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Sunday, April 12, 2020 / 05:57PM / By Mir Mohammad Ali Khan / Header Image Credit: WatPad
Mir Mohammad Ali Khan, finance expert, author of several books and first
Muslim investment banker of Wall Street, explains why the impact of Corona
pandemic is more dangerous than previous financial crisis. What is the
difference? Must read for students of IR, finance, media and policy makers.
Paris is not so romantic anymore. Is it? Manhattan sleeps very early
now. Doesn't it? Giving hugs and kisses is considered a sign of ignorance now.
Isn't it? Sitting near your grandparents is looked upon as a risk towards them.
Right? It shows world economy is at a standstill.
Well, I read this somewhere today or something similar
to it and it imprinted in my mind forever.
The world has run out of gas, it feels like, and even that on a deserted
highway millions of miles away from a gas station. Coronavirus has gripped our
lives. We woke up in 2020 like we are still sleeping through a nightmare. Some
say that the world is going to end and others say that it is the wrath of God.
Well, I would refrain from commenting on the world
ending or the wrath part because that would involve an emotional statement and
at a time like this, as an investment banker, my duty becomes to guide the
people as to what I foresee. According to my expertise in finance, I believe
investment banking on Wall Street depends on the political economy and changes
on Wall Street affect the global economy.
So many questions come to mind at once. Will this
affect the globalization of the past 25 years? Will it tilt the balance of
economic power away from one region to another? Will America weaken and China
or Russia strengthen? Will it create a new trading or cooperation block/s in
the world? Will the world see new currency dominate instead of the Dollar?
Will the education system shift from the brick and mortar to an online
distance learning-based platform, albeit slowly? Will the democracies that will
or have failed to protect their people lose value in the eyes of the voters?
Will the selfish countries be isolated by world communities based on their memories
from the time of Coronavirus and non-cooperation?
Well, the questions are endless and most of the
answers will be nothing more than speculations. So, let us stick to facts.
Facts that can be calculated 12 months forward based on numbers in light of 50 years
backward.
Will the world economy collapse soon? No. But if this ordeal continues
for another 6 months then we are looking at some very grave consequences.
Consequences that this world is not prepared for. Before I go on with my topic,
let me shed some light on the facts where people compare this to the events of
the 2008 world financial crisis. 2008 was a car crash.
This could be a train wreck. 2008 was a sudden event
built up over a period of a few years based on just one financial product and
that product was high-risk mortgage securities. It was not an Armageddon. It
did not affect logistics. World tourism. Petrol prices. Airline industries.
Textiles around the world. So on and so forth. This affects 193 countries. And
all of them at once and in every aspect possible not just financial.
The world GDP as we stand right now is approximately $88,081 billion
dollars or $90 trillion. The first three (3) months since (including February and March),
we have lost $3.2 trillion in global GDP. World capital markets have lost
double that amount. Corporations that declared their earnings or will do so
will do it including the month of January when it was not so bad and February
when it started to get bad and March where it has become a pandemic.
Will $2 Trillion package not
save America?
These figures will not look as bad as for the next quarter which
includes April, May and June. Apple alone is facing a revenue loss of $1
billion a day because of its stores closure around the world. Airlines in Asia
alone have swallowed a loss of $129 billion dollars. This loss can never be
made back because airlines are already a high debt low-profit margin business.
Tens of airlines will go bankrupt within the next few months.
America being the biggest economy will pull so many
other countries down with it, but before it pulls others down; and IF this pandemic
continues for the next 3 to 4 months, America will see damage to its economy
that will be absolutely irreversible.
70 million people are working from home right now.
Working from home (WFH) very soon is going to change into staying at home without
work. The highest unemployment claims came in last week in America, 3.2 million
jobless claims.
This can increase to a number anywhere between 8 to 12
million within the next 6 months. 12 million jobless claims o[r even 6 million,
half of it, which can be filed next month, spells disaster for America. Why?
Because out of work America means mortgage default on homes.
