The event described by Nassim Taleb as the “Black Swan” has occurred. Since February 24, 2020, the main stock markets have almost lost last year’s profits. The reason for this was and still is the outbreak of the coronavirus (Sars-CoV-2, COVID-19). Although the coronavirus is a low blow, it also provides an opportunity to rethink previous strategies and processes and to act as a catalyst for improvements. Of course, medical concerns are currently at the forefront, but in the longer term, fundamental changes will have to take place.


Monetary policy

In view of the risks to the economy and economic growth, central banks have taken action. At an extraordinary meeting on 3 March 2020, the US Federal Reserve cut its key interest rate by half a percentage point and on Sunday March 15 by a full percentage point to now 0-0.25%. In addition, Treasuries worth USD 500 bn and mortgages worth 200 bn will be purchased. Although the economic data have not yet been affected, according to Fed Chairman Jerome Powell, the interest rate cut should be seen as a confidence-building and preventive measure. In addition, political pressure would be countered and the ability to act demonstrated.

At its regular meeting on 12 March 2020, the ECB decided not to cut interest rates, but instead to grant additional loans to banks. In addition, EUR 120 billion in securities are to be acquired by the end of the year. ECB President Christine Lagarde is thus focusing on possible liquidity problems at banks and SMEs.

The actions of the relevant central banks come as no surprise and will probably have a calming effect, but they are not a solution. The extremely loose monetary policy to save the EU and the financial system may have had its justification, but today it is almost counterproductive, as the capitalist element in the free market economy has almost been eroded. The ECB’s move towards targeted measures is welcome, and the Fed’s intention to support the repo market with USD 500 bn for 1 month and another USD 500 bn for 3 months is a step in the right direction.


Fiscal policy

Democratically elected governments are known for their inertia, and if parliament must also be considered, inertia soon turns into standstill (Brexit). Federalism also impairs action. All appeals by former ECB President Mario Draghi for state aid in the EU and financial crisis were unsuccessful, and the last state measure in recent years was the US tax reform shortly after President Trump took office. Today, statements by those responsible are limited to martial slogans and platitudes. Hopefully, the stopgap measures now being taken will be followed up.

Part of the problem is the fact that fiscal policy (Keynesianism) has taken a back seat to monetarism since the late 1960s. But times have changed: The very successful government demand after World War II led to high inflation rates, which are no longer relevant today. Ironically, the long-awaited inflation could rise again because of the coronavirus.


Business strategies

From the enactment of the Treaty of Rome (04.01.1958) up to and including the Treaty of Lisbon (01.12.2009), the EEC and its successor organization the EU have had the objectives of a common market and a convergence of economic policies. A common currency, various trade agreements, China’s admission to the WTO, etc. supported the globalization of the economy. Nationalist tendencies are a relatively new phenomenon but are gaining in strength.

The economy must now learn that globalization not only creates the ideal conditions but also poses a systemic risk. Outsourcing and just-in-time inventories are only two keywords of a whole series of practices that must now be questioned. At the forefront are production plants and supply chains. The focus on cost reduction must give way to a broader cost/usage analysis. Parallel organizations and redundancies are expensive but, in the end, may be the better solution.


Investor behavior

The lessons for the investor revolve around two themes: cash and index products. Although frowned upon by financial professionals, holding liquidity is very often tactically correct, losses are avoided, and freedom of action is assured. Index products are probably cheap, but they mirror any correction 1-to-1 correction. Selected individual stocks can certainly beat indices, so it is better to consider index products only as a single component of the equity quota.


This post was automatically translated

Christian Wagner
Financial Advisor