What to watch for
Aswath Damodaran argues that if the current corona virus crisis leads to an earnings drop, which will be fully recouped, then stocks look cheap even if earnings drop by 20% in 2020. Conversely, if this earnings drop is likely to be permanent, with none of the drop being recouped, then this will suggest that there is more pain ahead for the market. To understand which scenario will play out he suggests to watch the following developments in the US:
A Viral Market Meltdown Part II: Clues in the Debris!By: Aswath Damodaran – New York University
Policy response to the stock market
Roger Farmer argues that a 30% persistent drop in the stock market, if not contained, will lead to a 13.5% increase in the unemployment rate as stock market crashes amplify supply side shocks.
Direct market intervention of a central bank is not unprecedented. During the Asian Financial Crisis the Hong Kong Monetary Authority invested in the stock market and their intervention is widely credited with preventing Hong Kong from experiencing the worst effects of the contagion that affected other countries in the region. The Federal Reserve is currently constrained by the Federal Reserve Act from directly purchasing stocks. The US Treasury is not and an emergency intervention to create a US wealth fund, backed by Treasury Debt that was subsequently purchased by the Federal Reserve Open Market Committee is one possible way that a policy of this kind could be quickly enacted.
Contagion
By: Roger Farmer – University of Warwick
…and a potential “oily disaster”
The United States has become the world’s largest oil producer. That honor is likely to vanish, and with it a lot of companies. If so – and it is almost certain to be so if the oil price war is not promptly ended – the question will be what impact that will have on the rest of the financial system. Twelve years ago, when the subprime mortgage market was in distress, officials repeatedly noted how small that market was, and said the overall economy and financial system would escape unscathed. They were wrong.
Oily Disaster
By: Floyd Norris – Johns Hopkins University
