Did COVID-19 just trigger the Greatest Economic Depression?

The COVID-19 pandemic has engendered a grievous and disruptive effect on humanity. The global economy has been rattled, even though the build up to such a cataclysmic event has been somewhat predictable. The US-China trade stalemate, Brexit and US-Russian, US-Iran and US-North Korean relationship tensions have been leading indicators that a substantial threat to economic growth was indeed possible.

The past few months have seen exacerbated market moves and have left many investors with their pants down being either over-leveraged or holding high risk assets. Central banks across the globe have been forced to intervene with extraordinary, but experimental monetary policy measures attempting to curb the market bleeding and contain this rapid economic collapse. Triggered by the coronavirus pandemic, this economic crash has begot some of the worst economic data in history, with a GDP contraction (-3%) now forecasted globally; a quick revision of the previous +3.3% growth projected in January 2020.

Chief Economic Advisior at Allianz, Mohamed A. El-Erian describes the effects of the pandemic as a pull on two main priorities. On one hand there exists a rush to adopt precautionary health measures; whereas on the other hand, COVID-19 safety-measures such as country lockdowns can lead to economic collapse. Hence, the biggest challenge to policy makers have been striking a delicate balance between both.

But let’s back up and discuss firstly what exactly is an an economic Depression. Not much data has been collected regarding Depressions since from history we only have one sample for study. The Great Depression of 1929–1933 was marked by a drawn out period of high unemployment, low consumer spending, declining industrial production and of course a 34-month bear market for the US stock market. Simply put, it was a period which highlighted the worst economic data in history!

Almost 91 years later, reported economic data has sent chills down the spines of many economists as fears of another Depression crawls into consideration.

The question that now begs to be answered is, will this economic flash-crash triggered by the coronavirus pandemic extend into a slow grinding Depression greater than that of the early 1930’s, or is an economic Depression just an exaggerated scenario?


These times, not seen before, have led to vast speculation as to how to navigate the unmapped economic territory. There have been many comparisons to the financial crash of 2008 however, this time around, unprecedented central bank intervention has ensured that financial systems would be protected. The 2008 recession served as learning experience, and consequently central banks adopted a plethora of expansionary monetary policy regimes, effectively keeping the traditional banking system propped up and mounting stock markets.

From September 2008 to February 2020, total assets on the US Federal Reserve’s balance sheet increased 400% from $1 trillion to $4.2 trillion. Throughout the same timeframe, the ECB, BoJ and BoE also adopted similar practises. March 2020 has however, dwarfed these prior quantitative easing actions; whereby, more than $3 trillion has been added cumulatively to the balance sheets of Central Banks across the world.

Intuitively it would be expected that an increasing money supply (i.e. higher M2) would promote at least base line inflation of 2% but in fact, the Fed, BoJ and ECB all undershot their target for the majority of that 11 year timeframe! Though M2 increased, the velocity of M2 decreased, correlating with increasing personal saving rates (33%, April 2020).

Analyst Lyn Alden pointed out a similarity between the fiscal and monetary policies at present and in the 1940’s. Notably, the low interest rate environment coupled with the rising money supply shows an uncanny similarity to that in 1940, as did the environment in 2008 with that in the 1930 Depression. While private debt as a percentage of GBP peaked in 2008/9 just as it did in the 1930’s, public debt has continued to breach record highs.

Chart Source: Bridgewater Associates, Ray Dalio, Updated/Annotated by Lyn Alden

Associate Professor of Economic History at George Washington University, Trevor Jackson has expostulated that we are in for a period of ‘Terminal Deflation’ unless policymakers respond effectively. He’s argued:

“Well before the pandemic, it appeared that the relation between the money supply and inflation was breaking down. Central bankers had been running as fast as they could just to stay in the same place. Economists (and the Economist) began to wonder if inflation was over or had lost all meaning.”

The COVID-19 pandemic has led to global shutdowns which in many regards may be the reason global economies continue to face deflation and then possibly a rapid shift to stagflation in the months to come. The fact of the matter is, now Central Banks are running out of ammunition, and with global debts already at record highs, Modern Monetary Policies being explored over the last few years could actually do more harm than good in this economic crisis.


Simply put, horrible! Firstly, let’s consider the economic data from the world’s largest economy, the USA:

The National Activity Index released by the US Chicago Fed, which tracks 85 existing monthly economic indicators, slumped to a record low, pointing to a dramatic contraction of US economic activity as a result of the COVID-19 pandemic.

