a pandemic.
The situation on the ground is evolving incredibly quickly, and below you can find charts & numbers representing the increase in cases:
The charts above represents the estimated number of total cases & deaths.
While the previous chart represented the total amount of cases & deaths (estimated, at the time of writing) the next chart represents how fast the virus spreads in each continent:
How dangerous is the Coronavirus?
From the 285.772 people that got infected with the Coronavirus ‘only’ 11.876 people have died from the virus (= 10 to 11%), yet after a series of experiments, done by scientists, they found out that for each new infection 2.5 other people will be infected.
Below you'll find an overview representing the total confirmed cases, deaths and the amount of people the recovered from the virus.
Different types of crises
When talking about a period of crisis, there are different types of crises and different causes that lead to crisis. This is explained in the list below.
Environmental or ecological disaster:
1976 – Seveso disaster (release of dioxine)
1986 – Chernobyl disaster
2002 – Prestige oil spill
1963 – birth defects
2003 – SARS
2014 – EBOLA virus
Constitutional crisis (political crisis)
Egypt President Mubarak was removed and the country was left without a president until President Morsi was elected and then again when Morsi was arrested until President Al-Sisi took office
Denmark King Christian X of Denmark dismissed the country's cabinet.
Economic crisis (= Financial Crisis)
1920 – Depression of 1920-21
1929-39 – Great depression
1970 – Energy crises
1979 energy crisis
2008 – Financial crises
2020 – Black Monday (09/03) and Thursday (12/03)
Here are different types of crises that can have major consequences for the future of the well-being of the world or of a (number of) country (s). The crisis that we are currently experiencing is a natural disaster leading to a financial crisis that is being felt worldwide with all its consequences.
IN-DEPTH: Economic Crisis
An economic crisis or financial crisis is a crisis where some assets suddenly lose a large part of their normal value, in the last 100 years there have been multiple financial crises such as the 1929 great depression, 2008 housing crisis,…
Financial crises can be divided into different types of crises:
· Banking crisis
· Currency crisis
· Bubbles and crashes
· Financial crisis
· Economic crisis
A banking crisis occurs when a rush of withdrawals is requested by the depositors, this is called a bank rush. It’s difficult for banks to pay back all of the deposits if they are suddenly demanded since the bank tends to lend out most of the cash they receive (= this is called frictional-reserve banking).
This causes customers to lose their deposits to the extent that they are not covered by the deposit insurance.
A currency crisis is considered as a part of a financial crisis, and also goes by the name of ‘devaluation crisis’. It can be defined as a situation when the participants in an exchange market come to recognize that a linked exchange rate is about to fail, causing speculation against the link that hastens the failure and forces a devaluation
Bubbles and crashes
A bubble only exists in the presence of large, sustained overpricing of some assets. One factor that frequently contributes to a bubble is the presence of buyers who purchase an asset based solely on the expectation that they can later sell it at a higher price, instead of calculating the income it will generate.
If there is a bubble, there is also a risk of a crash in asset prices: market participants will go on buying only as long as they expect others to buy.
However, it is difficult to predict if an asset's price actually equals its fundamental value.
A financial crisis is a situation whereby the financial assets it’s value(s) fall rapidly in an economy. Due to this, assets decline in value, consumers are unable to pay their debts and financial institutions are faced with liquidity shortages, causing economic instability.
An economic crisis is a situation where a country experiences a sudden downturn due to a financial crisis. This results in drying up of liquidity, high rate of unemployment, low production levels, a falling GDP and economic fluctuations as a result of deflation or inflation. An economic crisis can be in the form of a depression or a recession.
