No one knows how long and wide the coronavirus goes. In a best-case scenario, it’s contained over the next few months.
What we know for sure, however, is that global growth and many businesses and governments are taking a big unexpected revenue hit in 2020. This will be hard to absorb because debt levels are so high, and cash levels so low.
At the same time, the most grotesquely overvalued asset markets in a century have left zero margin of error for a business cycle downturn of any kind. That was always reckless and destined for the usual capital punishment.
The aggravating feature this time is that a decade of trend-following flows into price-indiscriminate funds and strategies, enabled by once-in-a-generation central bank largesse, has left an unprecedented $20 trillion in global capital now piled onto the mean reversion train as it goes over the rails. This is likely to spawn its own pandemic-style panic in global markets as present holders–levered speculators along with mom and pops–increasingly seek to exit in the weeks and months ahead.
Make no mistake, a ‘V’ recovery in asset prices is not historically typical in these conditions. A downcycle that lasts 12 to 24 months, lops off half of the market values, and takes many years to recover recent highs, should be within base case expectations today. It is time to put mindfulness back in financial planning. It’s not, yet, too late.
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