Front Burner - COVID-19 comes for the stock market

Episode Date: March 10, 2020

It was a historically bad day for global markets. The twin factors of COVID-19 and a collapse in the price of oil led to widespread panic and one of the worst days in the stock market in years, with consequences still to come. What just happened, and why are people freaking out? Manulife global chief economist Frances Donald is here to explain.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hello, I'm Jamie Poisson. On Monday, markets around the world absolutely cratered, in a way that they haven't since the 2008 financial collapse. At the center of this was the price of oil that dropped 30 percent. And it was triggered by two related things. The coronavirus, which the World Health Organization says is now a borderline global pandemic.

And an oil price war between Russia and Saudi Arabia. pandemic and an oil price war between Russia and Saudi Arabia. All this has experts saying we're likely on the cusp of a global recession or we're already in one. Frances Donald is the global chief economist at Manulife and she's here with me now to try to make sense of all of this and we're also going to talk about how well positioned or not Canada is. This is FrontBurner. Hi, Frances. Thank you so much for making time for me today on such a banana's day. This is when we show our best. This is extraordinary times. This is history. There isn't a day when I'd be more excited to talk about what's going on in the world. So let's talk about that today.

I have so many questions for you. But first, can you describe for me what it was like after the opening bell on Monday? What's the scene like? So it didn't start at the opening bell. It started Sunday night. And that's when the texts were happening between my colleagues and I. And we start discussing, are you watching the pre-market moves? Are you watching Asia?

And then it was actually in the futures trading that we saw futures trading halt. And we knew that Monday was going to be a big day. Savannah, this morning we had been looking at the futures down by 5%. As you mentioned, that's limit down. That is far as they will allow the futures to trade down before the opening bell. So you walk into the office and a lot of people there early today, but there's this sense of we've already positioned for downside. We know that there's more weakness to come.

We all at once have all the information available to us and so little information about the future. So you have to sit there and watch this market move in real time in front of you, watching history be made on every tick. Wall Street is about to close any minute now. The Dow collapsing around 1900 points today. It Its worst single day loss ever. That bond market doing things it's never done before. And while you have this sense of all at once having a grasp of the future, you also feel in some senses very powerless.

And so tell me what happened on Monday when you're watching sort of this history happen. What did you see? So we come into Monday already having a fairly good grasp that COVID-19 is likely going to lead to recession or something that looks like a recession in most developed markets economies. And the market already pricing that in pretty aggressively. pricing that in pretty aggressively. But a lot of the conversations before Monday were about how quickly do we come out of this? When do we buy the bottom? Itching to get our hand on those stocks that are on sale. And then we get this news about oil prices tanking. We've seen oil dip more than 20 percent today. That is the biggest fall for oil prices here in the U.S. since the Gulf War in 1991. Now, Canadians have a pretty good sense about oil prices down, bad for business investment,

and if you work in the oil patch, being concerned about it. But Americans are new to this idea. Americans in the past would be very excited when oil prices fell because suddenly they're not paying as much for gasoline. But the U.S. economy has moved away from being a net importer of oil. And now, unlike in 2008 or prior recessions, is now more leveraged to oil prices when they fall. It means business investment in the shale patch starts to fall. And actually consumer incomes are now tied to where oil prices go next.

Because they're producing a ton of shale, right? Exactly. So, you know, the shale county looking a lot more like Alberta for Canadians than it ever has in the past. But then there's this additional complication. And that's why Monday was so nerve wracking for a lot of strategists, which is that for a couple of years now, we've had this nagging concern about corporate debt. That like in 2000s, we probably lent a lot of households money that we probably shouldn't have lent them. There's been this nagging concern that we've done that for corporations in the last couple of years. And a lot of those charts that will show you corporate debt levels are looking really elevated.

But for a long time, people would say, as long as companies can pay their debt at the end of the month, it's not a problem. Now we have a twofold issue, which is that a big chunk of that corporate debt that people were worried about is actually energy companies. OK. The second problem is that we know that there are companies who can't survive with their incomes and their revenues dropping for a sustained period of time. One month, fine. Two months, fine. But at what point do we start to see American corporations struggling when their revenues have declined and not capable of making those debt payments?

And this is what the market is grasping onto is, has this moved from just a virus concern to a corporate debt concern? And so when you say corporate debt, like basically what you're saying here is that back in the 2000s, while we were giving people tons of mortgages and maybe they couldn't carry those mortgages, we've now been doing that with corporations, particularly energy companies. And then that makes them very vulnerable to what's happening in the market. That's the fear. That's exactly the fear is that we maybe lent companies a little too much money for too long at too low rates.