A new financial/economic crisis is coming
Whether you realize it or not, we are on the cusp of the greatest financial crisis the modern world has ever known — and it all revolves around debt. Practically every nation in the world is in debt, but it's far worse than most people realize. You know that $22 trillion dollar US debt number that everyone always talks about? Well, that's only the government's debt. The total debt of the US can be seen in the "unfunded liabilities" numbers. That takes debts like student loans, personal debts, mortgage debts, credit card debts, social security liability, and medicare liability into consideration. When we factor all of those debts, and add it to the $22 trillion dollar number that everyone always talks about, we get a more realistic look at what the US debt situation is actually like. According to the Federal Reserve's official numbers, the US unfunded liabilities are a staggering $125 trillion dollars. To put that into perspective, the value of all US assets (our real estate, buildings, technology, intellectual property, business giants, transportation systems, infrastructure, etc.) totals about $155.8 trillion. In other words, the US's unfunded liabilities are over 80% of the entire value of our national assets. And that's ONLY the US.
Practically every other developed country in the world is in debt. In terms of national debts alone, the US has $22 trillion, China $9.5 trillion, Japan $12 trillion, Germany $2.2 trillion, UK 3.5 trillion, India $2.8 trillion, France $3 trillion, Italy $3 trillion, Brazil $2 trillion, Canada $1.8 trillion — the list goes on and on. And let me remind you, those are only GOVERNMENT debts. Not the unfunded liabilities of those respective countries.
People, we have a major global debt crisis right in front of our faces, and it's getting worse, and worse, by the day. If something isn't done to change the acquisition of debt worldwide, we will eventually see a financial meltdown like the world has never known.
In my view, here is how it will start. Since Federal Reserve banks set interest rates worldwide, they have been able to enjoy the economic benefits of growing a debt-based economy, with the LUXURY of new debt being subjected to low interest rates. Meaning, people and businesses acquire debt, at low rates that the Fed has created. However, I believe that Reserve Banks will eventually lose control of interest rates, and that is where the collapse will begin.
You may be wondering how Reserve Banks could lose control of rates. The answer is demand. Since interest rates and bond prices have an inverse relationship, I believe that bond prices will eventually crater, due to a sudden collapse in demand for debt. In other words, owning debt is becoming increasingly risky, as debt continues to climb, while NOBODY PAYS THE DEBTS!! Who is going to want to own debt, when practically NOBODY is paying it? Eventually, I think demand for debt will collapse, and therefore bond prices will collapse. When bond prices collapse, interest rates will skyrocket, regardless of what federal reserve banks want to "set" them to.
In this scenario, tens of trillions in global debt will suddenly be exposed to inflated interest rates, which will cause these debt figures to swell exponentially. The debt could rapidly grow into the hundreds of trillions, or even quadrillions of dollars. This is how I believe we could see a global currency crisis, and potentially war, as a result.
Now, there are things that Central Banks can do to prolong the inevitable. They could print more money (which they will.) They could suppress interest rates (which they are.) They could even take rates negative, like Japan did. That means that central banks could start charging depositors a fee for their deposits. The intention is to incentivise depositors to keep their money out of the banks, and circulate through the economy. It's an inadvertent form of economic stimulus, and extremely bullish for cryptocurrencies. Either way, the outlook is very grim, in terms of global debt.
So, when can we expect this crisis to erupt? Well, I think it will be born out of the next recession. And I believe that the next recession is most likely less than 18 months away. We've seen an inversion of the yield curve. We've seen the Fed reverse course on rates, showing us all that they are too scared to hike 0.25%, for fear of collapsing the market, causing a recession, and a debt crisis as a result.
I fully expect to see the US Federal Reserve cut rates again, AND return to QE . They will pump the economy with worthless money hot off of their presses, and they will probably be successful at temporarily preventing a complete collapse. But folks, this system is BOUND TO FALL, and eventually, it will.
As a side note, US unemployment is at record lows, and it tends to bottom out before a recession. I believe that the US labor market is reaching a point of saturation, and that will likely cause growth to stagnate, which will contribute to the emergence of a recession.