United States Chicago Fed National Activity Index

It is important to note that consumer demand, though it has been praised for the the surging stock markets, never truly pierced pre-2008 levels. In this regard the current low (and in some cases negative) interest rate environment trialled by central banks, has not done much to propagate inflation through consumer spending.

US Consumer Sentiment and Spending

Many analysts imply that pent-up demand will propel economies out of recession however, consider these factors: Consumers are aware of the current economic crisis and consequently would expect a drop in prices in order for businesses to cope with the demand shock. Therefore they would adopt a “wait to buy” approach and this self-fulfilling prophecy would then cause businesses to eventually lower prices and this process sprials creating higher levels of deflation.

On the flip side, many businesses such as airlines, have suffered throughout this economic collapse and as such may try to squeeze more money from customers in order to meet decreased demand.

On another note, US Retail Sales also plunged to a record -21.6% Y-o-Y while US Manufacturing Production dropped 18% in April indicating record contractions since 2009 due to the coronavirus pandemic and restrictive measures imposed.

US Initial Jobless Claims spiked to 6.8 million at the end of March due to the original COVID-19 shock. Although the amount of new claims have been steadily dropping since that spike, the more telling Continued Claims numbers, have catapulted the US unemployment rate to an astonishing 14.7% (April) from a 60-year low of 3.5% in February. It must be pointed out that US labour force participation never truly returned to pre-2008 levels and has been in a downward trend since the late 1990’s.

U.S. Employment and Training Administration, Continued Claims (Insured Unemployment) [CCSA], retrieved from FRED, Federal Reserve Bank of St. Louis

Hedgeye’s Senior Macro Analyst Darius Dale has noted that 50+ years of economic history suggests that bear markets conclude once there is a peak in Initial Jobless claims, with the outlier being the 2000–02 recession. Though there appears to be a notable improvement of economic data in May-June (i.e. the troughs have occurred), longer-term recovery remains uncertain due to still deteriorating labour and credit conditions. It is also important to consider Global data since after all this is a Global Pandemic.


In Europe, Retail Sales growth peaked in Q3 2015 and has been showing signs of deceleration. Both the Eurozone Services and Manufacturing PMI also peaked in 2018, giving indications that Europe was already in recession long before the COVID-19 pandemic and now this global shutdown has just made things worse, with Services PMI now falling to a record low of 11.7 (April) and Manufacturing PMI at a 136-month low of 33.6.

Post the 2008 financial crash, the European Union was faced a massive sovereign debt crisis which eventually peaked between 2010-2013 after a massive bailout from the ECB and the IMF, however in 2016, the Brexit shock made the EU economic recovery stickier than initially anticipated.


The second largest economy in the world, China, contracted by a seasonally adjusted 9.8 percent on quarter in the three months to March 2020, following a 1.5 percent growth in the previous quarter. Unemployment jumped 17% to the highest level in >15 years (6.2% in February).

SOURCE: Trading Economics — Caixin China General Composite PMI

Composite PMI dropped 47% to a record 27.5 in February 2020 revealing a decline in business activity as coronavirus shutdowns came into effect. New orders (29.3) and Business Confidence (35.7) plummeted to their lowest levels on record, and while there was a notable increase in sales of medical equipment and PPE, the effects of prolonged business closures from Chinese New Year into COVID-19 lockdowns was evidenced by the fastest backlog accumulation in nearly 15 years.

Even the remainder of the touted BRIC economies (i.e. Brazil, Russia, India) have all seen a significant downturn in economic activity.

DATA SOURCE: IHS Markit Surveys via tradingeconomics.com

The Brazilian IBC-Br economic activity index’s sharp plunge of 5.9% (M-o-M) in March pointed to the steepest economic activity contraction on record due to the COVID-19 pandemic. In the same period, the Russian Leading Economic Indicator showed signs of slowing expansion in Russia’s economic activity as GDP growth (Y-o-Y) slowed from 2.8% in February to 0.9% in March, 2020. Similarly, the coronavirus lockdowns have led to a record contraction in Indian output as GDP growth slowed dramatically to a 10 year low of 3.1% (Q4 2019) from 4.7% (Q3 2019) thereby signalling growth of and is projected to slump to -6.8% throughout 2020.


