Abstract: We evaluate the impact of Coronavirus on the economy and financial markets. The response to the virus will mark a significant economic regime change, from monetary policy to central bank funded fiscal expansion. Eventually, there will be one clear winner under this new regime: inflation. Economic circumstances could look like the 1970s, with volatile inflationary expectations. This regime change and inflation will be something financial markets find difficult to tolerate. In this environment, Bitcoin could be given its biggest opportunity, in its short lifetime.
(Image modified from HBO’s Game of Thrones: “Winter is Coming” – House Stark)
The Coronavirus Financial Market Crash
The 2020 coronavirus stock market crash is now establishing itself as one of the great stock market crashes, alongside:Global Financial Crisis (2008) Dotcom bubble (2000) Asian crisis (1997) Black Wednesday (1992) Japan asset bubble (1991) Black Monday (1987) Oil crisis (1973) Wall Street Crash (1929)
On 17th March 2020 the volatility index (VIX) reached a high of 84.83, just shy of the 89.53 peak reached in the 2008 global financial crisis. At the time of writing, peak to trough, the S&P 500 has fallen over 30% in 2020, and the Dow Jones Industrial average saw its largest daily decline since black Monday in 1987. There is now little doubt that in financial terms, the Coronavirus crisis of 2020 is one for the history books. Asset managers, who went into the crisis more leveraged than ever, are in a desperate race to obtain US Dollars, sending almost all asset prices spiralling downwards, from equities to commodities and non-government bonds to cryptocurrencies.
Central banks and governments have been fast to respond. In the US the Federal Reserve lowered interest rates to near zero (0% to 0.25%), announced the purchase of at least $500bn of treasuries and $200bn of mortgage backed securities, and also reduced...