Bankruptcies now the key risk as hopes for V-shaped recovery disappear

Economic growth

SHARE THIS STORY

Governments, financial markets and central banks all originally assumed the Covid-19 pandemic would be over in a few days or weeks. But it is now clear they were wrong. And unfortunately, there is little sign of a Plan B emerging.

The idea was that consumers would have plenty of money in their pockets after the lockdowns, due to all the furlough payments. So by now, it was assumed, they would be coming out to ‘spend, spend, spend’:

  • Businesses would have lost income for a while, but it would be quickly made-up over the summer
  • Very quickly, everything would be back to ‘business as usual’, with pent-up demand leading to a major boom
  • This would confirm policymakers’ view that the pandemic was simply a problem of cash-flow and liquidity
  • And until recently, central banks were suggesting their stimulus was a “job well done” as the Bank of England claimed

“The economy is on track for a sharp V-shaped recovery thanks to a faster-than-expected rebound”.

Unfortunately, this was wishful thinking.

SENTIMENT IS NOW BEING REPLACED BY FUNDAMENTALS

Of course, the $tns of free cash on offer from central banks did lead to a sharp recovery in oil and financial markets.  And millions of frustrated sports bettors have also opened trading accounts with Robin Hood and other platforms:

  • In the short-term, as Ben Graham noted, financial markets are a voting machine
  • So if people are given free money, they will naturally run to bet on their favourite stock(s)
  • But in the longer-term, fundamentals always win out, as the weighing machine takes over
  • Markets are now starting to recognise the main risk is that companies may go bust due to lack of demand

Until very recently, of course, the “voting” machine has been pushing markets higher.

But now the risks are rising, as we saw in 2000 with the end of the dotc0m bubble, and in 2008 at the end of the subprime bubble.

IN A BALANCE SHEET RECESSION, COMPANIES GO BUST DUE TO LACK OF DEMAND

The issue is simply that we are now in a balance sheet recession. Consumers are worried they may not have a job tomorrow. So they are saving more and paying down debt when they can.

Whole industries are also being restructured almost in real time – travel, leisure (including airlines/transport/hotels/restaurants); commercial and retail property (including the retail sector and offices); energy (including oil/gas/petrochemicals.

None of these seem likely to go back to where they were. And at the same time, new business models based on sustainability and affordability are starting to emerge.

So what can we expect now the mood has changed and financial/oil markets have begun to fall again?

Most likely, attention will turn back to the IMF, and their forecast of a decade-long depression scenario where deflation becomes embedded in the economy.  This would tie in, of course, with the demographics. It is still widely overlooked that, as the chart confirms, over 50% of the 750m global population increase over the next decade will be due to the Perennials 55+generation.

Perennials are very bad news for growth as they already own most of what they need. And their incomes are set to decline as they enter retirement.  So it is hard to see where fundamental support for the economy could come from, once the myth of the V-shaped recovery has been exposed.

PREVIOUS POST

Reshoring set to create Winners and Losers as advanced manufacturing takes over

12/07/2020

Not many companies still operate in the same way as 500 years ago, or even 50 ye...

Learn more
NEXT POST

Oil prices signal potential end to the V-shaped recovery myth

26/07/2020

Oil prices have moved into another ‘flag shape’ – which previo...

Learn more
More posts
Global chemical industry – key trends for success in today’s New Normal
02/08/2020

The chemical industry is the best leading indicator for the global economy. On Friday, I had the pri...

Read
Oil prices signal potential end to the V-shaped recovery myth
26/07/2020

Oil prices have moved into another ‘flag shape’ – which previously provided critic...

Read
Merkel warns of need to prepare for No Deal Brexit
05/07/2020

Most people missed the fact that last Tuesday was the last possible date to delay the UK’s exi...

Read
World moves from Denial to Anger, as the Paradigm of Loss moves forward
07/06/2020

I have been warning about the Covid-19 risk since early February, and in April suggested here that: ...

Read
The New Normal for global industry
31/05/2020

The global chemical industry is the third largest sector in the world behind agriculture and energy,...

Read
Debt, deflation, demographics and Brexit set to challenge London house prices
17/05/2020

London property websites haven’t used the word “reduced” for many years. But it...

Read
The bill for two decades of doomed stimulus measures is due
03/05/2020

The Financial Times kindly made my letter on the risks now associated with central bank stimulus the...

Read
Local supply chains replace global trade as world starts to “do more with less”
26/04/2020

Something quite dramatic is happening in the global economy.  Of course, Wall Street analysts still...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more