We must take a look at different markets to get a holistic understanding of the economic narrative being conveyed.


Commodity markets have had a shock like no other and have emphasized the deflationary woes faced by global economies since the adoption of Modern Monetary Policies in 2008.

Thomson Reuters/CoreCommodity CRB Index

Lockdown measures as a result of the COVID-19 pandemic have dramatically affected prices of commodities particularly related to transportation. Most recently, the WTI oil price collapse has given insight into just how bad the market is and efforts to cut production by OPEC in response to the plunging demand has quelled the free fall in prices for now. However the main concern is to what extent will the demand recover in the coming years?

Agricultural prices, though not a typical economic indicator have also been dropping due to trade restrictions, once more as a result of the COVID-19 lockdown and are poking at the well-stocked supply chains in some countries. According to the World Bank some supply chains have already begun breaking down as “snags to supply chains have already affected to the exports from some emerging market and developing economies of perishable products such as flowers, fruits and vegetables.


With plummeting global bond yields attributed to the aforementioned Central Bank experimental policies, US Government bonds have been in a raging bull market. Simply put, as yields fall, prices rise, offering capital gains for traders. From a risk perspective, Government bonds offer an almost risk-free option for investors, and since 2019, the bond-trade has been crowded, implying mounting global risks (due to ‘white swan’ events and now the COVID-19 pandemic).

At a deeper level however, the rising levels of global debt have smashed records for the debt-to-GDP ratio and have caused concern amongst economists. Although low debt servicing rates (due to low bond yields) have allowed Central Banks to sustain these gargantuan levels of public debt, private sector debt, though not as substantial, has not been so lucky.

Value of US Corporate Debt issuance | SOURCE: FT.com

COVID-19 adversities have starting pressuring more and more businesses to raise capital via the debt markets. These higher yielding bonds have begun to go sour as rising credit spreads lead to solvency issues for many highly-leveraged companies.

Notwithstanding, the US Federal Reserve has dramatically stepped up it’s efforts to prevent an economic Depression by experimenting on corporate investment-grade and junk bond purchases. Thus far approximately $223 million worth of high yield debt has been purchased by the Fed with the total corporate debt purchases reaching $3 billion on May 27th.

On a global scale however, negative bond yields have turned many investors away from investing in many European and Japanese bonds as they offer no income and mean investors receive less than what they invest if they hold till maturity. Sovereign default risks such as in Argentinian, Ecuadorian and Lebanese bonds have further emphasized the demand for US bonds as the longer-term trend in EM bonds continues to show deteriorating credit ratings.


Stock Markets are considered leading economic indicators and are typically not indicative of current economic conditions within its pricing. Particularly in the US, the FOMO of retail investors and the high publicity of financial pundits who often encourage investors to ‘buy and hold’ rather than the more plausible ‘buy and homework,’ have inflated stock prices to now the highest valuation in 18 years signalling a V-shaped recovery but is this the most likely scenario?

The high market volatility (VIX >25) coupled with the lockdown measures have led to a dramatic increase in retail investor trading volume particularly in the US where zero commission trades are being taken advantage of. Top US online brokers (Charles Schwab, TD Ameritrade, E-trade and Robinhood) reported new account growth of as much as 170% in Q1 2020. Ford, Genral Electric, American Airlines, Delta Airlines, The Walt Disney Company, Carnival Corp. and Aurora Cannabis are amongst some of the top holdings on Robinhood. Retail investors rushed to buy share of the aforementioned companies at ‘hefty discounts’ after their stocks plunged >50% at the beginning of 2020.

YTD the S&P 500 Index is down 5.77%, while the median stock in the index is down 11.4%. Interestingly, more than half of the stocks in the index are down >10% YTD. This performance spread can be a reason for concern as investors currently remain pessimistically optimistic. The top 5 companies of the index, Apple, Microsoft, Amazon, Google and Facebook now make up 18% of the S&P 500 and are all within 5% of their all time high price. To put things in perspective, the equal weighted S&P 500 Index is down 13.05% YTD.

Similarly, the Nasdaq 100 index while positive on a YTD basis (+5.76%) and within 4% of record highs, has also seen this wide spread of returns (>50% of stocks in the index are negative YTD).