America has approximately $15.8 trillion in mortgage
debt. $11.1 trillion or the highest portion of the debt is in home loans. $3
trillion is in commercial properties. $1.6 trillion is in multi-family units or
what you may call apartment buildings. And $254.1 billion approximately in farm
loans.
Add to it the national American debt which rose by
another $3 trillion in 60 days to above $23 trillion because of the $2 trillion
relief package announced by Trump. $2 trillion cannot and will not help America
more than a few months, Not even 2. It will require a package of $6 to $10
trillion. Which will take the American national debt to its highest level ever?
Money that America does not have or maybe has spent on wars, $14.8 trillion,
instead of domestic spending or savings.
Back to the mortgages. Out of work Americans means no
mortgage payments. No mortgage payments on top of a sinking economy due to
deserted roads, no retail, no food, no traveling, no tourism and no money, will
create a snowball of foreclosures. Foreclosures unlike the 2008 bad loans.
Here it will be the people with the best credit
history and decades of great payment history will be declaring bankruptcies.
Corporate earnings for the next 2 quarters dwindling will force companies to
lay off people. That will be an icing on the cake.
American capital markets may have a few Dead Cat
Bounces (quick upward rallies) but the future of it is dependent upon the
corporate earnings, not Trumps' plans to inject funds. No corporate earnings
like earlier mean no investor confidence and no investor confidence means a
bleak outlook for the markets.
No airlines. No cargo ships. No cars on the roads. No winter where oil
is needed as energy. A war of production between Russia and Saudi Arabia which
has absolutely backfired in their faces because neither of them foresaw the
Coronavirus spreading to this magnitude within weeks when they were fighting
over production numbers in Vienna three weeks ago. 100 million barrel a day
world consumption has already dropped to 89 million barrels a day. To add
insult to the injury, then Kingdom of Saudi Arabia (KSA) announced that it will increase its daily production
from 9.7 million barrels a day to 12.8 million barrels a day.
Keep in mind that KSA cost per barrel at the well is
the lowest in the world, $2.4 cents. But add all the other costs to it, and the
fiscal break-even comes to $83 dollars a barrel.
Russia, on the other hand, has a cost per barrel at
the well for extraction is, $22 dollars a barrel, add the fiscal break-even,
because not all of Russia's income comes from oil sales, like KSA, Russia then
stands at a cost of $43 dollars a barrel. Oil trading near its 52 weeks low of
very low $20s, no future demand immediately, high output numbers, high debt
situation of KSA, Russia and other oil-producing countries, we can expect
bankruptcies coming around the world.
Oil trading in low teen numbers for a long period of
time can cause devastation to the concept of Petro-Dollars. The concept that
keeps the Greenback alive. Petro-Dollar evaporates into thin air like the
petrol itself when left out of the tank.
If Petrol trade is delinked from the Dollar, that
would be the death of American currency stability. It might be great news for
many other countries but not for the ones whose income depends on oil sales.
Copper, Silver, Gold, Platinum, and many other metals
are human intensive extraction processes in confined places, may it be the
mines or the refineries. Some of the biggest refineries of metals like Platinum
are based in Europe, many in Italy.
A slowing demand, no extraction, and no refinement
will not increase the prices but lower them because of one factor being absent,
the demand.
Why Europe is crucial to world
economy?
If anyone thinks that the European Union is immune to an economic shock,
they need to just realise that except for a few strong economic powers like
Germany or England or France, most have a very fragile economy. Greece and
Italy and Spain and Portugal have barely come out of their debt trap. But the
problem is that the strongest economies of Europe are also under the grip of
this virus.
Germany being the King of Europe has been hit the
hardest when it comes to loss of economic activity. We are looking at a
financial contagion more dangerous than the viral contagion because by the time
we recover from the virus, economies would have been so weak that recovery will
take years. Most of the world runs budget deficits and Current Account
Deficits. It's like having a bad heart, weak kidneys and getting Coronavirus if
one puts it in non-financial terminology.
Almost $20 trillion dollars is the European GDP which
represents 23%+ of the global GDP. If one thinks that 23% of ones' body can be
affected by cancer and the rest of the body will remain healthy then needs a
Psychiatrist more than an Oncologist.