So, the chart in front of you is something that we've made in the past. It's a recession indicator. I know that other people follow the initial claims movement as a recession signal, but I have tweaked it to perfection. The black line is the Initial Jobless Claims. The blue Line is the S&P 500 . As you can see, when the 25 MA (in BLUE) crosses above the 100 MA (in RED) it has corresponded to an absolute peak in the market, and a subsequent recession. In October of 2000, the signal triggered right at the top of the dot com bubble. Then, in October of 2007, the signal triggered again right at the market high before the Great Recession. Now, the stock market is nearly three times higher than it was then, all thanks to the trillions of dollars of worthless money created by the Fed, during QE1, QE2, and QE3. The recession will be just getting started.
Last week the initial claims jumped 33% (= 70.000 new jobless people).
Business behavior after a crisis
After a crisis, the way of doing business or conduct of business can be influenced by various factors such as the sensitivity of the sector to the economic cycle, the financial situation of the institution / sector, the size of the company.
First and foremost, a company will reduce the cost level, all kinds of unnecessary activities will be shut down and possibly closed. They will start doing things that are outsourced to an entrepreneur because this is cheaper, such as recruiting new workers.
Employees will be assessed more rigorously on their performance and encouraged to increase labor productivity. Likewise, wages will no longer be increased and will be temporarily frozen, even with a profit most likely no bonus will be awarded to hold a buffer if it did not run as anticipated.
Dismissal should also be feared during a slump. Sacking or stopping staff can be a double-edged knife, firing staff or hiring can be cost-effective, but it can also lead to the lack of qualified or skilled staff available that could lead to quality loss. As a result, a company may still run into problems after the economic crisis.
Ultimately, multiple companies will go down during an economic crisis, there is almost always an increase in liquidations and bankruptcies of companies (large and small scale).
Before speaking about a safe haven we first need to define a safe haven and understand the term ‘safe haven’.
What is a safe haven?
A safe haven is an investment that is expected to retain or increase in value during times of market turbulence. Safe havens are sought by investors to limit their exposure to losses in the event of market downturns. However, what appears to be a safe investment in one down market could be a disastrous investment in another down market, and so the evaluation of safe haven investments varies, and investors must perform ample due diligence.
An investor’s portfolio must contain diversified investments and is beneficial in times of market volatility. Most times, when the market rises or falls, it is for a short period of time. However, there are times, such as during an economic recession, when the downturn of the market is prolonged. When the market is in turmoil, the market value of most investments falls steeply.
While such systemic events in the market are unavoidable, some investors look to buy safe haven assets that are uncorrelated or negatively correlated to the general market during times of distress. While most assets are falling in value, safe havens either retain or increase in value.
Examples of safe havens:
1. Gold For years, gold has been considered a store of value. As a physical commodity, it cannot be printed like money, and its value is not impacted by interest rate decisions made by a government. Because gold has historically maintained its value over time, it serves as a form of insurance against adverse economic events. When an adverse event occurs that lingers for a while, investors tend to pile their funds into gold, which drives up its price due to increased demand. Also, when there is a threat of inflation, the value of gold increases since it is priced in U.S. dollars.
2. Treasury bills (T-bills) These debt securities are backed by the full faith and credit of the U.S. government and, hence, are considered safe havens even in tumultuous economic climates.
3. Defensive stocks Examples of defensive stocks include utility, healthcare, biotechnology, and consumer goods companies. Regardless of the state of the market, consumers are still going to purchase food, health products, and basic home supplies.
4. Cash Arguably, cash is considered the only true safe haven during periods of a market downturn. However, cash offers no real return or yield, and is negatively impacted by inflation.
Currencies as a safe haven
The Swiss franc is considered a safe haven currency. Given the stability of the Swiss government and its financial system, the Swiss franc usually faces a strong upward pressure stemming from increased foreign demand.
Switzerland has a large, safe, and stable banking industry, low-volatility capital market, virtually no unemployment, high standard of living, and positive trade balance figures.
The country’s independence from the European Union also makes it somewhat immune to any negative political and economic events that occur in the region. Incidentally, Switzerland is also a tax haven for the wealthy, who take advantage of the country’s high-security and anonymous banking features to evade taxes and hide ill-gotten funds.