US Equity Indices YTD performance | SOURCE: FT.com

On a sector basis, Technology, Consumer Staples, Health Care and Communication Services have outperformed the broader markets whilst Energy, Industrials, Financials and Materials have lagged behind. This has not just been evidenced in price action but also through earnings performance:

SOURCE: I/B/E/S data from Refinitiv

On an absolute performance basis, since March 2020, the majority of market moves have occurred during ‘after-hours’ trading. Within the last two weeks, the “buy the close, sell the open” strategy for traders has proved very effective.

SOURCE: Hedgeye Macro Show Slide Deck 27th May, 2020

From a global standpoint, equities in China, Hong Kong, Japan, the UK, Canada, India and the Eurozone all peaked around Q4 2017 and entered bear markets whilst the US stock market continued to climb.

Global Equities 3Y Performance | SOURCE: FT.com

Interestingly, the sharp rebound in equities is eerily similar to that in 1929–30 during the Great Depression stock market crash. Whether the bottom is set for equity markets or this rally just represents a classic bear market bounce is yet to be seen, although I lean toward the latter.

SOURCE: Dow Jones — 1929 Crash and Bear Market — Macro Trends


The US dollar has established its dominance within the currency markets accounting for 79.5% of global trade and denominating close to $100 trillion of global debt. Due to this, the dollar has strengthened against most other currencies as the global demand for USD has gradually increased. Many calls by US President Donald Trump to have a weaker dollar did in some eyes, influence the Fed to act irrationally by slashing interest rates when they may not have been needed, but this has had an almost negligible effect.

Board of Governors of the Federal Reserve System (US), Trade Weighted U.S. Dollar Index: Broad, Goods and Services [DTWEXBGS], retrieved from FRED, Federal Reserve Bank of St. Louis;

With the COVID-19 shock, the US Federal Reserve has quickly initiated cross-boarder swap lines between Central Banks to meet the rising demand for the dollar, however if this economic crisis turns out to be a slow grinding Depression, solvency issues come to the forefront instead of the now concerning liquidity crisis. Consequently, this could further strengthen the US dollar against other major global currencies (EUR, GBP, CNY, CHF, CAD) in the short-term.


Whether it will be a V-shaped, W-shaped, L-shaped, Z-shaped or U-shaped recovery is yet to be seen, but for the sake of argument, one can rightly ask why does it have to conform to an alphabetical-shaped recovery? In the past, investors such as George Soros likened the 2009 economic recovery to an inverse square-root sign shape implying a natural bounce in the economy after GDP contraction hit the bottom to be followed by a prolonged period of subpar growth — a “lasting slowdown” and that could indeed be the case this time around or not.

Until now, global recessions have been confined to a handful of countries/regions. However, the rising interdependency between global economies now raises concern as to what would be the implications of this Great Lockdown which has affected the world as a whole. In the past, periods of rapid economic innovation and global policy revolutions have propelled economies out of turmoil, but what do we turn to this time?

As can be evidenced in the US stock markets, Technology stocks have been the market darlings and have led the recovery. The shift in consumer behaviour as a result of lockdown measures have justified why the stocks of Amazon, Shopify, Zoom and Netflix have hit hit all time highs whilst the broader market crashed. The question remains to be answered whether or not these behaviour shifts will morph into a permanent permutation.

Nevertheless, it is incredible that companies through technologies only developed within the last 10 years have managed to propel us through these rare times. The argument has been made, that rapid advancements in the ML/AI, 5G and Info Tech spaces through automation will drive economic expansion as the world gets accustomed to this ‘new normal.’ Currently, contact-free grocery and food deliveries, remote teleconferencing, mobile and online banking offer the solutions for a society that is slowly inheriting a predisposition to germophobia.

Many Economists have called for a major monetary and fiscal policy intervention via “people’s quantitative easing” and “helicopter drops” of cash to supplement household income in order to dampen this economic blow. It is clear that this economic suffering has overshadowed that of the 2008 Financial Crisis and as such, policy measures implemented then, may be useless now. Of course, understanding economic cyclicality assures investors and professionals alike that eventually economies will return to a period of economic prosperity. However, the question that is high debated amongst economic perma-bulls and perma-bears is when?

With the US presidential election upcoming and Sino-American relationship tensions heating up, paired with the threat of a second wave of COVID-19 infections, I remain skeptical of a rising systemic risk; is the worst past us or is this going to metamorphose into Greatest Economic Depression?

**This article is solely an opinionated argument based on current macroeconomic conditions and is in no way financial advice or predictions.

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