Category Archives: Corona crisis

Live appearances

I have participated in a number of live appearances during the last couple of weeks, most of them in Danish, though.

I gave a webinar (in English) on the economic impact of the corona virus: Link.

I participated in a program (in Danish) on the consequences of the crisis on real estate prices: Link. I am on at 2:20, 14:05, 18:40, 21:20, 24:45. This is also described here: Link.

I participated in a program (in Danish) on the consequences of the crisis on savings: Link. I am on at 2.20, 6.30, 17.40, 26.30. It was a popular program. Around a third of Danes watching TV that evening tuned in.

I participated in a radio program (in Danish) on the global economic outlook: Link.

A 121 x sigma event

What happened on the oil market this week was completely crazy.

I believe everybody noticed the headlines, but it is worthwhile to pause and reiterate, as this was another sign of the very unusual and severe recession we are going through: For the first time in history, oil prices were negative at minus USD 38 for a barrel of oil. I think this graph nicely illustrates how unusual this was.

Percentage daily changes in the WTI oil price.
Data source: Thomson Reuter Datastream via Eikon.

The graph shows daily changes in oil prices since 1983. Until April 16, the average daily price change is 0.03%. The standard deviation of daily price changes is 2.5%. On April 20, Monday, the price of oil fell by 306% compared to its price Friday. This is a 121-sigma fall. Almost surreal, but true.

The price of oil fell because demand for oil has tanked as a result of the recession. When economic activity falls, as it does right now, demand for oil falls. When we do not travel, when we do not drive our cars to work, when production facilities are closed down, and so on, we do not use oil. When supply of oil is not reduced, or at least not reduced as much as demand for oil falls, prices adjust.

If oil is produced but not used, it needs to be stored somewhere. Traders panicked on Monday, as they feared that there is simply not enough physical space to store oil. If you possess thousands of barrels of oil and have nowhere to store them, you are willing to pay somebody to take care of it. FT explains it nicely: “Analysts believe a lack of available storage capacity at the WTI contract’s delivery point of Cushing, Oklahoma — known as the Pipeline Crossroads of the World — set off panic among traders holding derivative contracts, who found themselves with nowhere to put the oil.”

The negative price of oil relates to West Texas Intermediate, the US benchmark oil contract. The price of Brent oil, the international benchmark, has been positive, even on Monday at USD 17 per barrel. This indicates that Monday’s event was more of an issue with storage of oil in the US, and the expiration of futures contracts, than a general issue with storage of oil. E.g., Brent oil can more easily be stored at sea, at least as long as tankers are available. One should also notice that the price of WTI was back in positive territory already Tuesday and stayed positive during the rest of the week. This was, even if very dramatic, a one-day shock.

Prices of both WTI and Brent have been falling since the outbreak of the virus in China in early 2020, however, particularly in early March when Europe and the US started shutting down. Except from the astonishing event on Monday, the price of both Brent and WTI have followed the same path. The agreement from April 10 limiting oil production has thus failed to slow the fall in oil prices.

Prices of WTI and Brent oil since January 1, 2020. Daily prices.
Data source: Thomson Reuter Datastream via Eikon.

The behavior of oil prices reflects the severity of this crisis. The drop in oil prices since the start of the year tells a different story about the recession than does the stock market. The stock market has sprinted ahead since mid-March, indicating that stock market investors believe the recession will soon be over (the stock market did fall on Monday and Tuesday, though, due to the turmoil on oil markets). Oil markets, in contrast, indicate that the recession is very much still ongoing. What signal do you believe – the one from the oil market or the one from the stock market?

V, U, W, or L? The stock market votes “V”.

How will this recession play out and how will the recovery look? Will we get a short recession with a fast rebound (V), will we get a longer recession before the recovery (U), will we get a new lockdown in autumn resulting from a second wave of the Corona virus (W), or will economies remain depressed for a long time (L)?

Nobody knows, particularly this time around when the shape of the recovery will be determined by a virus and how this develops.

Supporting the V-shaped recovery, this recession is not caused by economic imbalances, such as an overvalued housing sector, too much debt, a fragile banking sector, or the like. Also, we know from history that recessions last longer and are deeper if they are caused by financial crises. This is also not the case this time around, in contrast to 2008, for instance. This means there is hope for a reasonably fast rebound, if we manage to get the virus under control.

On the other hand, if we get a second outbreak, e.g., in autumn, and economies are shut down again, the path of economic activity will probably take the shape of something like a W.

What we do know is that the depths of the recession is unprecedented. The fall in economic activity and the increase in unemployment is mind-blowing, and very scary (link).

This makes one fear that the recession could drag out. When economies open up, it will take time to find jobs for those who get unemployed during the recession. Firms will probably be reluctant making new investments until we have a vaccine. Consumers want to go to restaurants, cinemas, on vacation etc., but will probably hold back until they feel on safe ground, too. Uncertainty abounds.