The Japanese Yen still has it’s safe haven status, Near-zero interest rates have almost become the new norm in developed countries, so the relative attractiveness of the Japanese yen is less evident. Japanese banks have also become more risk-seeking, particularly abroad, whereas their European and American peers have attempted to make boring banking exciting again.
The Japanese financial system is comparatively more fragile than a decade ago. Japan has an extraordinarily high debt-to-GDP ratio, an economy that shrank 7.1% on an annualised basis in the fourth quarter of last year, an ageing population, and is geographically and economically close to China. This proximity makes Japan particularly sensitive to fluctuations in US-China trade relations and, of course, the spread of the coronavirus.
But fear is not the same as panic. With Italy having placed 16 million people under quarantine and Saudi Arabia launching an aggressive oil price war, the real test took place on Monday March 9. Neither fear nor panic are enough to describe how the financial markets opened that day. Newspapers would describe it as a “bloodbath” or “Armageddon”.
In the midst of this, the Japanese yen hit multi-year and even all- time-highs against a range of currencies. On the next huge market sell-off on Thursday 12, the yen was again in very high demand.
Gold as a safe haven
Gold, known as the safe haven asset, historically becomes more valuable during times of geopolitical turmoil. Approximately 20% of the above ground stock of gold reserves is held by central banks and international monetary organizations. In addition, gold and the U.S. Dollar typically have an inverse relationship since international gold is dollar-denominated. Weakness in the dollar pushes up gold prices and vice versa.
Gold mining happens on every continent except for Antarctica and is extracted from mines of widely varying types and scale. China was the world’s largest gold producer in 2018 and accounted for approximately 12% of total global production, followed by Australia, Russia, the United States and Canada. The world's gold production affects the price of gold, and like most commodities, the price of gold depends on supply, demand and short-term trading by speculators.
Supply and demand of gold is in relative balance presently but because no absolute estimate of how much gold is left to be mined in the world exists, it’s impossible to know exactly how long current reserves will last. Gold is scarce and a majority of exploration activity by gold mining companies does not find commercially viable quantities of gold. Once a suitable ore body is identified it generally takes at least ten years to develop a large-scale gold mine.
Price VS Value
Gold’s price is tangible, measurable in any currency you choose and subject to market forces. Gold’s value is far more conceptual. It is reflected in its anonymity and portability for those fleeing from risk or danger, while its very low or negative correlation with virtually all other asset classes, as well as its role as an inflation hedge, makes it a valuable component of a portfolio as it expands the efficient frontier (higher reward for same risk and vice versa).
This is why if an investor is looking to spread risk across his portfolio, it doesn’t matter what price they pay for the gold because over time its contrarian spirit will mitigate his risks. If they are looking for capital appreciation, of course, the argument is very different.
The chart below represents the changes in growth, comparing the SPX500 index with GOLD (XAU):
COVID-19 VS STOCKMARKET
Ultimately, The Forex Dictionary wants to share what the consequences are, in terms of markets crashes, caused by the pandemic ‘COVID-19’.
Firstly, we must be aknowledge that the COVID-19 virus has just begun with it’s outbreak and the peak is yet to come. Hence why there has been a massive sell-off already. You may be wondering ‘how is it possible that one virus can ruin the whole society?’. This is due to the fact that there’s fear in the world, fear often expresses itself in sell-off’s. These sell-off’s are due to A LOT of people / institutions that sell their shares in a short space of time.
They sell their shares and reinvest their capital into safe havens, as mentioned earlier, a safe haven is a place where an investment is expected to retain or increase in value during times of market turbulence.
During times like this, full of fear and panic, safe havens tend to increase in value due to the large amount of funds that’s being injected in a short space of time.
As far as The Forex Dictionary concerns, the COVID-19 virus will be present until this summer and the cases will increase, we expect further decline in the markets as there is no
official medicine yet.
We hope you enjoyed reading this article and learned new things. Feedback is always welcome.
Hisham & TFD TEAM