◼ FINANCE Bloomberg Businessweek March 23, 202021PHOTO
ILLUSTRATION
BY
731;
PHOTO:
SHUTTERSTOCK
TheGreatCoronavirusCrashhasbeenfrightening
in its speed and breadth. Stocks have lurched lower
worldwide, with brief rallies between the falls, like
wounded bulls in a corrida. Through 1 p.m. on
March 18 the S&P 500 index was off 27% for the year
to date, Germany’s DAX was down 38%, and Japan’s
Nikkei was off 29%. In the credit market, investors
have fled junk bonds. Even U.S. Treasury bonds—
traditionally a safe harbor in crisis times—have come
under pressure, possibly because investors are sell-
ing them to cover losses elsewhere.
“This is different. The thing that is scarier about
it is you’ve never been in a scenario where you shut
down the entire economy,” Steve Chiavarone, port-
folio manager and equity strategist with Federated
Hermes, told Bloomberg News on March 16. “You get
a sense in your stomach that we don’t know how to
price this and that markets could fall more.”
The scariest aspect of the crash is that, for once,
it’s about something real. The crash of October 1987,
which featured the largest one-day decline ever, was
a hiccup, a market malfunction that didn’t even cause
a recession. The crash of 2008 also had an internal
cause: the popping of a debt bubble inside the finan-
cial system, which was addressable with fiscal and
monetary stimulus. This crash hasn’t been caused by
an imbalance in balance sheets but a life-and-death
struggle with a microscopic invader, the virus that
causes the lung disease Covid-19. Investors are wrap-
ping their minds around the awful reality that the
pandemic is out of control. The coronavirus infects
stealthily: It’s too late to stop it at the border or to
seal off hot spots within a nation. It has spread so
widely, the only way to halt it now is to operate on
the assumption that anyone could be a silent carrier.
When sickness can come from anywhere, the
agreed-upon solution is extreme social distancing—
for a long time. President Trump said on March 16
that “people are talking July, August, or something
like that.” That’s a big step for Trump, who’s repeat-
edly played down the severity of the pandemic, but
he’s probably still being too optimistic. The Covid-19
response team at Imperial College London, headed
by Neil Ferguson, issued a report that same day say-
ing that to prevent new waves of infection, extreme
distancing measures need to remain in place until a
vaccine is ready. Scientists say that’s likely to take a
year to 18 months, if not longer. More optimistic fore-
casters point to China, which is encouraging peopleto go back to restaurants after a steep drop in new
infections. But if China eases up too much, it could
see a fresh outbreak.
Extreme social distancing is hell for airlines, cruise
ships, restaurants, hairdressers, retailers—the list goes
on. Few companies have announced mass layoffs yet,
but they’re bound to do so soon if no money is com-
ing in. The American Hotel & Lodging Association
said on March 17 that the industry would be forced to
shed 1 million jobs in the next few weeks. Economists,
some of whom have been almost as reluctant as Trump
to look on the dark side, are finally facing up to the
likelihood that a global recession will set in soon, if
it hasn’t begun already. Goldman Sachs Group Inc.
predicted on March 15 that the U.S. economy would
not grow at all in the first quarter and would then
shrink at a 5% annual pace in the April-June quar-
ter. Goldman and other forecasters are lookingfor
a second-halfrebound,butthat’scontingentonan
easingofdistancingmeasures,whichmanyepidemi-
ologists doubt will occur by then.
In that light, the retreat from stocks and low-grade
credit doesn’t look panicky. It looks rational. As of
midday on March 18, stock prices had retreated only
to where they were in February 2017. The Covid-19
bear market has wiped out most of the Trump bull
market, but nothing more than that so far.
To the extent that there’s been panic, it’s been in
the scramble for liquidity. You’ve seen the photos
of people loading shopping carts with toilet paper,
hand sanitizer, and milk? The same primitive hoard-
ing instinct grips Wall Street, except what people
hoard there is money. Not financial assets, which
can lose value, but pure money—the stuff that’s hon-
ored everywhere and instantly transactable. In par-
ticular, dollars, which became scarce on the store
shelves of finance in mid-March.
Corporate treasurers from Boeing to Carnival
Cruise Line to Anheuser-Busch are borrowing as
many dollars as they can from their credit lines while
the money is still there for the taking. Eight banks,
including JPMorgan Chase & Co. and Bank of America
Corp., are suspending repurchases of their own
shares to save cash. For people outside the U.S., the
cost of getting dollars through swap contracts soared
despite the best efforts of the Federal Reserve and
other central banks. “We underestimated how acute
dollar funding pressures would become,” George
Saravelos, head of currency research at Deutsche
Bank AG, wrote in a client note.
The phrase “flattening the curve” has taken on
a whole new meaning in the pandemic. In finance
it means changing the shape of a graph of interest
rates by raising short-term rates or lowering long-
term ones. In epidemiology it means slowing the“The thing
that is scarier
about it is
you’ve never
been in a
scenario where
you shut down
the entire
economy”● Business has to live with social
distancing to save lives. But what
if the money shuts down, too?