This world cannot assume to have a healthy global economy without a healthy European
economy.
In my opinion, the EU is more important to the global
GDP than China. Because of its maturity of markets and a strong financial
system based on hundreds of years of foundations. China lacks both these
qualities. China is emerging, Europe already has. A fall of the European
economy along with a slowdown in the American economy plus a laggard India and
over production-based China with no buyers in sight, it is a recipe for a soup
laced with unseen traces of cyanide.
Well, regimes standing on long-overdue promises, a huge percentage of
population below the poverty line, a neglected healthcare system and mere past
focus on sending based growth, will come falling down. Every country is not as
disciplined or controlled as China. China has a grip on its population. Many
others do not.
The country that would be hit the hardest would be
India in this region. I had written an article almost nine (9) months ago predicting the slowdown of the Indian
economy to a dangerous level already.
Many had questioned the article for a few months until
it all started to come true. It was the most in-depth article I had ever
written on the Indian economy. I had taken the entire Indian economy apart,
thread by thread and put the kit back together without a sewing machine.
And nowhere in my wildest dreams had I incorporated
economic shocks of Coronavirus for an Indian economy. It gives me no pleasure
to predict doom for any country, even India because my differences are loud and
clear but they are with the bigoted regime of Modi and his sidekick Amit Shah.
The people of India have just as much place in my heart based on "humanity" as
the entire world is, minus the RSS and BJP hatemongers.
Please take time out to read the article referenced above to understand the severity of what is about to happen to India and
multiply it by 4 or 5 times. Along with all that I wrote in the article
about India and its economy, let me add that now India will see a food crisis.
A severe food crisis without a drought. It will be a human drought where
commodities and vegetables will be ripe enough to be plucked but there will be
no one to pluck them because they are locked up at home hiding from
Coronavirus.
Elections in countries like ours, Pakistan, will no
longer be based on the promises of roads and bridges. Hospitals and healthcare
system will be demanded by the voters. Educational system betterment will be
asked for. Corona will force the leaders to listen to the voters.
Something that has never happened in 73 years in
Pakistan. This time is the time when the voters will have the say and not the
vote taker. Election debates will be based on healthcare and education.
Again I say, if the cure is not here by August, the
world can see an armageddon.
So the conclusion is that IF this continues till
August, we are in a depression that this world has not seen earlier not even in
1929; 1929 was not even 5% as dangerous as the coming one because there was not
much to lose at that time, GDP was minuscule. There were no Trillion-dollar
companies. Globe was nowhere near to be connected enough to have a global
economy. Comparing 1929 to 2020 is like comparing the injuries of a person
falling off a sidewalk and the other falling off a 10-story building.
Time is of essence: why?
You see, when I see or forecast something really terrible based on
research and numbers, I do not get scared or fear. Why? Because if it is that evident
then it is going to happen, then do what you can do to protect yourself and
remain calm. If nothing can protect you then no need to worry because that
will only create anxiety and anxiety lowers your immune system and a weak
immune system in the Coronavirus days is more dangerous than a future-based
financial Armageddon, because that is in the person with a job to pay for
future, and this is today.
Read more: 7 immediate economic solutions for government - Mir Mohammad Ali Khan
Take care of your today. Yes, I think if we do not have a cure within the next six (6) months, we are looking at an economic disaster that this world has never seen before.
The world debt alone is $194 trillion
dollars, add to it $29 trillion of the American debt, plus the $15 trillion of
mortgage debt and then add the Corporate debt which is not included in it plus
much more; and then realize that there is no person with a job to pay for all these
debts.
The 'House of Cards' will be coming down. And the cards may
be made out of solid steel when they fall on our heads.
Thank you.
Credits
The post Why world economy is at the brink of
collapse? Investment Banker explains first appeared in GlobalVillageSpace
on Monday, March 30. 2020.
About the Author
Mir Muhammad Ali Khan is the first Muslim founder of an Investment Bank
on Wall Street. He is the author of four (4) books and has published over eight
hundred (800) articles.
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