And they can't sustain any type of shock. For a long time, the view was corporate debt will be fine as long as we don't see interest rates rise. That was the view, that the popping of corporate debt would actually be interest rate related. Very few people, in fact, none to my knowledge, predicted a public health crisis being the reason that companies might come under pressure. And so it's been growing because of COVID-19, because of supply chain disruptions in China, because people have stopped traveling, that kind of stuff. Think about it this way. Let's say you open a coffee shop next to a corporate building. Maybe you're in the middle of downtown Toronto, Bay and King, and you sell coffee every day.

And then suddenly those corporate offices shut down. They tell everybody to work from home. Well, those people aren't buying coffee in your coffee shop anymore. And that's difficult. Revenues go down and then you don't have enough money at the end of the month to pay your bills. What do you do? Well, you might do a couple of things. You might say your new employee that you just hired, you're going to have to cut their hours because you just don't have enough demand. And that person gets laid off. You might say, well, I'm going to ask my landlord if I can extend, maybe get a little bit of a pass here on paying my rent this month, which of course has implications for the landlord. And then you might say to the bank, I actually can't pay more than my minimum payment or my

minimum payment on my business loan this month. So these companies have to go through this period. Now, a lot of companies are actually fine, just like you or I or many other people might have enough cash to not have an income for a month, although many people do not. You know, we're reaching a stage where we have to question how prolonged is this drawback in economic activity going to be? We don't know. And that's what's so difficult about this environment. It's not something that we can measure as, you know, companies only have to go through my coffee shop owner only has to survive with one month of reduced coffee. It may be, you know, two weeks. It may be six months. Okay. That's the concern. Now, we should also recognize oil prices falling have a whole slew of economic consequences.

They lower inflation, which for most of us sounds good, except when we start worrying about deflationary risks and becoming Japan. They lower business investment. In Canada, we have one-fifth to one-quarter of our business investment is still in the energy patch. And there's another thing that happens when oil prices fall is you tend to see the U.S. dollar strengthen. Well, that sounds good for us, except that when you start seeing that U.S. dollar get too strong, it hampers the whole global financial system. So this one thing that sounds just like it's about oil prices actually filters through to five or six economic consequences that aren't just relevant to one economy, but to all global economies.

Right. So when Donald Trump tweets like, this is maybe a good thing, gas prices will be lower. It's way more complicated than that. Well, that's one silver lining in a longer list of complications for sure. But, you know, we have to balance one from the other. If you work for an energy company in, you know, If you work for an energy company in, you know, Calgary, yes, you have less money towards gas. But if you're concerned about what your paycheck will be at the end of the month, you're not really that worried about the couple dollars you're saving at the pump. I also understand that this massive drop in oil prices that we saw on Monday, it has to do with the fight between Saudi Arabia and Russia. On Monday, it has to do with the fight between Saudi Arabia and Russia. Essentially, OPEC, the Organization of Petroleum Exporting Countries, had been trying to control how much oil they produce over fears that the coronavirus is actually decreasing the demand for fuel. But Russia, which is not part of OPEC, they didn't want to do this.

They didn't want to do this. And so on Sunday, Saudi Arabia retaliates straight up, starts this oil price war by upping its production as a way to get Russia to like essentially fall in line. His name is Richard Masson. He's an executive fellow at the University of Calgary's School of Public Policy. Well, this is going to be a big crisis for oil producers and for oil producing countries. When the two big boys decide to go to war, there's going to be a lot of casualties. And this is why oil prices have just plummeted. So what we're seeing here is essentially OPEC choosing not to cut supply. And what we're witnessing are two economies that can survive with oil prices closer to where they are now versus countries that cannot, mostly the United States. So this is a geopolitical development. You know, I'm not a geopolitical expert, but we have to monitor this really closely because if we're seeing essentially Russia and Saudi Arabia saying we're going to wait you out with lower oil prices, that to me suggests that this lower oil price is probably

a persistent shock. And what matters here is not one big drop. It's does it sustain over several months. And once again, that comes down to how individual countries and geopolitics will come into play. It's not something an economist like me can put into a model and tell you what the outcome will be. We simply have to run with scenario analysis. If it's sustained for three months, what happens? If it bounces back next week, what happens? That's still a really difficult investment situation. You know, you're talking about waiting this out. How long conceivably could we wait before we're talking about a recession here?

We may already be in a recession. We won't know for several months. Generally, we don't find out that we're in a recession until several months after the fact, if not a full year. But what I spent a lot of today thinking about is anyone immune? Because in my view, almost nobody is immune from what we're experiencing right now. But who is better positioned? Heading into 2020, we and just about everyone else wrote an outlook saying the U.S. consumer is in great shape. They have record low unemployment, rising wages, plenty of savings, and a low amount of their income was heading towards debt each month. And I'd have to imagine a shock that took a regular, strong, good old fashioned, plain vanilla, healthy U.S. consumer with plenty of money, good savings and a job that suddenly made them stop spending money radically and quickly.

