The not-so-great depression decade

Thursday 16th April 2020 Justin Cleveland

The last three weeks have been marked by three general periods. The first found us holding our collective breath, trying forecast what government would do to help mitigate what promised to be an ugly situation.

Next, we had a cautious optimism. Sure, there were plenty of worrying signs, like the crush on the retail sector and general job losses, but many forecasters saw signs that our economy could bounce back quickly once the markets reopened. Despite the sudden drop in the global share markets, we were clawing back losses surprisingly quickly.

Since Easter, however, prognosticators have brought us to a new period. A pessimistic panic.

Take Nucleus Wealth, a Melbourne-based wealth manager that took client money out of risk assets before the biggest of the falls in February. Their head of investment, Damien Klassen, says there are ominous signs for a new Great Depression. “Today we remain deeply pessimistic about the outlook for markets and the global economy with no plans to rush back into equities or risk assets,” he says.

“The Covid-19 situation is severe, deep and disarming, but the overlay of other factors on top of the pandemic is why we are adopting a wait-and-see attitude.”

On the plus side, Klassen says that he doesn’t expect The Great Depression 2.0 to be as prolonged as the original, though the unemployment implications could be similar or worse.

Others don’t share Klassen’s optimism. State Street’s Amlan Roy, head of global macro policy research, says we could see a lost decade for many emerging market countries. “The projections of a deep global recession from the International Monetary Fund’s World Economic Outlook are more worrying for not just economic reasons, but for the social and financial stability of the world. In a bad scenario, it could lead to a lost decade for many emerging market countries.

“The need of the hour is global coordination to ensure that the lowest deciles of poorest and even rich countries, especially those in the informal sector do not get left behind.”

The fallout of our current situation could include challenges to operational logistics of getting resources like food, water, and medicines, to those who need it within and across countries, creating a humanitarian crisis, not just an economic one.

Is it time to start reopening the economy?

The one thing all commentators seem to agree with is that throwing the doors open to the economy too soon would only prolong the crisis or, worse, restart the clock entirely.

deVere Group CEO, Nigel Green, says that the broader stock gains are not taking into account a potential second wave of coronavirus. “[Investors] are clining on to relatively positive economic news from China, hints that some major lockdowns in Europe and elsewhere are being eased, and that confirmed cases are falling – meaning economic activity can be revived.”

Green expects markets to continue to be volatile for some time, thanks not only to the coronavirus but US Presidential election, inflation risks, and no-deal Brexit. “To sidestep taking a potentially massive hit, investors must avoid complacency and emotional decisions through solid financial strategies.”

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