In this environment, one would imagine that the stock market suffers tremendously. With a recession impeding, and with so much uncertain surrounding the future path of economic activity, one would imagined that stock markets, like economic activity, would be in freefall. This is not the case.

In the beginning of the lockdown, the stock market tanked. It was the fastest bear market ever (link). It reminded us very much about the dark days of autumn 2008. This graph shows the SP500 on a daily basis during the 2008 financial crisis and this crisis. “0” in the figure is September 19, 2008, respectively February 21, 2020.

S&P 500, daily closing prices. Normalized to “1” 25 days before September 19, 2008, respectively February 21, 2020.
Data source: Fed St. Louis Database.

Financial markets were in stress in mid-March, when even yields on safe assets increased (link). Fearing a replay of 2008, central banks and governments came to the rescue, and the stock market started its recovery. Since the bottom on March 23, the S&P 500 has gained an astonishing 28%. This is remarkable, given all the uncertainties and the depth of the recession. The contrast to the autumn of 2008 is stark. The stock market kept on falling throughout 2008 and early 2009, only to start its recovery in March 2009.

The stock market seemingly believes this recession will result in a V-shaped recovery. Let’s hope it is right. One might fear that it is not.

Horrifying figures

The corona crisis is unique in many ways, not least with respect to the speed with which economies have started freefalling. Literally, from one day to the next, economies have been shut down, with grave consequences for economic activity.

Aggregate economic figures, such as GDP, consumption, etc., are collected and published with a lag. Normally, this is not a big problem, as changes in business cycles are typically not too abrupt. But this time, it has been a problem. In the early phase of the crisis, we had to rely on data from selected sectors that provided real-time insights. Restaurant bookings completely collapsed, footfall (number of people entering retail shops) fell, flight traffic dropped, etc. This was dramatic and foretold that economic activity more generally contracted significantly. But we did not know exactly how much.

We start getting the aggregate numbers now. They reveal with horrifying clarity that this recession is unprecedented.

Initial claims for unemployment insurance in the US has been published weekly since 1967. The average from 1967 through March is 350,000, i.e. on average 350,000 people enter unemployment per week in the US, with a peak at 700,000 in October 1982 and another high of 665,000 during March 2009. In mid-March 2020, the number was a staggering 3,3 million, only to reach more than 6 million getting unemployed during the last couple of weeks, with the number last week being 525,000. In just four week, 22 million people have lost their job in the US. It is mind-blowing. And very sad.

Initial jobless claims in the US per week.
Data source: St. Louis Fed Database.

We have today received the latest GDP figures for China, for the first quarter of 2020. China has published quarterly GDP data since 1992. Annual growth has always been positive, even during the Great Recession of 2008-2009. In the first quarter of 2020, Chinese GDP was 6.8% lower than in the first quarter of 2019. An unprecedented fall.

Year-on-year percentage change in Chinese GDP. Quarterly figures.
Datasource: Thomson Reuters Datastream via Eikon.

We have also just received the latest figures for US industrial production. The drop in industrial production in March 2020 was the largest monthly drop since 1946. Industrial firms in the US cut production with 5.4% relative to February 2020. We also notice, though, that monthly drops in industrial production were larger during the Great Depression in the early 1930s and at the end of the second world war.

Monthly percentage change in US industrial production.
Datasource: St. Louis Fed Database.

These pictures tell a horrifying story about the freefall in economic activity. Expect more sad numbers to come. Hopefully, when economies start opening up again, we will see a rebound in economic activity. But the recession will leave lasting scars.

The normal economy is never coming by Adam Tooze

It is by now painfully clear that the corona crisis will be very severe and very different from any other economic and/or financial crises most of us have ever seen. The Spanish flu in 1918-1920 is the closest example. And even this we cannot really rely upon as the economy and the role of the state and central bank was obviously much different back then. So, how bad is it and how bad will it be?

Adam Tooze (https://adamtooze.com/) from Columbia University has taken a step back and written this interesting account on where he sees the economy right now and where it is heading (link).

He writes: “The economic fallout from these immense human dramas defies calculation. We are left with the humdrum but no less remarkable statistic that this year, for the first time since reasonably reliable records of GDP began to be computed after World War II, the emerging market economies will contract. An entire model of global economic development has been brought skidding to a halt.”

I think Adam Tooze is right on many accounts. At the same time, we should not forget that the economy enters this crisis in a better condition than the one we faced when we entered the financial crisis of 2008. I believe there is hope that the economy will be able to bounce back when economies are opened up again, as is also the main scenario in the latest WEO from IMF (link). Economic activity will suffer tremendously, but we will come back.

Of course, everything depends on how the virus develops, and, in particular, whether there will be a second wave in autumn where we need to close down again. Should this happen, this will be the worst crisis ever. Should it not happen, it will still be very bad, but probably not the worst crisis ever. I.e., we should not be naïve, this is an unprecedented crisis, but it need not be doomsday.