Financial crises are like human fingerprints – they may look the same and yet under ultraviolet light, there are very dramatic differences. The reality is, every crisis differs in its nature and intensity and will require a different action plan.
Types of crisis
Reinhart and Rogoff (2009a) distinguish two types of crises: those classified using strictly quantitative definitions; and those dependent largely on qualitative and judgmental analysis. The first group mainly includes currency and sudden stop crises and the second group contains debt and banking crises.
However, this year we became aware of a new type of financial disruption caused “voluntarily” to stop the expansion of the coronavirus, and not as a consequence of serious imbalances in the economy such as those in 2008 (real estate-credit bubble, deficit foreign, over-indebtedness of the private sector, etc.). In principle, this means that if the activity slowdown does not continue too long, the economy could recover relatively quickly once the current restrictions are lifted.
Similarities between the current and previous crises
According to the IMF, a financial crisis is often associated with one or more of the following phenomena:
- Substantial changes in credit volume and asset prices
- Severe disruptions in financial intermediation and the 5 supply of external financing to various actors in the economy
- Large scale balance sheet problems (of firms, households, financial intermediaries and sovereigns)
- Large-scale government support (in the form of liquidity support and recapitalization).
Despite the fact that the current recession has been accompanied or triggered by government actions, we did observe all of the previously mentioned criteria. But one thing deserves special attention: junk bond funds registered record $ 7 billion in cash inflows.
According to the OECD report, the volume of corporate debt reached an all-time high in real terms of USD 13.5 trillion at the end of 2019, driven by the return of more expansionary monetary policies early in the year. At the same time, the overall quality of corporate debt has declined.
One of the scariest charts for the financial sector today - the US credit market grew from $ 2 trillion in 2008 to $ 7 trillion in 2020. One of the biggest contributors to this growth was BBB-rated corporate bonds. The fall of the US economy into recession = a huge mass of BBB can lose its rating and turn into “junk” bonds = disaster.
As well noted by NYTimes, regulators are worried about how much banks are vulnerable to debt rated just above junk. If, as expected, the crisis leads to widespread downgrades of this debt by rating agencies, investment funds run by banks would be forced to dump the assets at fire-sale prices because they are not allowed to own junk bonds.
On the other hand, finding buyers for so-called fallen angels could be a difficult task. Downgrades by S&P and Moody’s last month sent $36bn of debt back into junk territory. BofA warns that the total for the year could reach $200bn. Citigroup, in turn, says that $200 billion to $300 billion could get downgraded just this year, at least doubling the prior single-year record from 2002.
Finding growth in tough global conditions
Nevertheless, it doesn’t mean that every company is in the same situation. There is no doubt that coronavirus has affected peoples' buying habits, due to universal quarantine. Even though, they are still willing to consume.
Over the last couple of months, a small group of companies registered a record inflow of new customers. First place, obviously, went to retailers, including pharmacies and grocery stores.
CVS Pharmacy
Due to an influx in orders, CVS Pharmacy announced it is currently looking to fill a total of 50,000 full-time, part-time and temporary positions nationwide, including "store associates, home delivery drivers, distribution center employees, and member/customer service professionals." Most importantly, the company will utilize a technology-enabled hiring process that includes virtual job fairs, virtual interviews, and virtual job tryouts.
Amazon
The second place on our makeshift list goes to Amazon, one of the few businesses to show growth on the year to date basis. Its sales have registered an unprecedented boom, as people all over the world are limited to online shopping. In this context, the company announced its plan to hire 100,000 people nationwide for full-time and part-time roles in Amazon's delivery network and at its fulfillment centers.
"We also know many people have been economically impacted as jobs in areas like hospitality, restaurants, and travel are lost or furloughed as part of this crisis," the company said in a statement on its website. "We want those people to know we welcome them on our teams until things return to normal and their past employer is able to bring them back."
Some other companies that started the recruiting process are Walmart (plans to hire 150,000 workers), Instacart (300,000 positions), Albertsons Companies (looking for 30,000 new employees), Dollar General (plans to add up to 50,000 employees), PepsiCo (wants to hire 6,000 full-time, frontline employees), Papa John's (announced plans to hire 20,000 new "restaurant team members") and Domino's (plans to hire 10,000 employees). The list does not end there, however.
...and what my employer, TradingView, is seeing
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