The COVID-19 shock is exactly that type of shock. It's like it was custom made to really pinpoint the weakness in this U.S. economy, which is you have to slow the consumer, which has no other motivation to slow. Make people stay home. Make them not travel. Make them stay home. Make them not travel. Make them more hesitant on making purchases. Everything from, should we get a new couch? Well, stock markets are down. My retirement portfolio is low. Let's just wait. Let's just wait, honey. You know, these are the conversations that are happening. Now, in Canada, however, we have a different conversation, which is yes, we have also near record low unemployment, we have rising wages, but we have very low savings rates. And a lot of our money, in fact, the most ever out of our income is heading towards debt. So we as Canadian consumers are much more

susceptible to that shock. And so what could the Canadian government ostensibly do here? First of all, let's distinguish between funding put together for public health infrastructure, which is really important and really a public health concern. And then there's how do we stem the damage in this economy? So first of all,, it has to be quick because a lot of fiscal policy takes several years to work their way through the system. It has to be something that literally people see at the end of the month or even at the end of the week. So that can be direct transfers to people who have been affected. It can be people who have, you know, have to stay home because of the virus, being compensated for that. Measures we take will include, but not be limited to,

supporting workers and parents who have to miss work in order to prevent the spread of the virus, supporting our excellent health care system. We are prepared to act, and we are. It can be things like payroll tax deductions, though I don't suspect that's what we're moving through. And it can be support for individual businesses who are told, if you run into challenges in this environment, this is how we're going to support you. Right. I'm a restaurant. Nobody's coming to eat at my restaurant because everybody's staying home. So maybe the government will give you some money. Can I have

a cash transfer? So this is pretty radical stuff, right? This sounds a lot like this modern monetary theory or universal basic income. I was just thinking of universal basic income. It's so shocking to me because all of these topics that we thought were taboo, like deglobalization. No, let's let everybody in and talk. Universal basic income, giving everyone a cash transfer. No, that doesn't sound right to me. Monetizing debt.

Central banks going to zero. Three months ago. Central banks going to zero. You mean the interest rate. Interest rate's going to zero. I can borrow money for free. For free. Or imagine this, negative interest rate.

Someone will pay you to borrow money, right? That's insane. Three months ago, these were theoretical constructs that someone would ask me about once every couple weeks, and I'd give a two-sentence answer to. Now we're facing them head-on as the true solutions to a pretty sizable economic shock. And what was taboo even a few weeks ago is now becoming a mainstream economic recommendation from even the most plain vanilla of economists, of which I consider myself.

Wow. In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization. Empowering Canada's entrepreneurs through angel investment and industry connections. I just want to go back to the government's potential response here and this idea that they could be paying businesses affected. How realistic do you think it is that that will happen? And then how do you think that will play politically here for this minority government? You know, this is a government that is also running a

deficit. You know, I'm a global economist. So I always put Canada in a chart with all its OECD peers. So it just, you know, it's never by itself. It's next to the US and Germany. And what you'll repeatedly see is that Canada, while we run a deficit, has some of the best federal fiscal finances in the OECD. They are actually starting from a place of fiscal strength. They have more room to attack these problems and not affect, for example, our country rating as being a AAA sovereign rating. My sense, however, is that we need to see this actually develop into a worsening environment before we start to see this type of more direct transfers. We may not get there. And, you know, as a Canadian, I hope we don't because I don't want COVID-19 to escalate to that point. I don't want to see job losses in this type of environment,

but it's a risk. And based on the communications we've been hearing from a wide range of government officials over many economies, it is something that is being actively discussed. So in that environment, the prudent thing to do is to be ready for quick policy responses, is to be defensive, to be cautious. This is what markets are currently capturing in their large price drops. And this is likely what Canadians need to be thinking about as we head into a period where it'll be a little bit rockier. Okay. Thank you so much. Anytime. So as Frances just explained, in Monday's plunging market,

Canadian energy companies did not fare very well at all. Suncor lost more than 25% of its value. Synovus was down by almost half at one point. Alberta Premier Jason Kenney held a press conference Monday. Here's some of what he had to say. Our priority is protecting jobs. Our priority is protecting the economy. is protecting jobs. Our priority is protecting the economy. And if that means that in the midterm we need to borrow money to help make that happen, we will do so.

And Finance Minister Bill Morneau spoke as well. We are looking at a host of things that we might be able to do to ensure that people have the capacity to deal with their personal challenge as they go through what could be a difficult time. These messages came the same day Canada reported its first death due to the coronavirus. A man in his 80s at a B.C. long-term care home. That's all for today. I'm Jamie Poisson. Thanks so much for listening to FrontBurner and talk to you tomorrow.