As usual, the worst possible time to understand what’s happening in an economic shakeup is when you are smack dab in the middle of it.
As in previous financial disruptions, the sudden transition from “everything’s fine” to “hold onto your hat” comes as a rude surprise not just to ordinary folks at home, but to sophisticated market participants with reams of data and research at their fingertips — those who you would think should have known better.
Only weeks ago, we were being reassured by U.S. President Donald Trump that the North American economy would be little affected by the coronavirus. “The market’s in great shape,” he then said last Tuesday after the first stock declines.
Who can you believe?
All at once, even before COVID-19 had made major inroads into the U.S. (or Canada), markets were in turmoil with businesses demanding bailouts.
Even for those who prefer Trump’s predictions, it is hard to know who to believe.
Credible voices are telling investors to sit tight, because everything will bounce back once this novel coronavirus fades away. Other equally credible voices are suggesting we have only seen the beginning of a bear market, triggered by the sudden realization that the world’s corporations are seriously overborrowed.
Meanwhile, just like in the 2008 market crisis, critics from all sides are demanding hasty action from governments and central banks, asking them to wave a magic wand to solve private-sector symptoms that have been repeatedly diagnosed — and repeatedly ignored.
But among that diversity of voices, a common thread seems to be emerging: A period of crisis may actually be a time for change.
While Calgary-based stock analyst Martin Pelletier wants Canadian taxpayers to help out the country’s oil-producing regions during a period of incredible volatility, speaking on CBC’s The Current, he also suggested government assistance could ultimately be an opportunity to stimulate diversification.
“This is the time that Ottawa needs to step in with some fiscal stimulus for the western provinces, and then, you know, maybe use that stimulus to not only to try to … slow down the impact of this oil crisis, but also, you know, help diversify and maximize your dollars that you’re spending,” he said.
If stimulus is needed, certainly Finance Minister Bill Morneau will be thinking about lessons learned from the last big market meltdown, caused by reckless investments by giant banks in a bubble of U.S. subprime mortgages and the insurance policies that backed them.
Since the Great Recession, an enormous taxpayer bailout and a sharp cut in interest rates have sent stock markets soaring, with companies borrowing money in the bond market to buy their own shares, creating a new bubble that has largely benefited the better off.
Critics have suggested such a bubble might have been prevented if the handouts instead had been introduced by way of consumers, who would have circulated the cash in the economy from the bottom.
Victims of cheap borrowing
For those who foresee a long bear market rather than a quick rebound, it is the end of that process of bidding up stocks they fear, where “elevated asset prices have begun to fall back to where fundamentals suggest they should trade,” as Mohamed El-Erian, chief economic adviser to financial giant Allianz suggested this week.
The energy sector is also now a victim of past cheap borrowing.
A fall in demand for oil, combined with an oversupply, means lenders are suddenly less willing to risk their money, especially on smaller U.S. shale producers who need it to keep drilling and pumping.
This week’s decision by Saudi Arabia to open its taps, rather than restrict supply, feels like a special case. But it may actually be part of a pattern.
Now, especially with Saudi Aramco as trading as a public company, the Saudis may want to keep the oil flowing until it damages the competition enough to allow it to reap the rewards of a rebound in prices.
If that is so, it is pretty clear that oil will bounce back, just as it did after the 2014 oil price crash. But if global demand for oil begins to decline over the long term, as some predict, like a bouncing ball, each rebound will not be as high.
The federal government is set to announce a spending plan for this latest crisis that will include giving money to workers sent home from the job due to COVID-19 and its economic fallout.
Cyclical or structural
Many market observers, including Andrey Pavlov, a risk-management expert at Simon Fraser University’s Beedie School of Business, suggest the best way to help an already-battered Alberta economy is to invest more in getting oilsands crude to world markets, allowing it to go head to head with Saudi Arabia.
Others, including Dan Woynillowicz, deputy director of Clean Energy Canada, say this is an opportunity to stimulate the economies of Alberta and Saskatchewan by encouraging change at the same time.
It may be a message many in the oil and gas industry don’t want to hear — but it’s not a new one.
Woynillowicz points to a blue chip panel set up a decade ago by Alberta Premier Ed Stelmach, which ultimately declared that province’s reliance on energy was an accident waiting to happen — something shown to be true in 2014 and again today.
Rather than just a cyclical swing, there is increasing evidence that climate change means there will be a structural decline in the demand for fossil fuels.
“This requires a fundamental reimagining of Alberta’s economy,” said Woynillowicz.
And while there will no doubt be another bounce in crude prices for companies that survive the Saudi-led price war, any injection of taxpayer cash still might be most usefully directed toward a low-carbon energy transition.
Follow Don on Twitter @don_pittis