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A Look At What To Expect In Next 12 Months

By Chris VermeulenMarket OverviewMar 25, 2020 04:54PM ET
www.investing.com/analysis/a-look-at-what-to-expect-in-next-12-months-200519052
A Look At What To Expect In Next 12 Months
By Chris Vermeulen   |  Mar 25, 2020 04:54PM ET
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As the global central banks and U.S. Fed attempt to come to the rescue during the COVID-19 crisis, the reality is that monetary policy works better when consumers are able to actually go out and engage in spending and economic activity. If the COVID-19 virus event contracts global consumer activity, as it has recently, for an extended period of time (4 to 6+ months), then we have a real issue with how QE efforts and consumer activity translate into any real recovery attempt.

The real risks to the global markets is an extended risk that the COVID-19 virus creates a contracting economic environment for many months/quarters and potentially fosters an environment where extensive collateral damage to corporations, consumer activity, credit/debt markets, and other massive financial risks boil over.

News is already starting to hit that QE is not helping the deteriorating situation in the mortgage banking business. Remember, this is the same segment of the financial industry that started the 2007-08 credit crisis event.  News that mortgage lenders and bankers are already starting to experience margin calls and have attempted to contract their exposure to the risks in the markets (a bit late) are concerning. This is a pretty big collateral damage risk for the global markets.

Additionally, as we expected, applications for new mortgages have collapsed to their lowest level since 2009. Until consumers feel confident in their ability to get out, engage in real economic growth and take on home loans they know are relatively secure in their ability to repay – there is going to be a continued market contraction. The next phase of this contraction is a price reduction, forced selling/foreclosures and a glut of assets waiting for a bottom.

“Home-purchase applications dropped by 14.6% while refinancing applications plummeted 33.8%."

I think the most important aspect of this global virus event is to remember that we will survive it (in some form) and we will live to rebuild after this event completes. Yet, the reality is that we were not prepared for this event to happen and we don't know the total scope of this virus event. We simply don't know how long it will take to remove the threat of the virus and for societies to re-engage in normal economic activity – and that is the key to starting a real recovery.

Hong Kong has recently reported a “third wave” of COVID-19 infections. I believe we should attempt to learn from places like Hong Kong, where news is moderately accurate and reported via social media and other resources. If we want to learn what to expect in the U.S. and how the process of containing this virus may play out, we need to start learning from other nations that are ahead of us in the curve.

It appears that any attempt to resume somewhat normal economic activities while the virus is still active spouts a new wave of infections. This would suggest that the only way to attempt to re-engage in any somewhat normal economic activity would be when a vaccine or true medical cure is in place to allow nations to attempt to eradicate the virus as these waves continue. 

The price collapse in 2008-09 represented a 56% decline from top to bottom. Currently, the S&P has fallen by just over 35%. We don't believe the bottom in the U.S. stock market has setup just yet and we do believe there is a greater downside price risk ahead. We don't believe the housing market will be able to sustain any of the current price levels for much longer. We believe the collateral damage of this event is just starting to be known and we believe a greater economic contraction is unfolding not only in the U.S. but throughout the globe.

Skilled traders need to understand the total scope of this event. An economic contraction, like the COVID-19 virus event, could contract global GDP by as much as 8 to 15% over an extended 16-to-36-month span of time.  Are we concerned about the real estate market? You bet! Are we concerned about global markets? You bet! Are we prepared for this as traders? You bet! Are the central banks prepared for this? We certainly hope so.

A Look At What To Expect In Next 12 Months
 

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A Look At What To Expect In Next 12 Months

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Comments (7)
Zman Trading
ZmanTrading Mar 26, 2020 3:25AM ET
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Chris V is one of the most interesting contributors to follow
Chris Sundo
Chris Sundo Mar 26, 2020 2:32AM ET
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Is it not odd that after MERS and SARS now COVID also gets released over Chinese New year. A conspiracy theorist would say it's all Trump's fault for messing with world energies and rubbing people the wrong way and someone added a little push to release the virus when Chinese were sent into the world with a good reason. Trump messes up the energies too much and he should go and never come back to politics. He has been a burden to America's finances just like he has been so for the finances of all his other ventures, all of which turned losses year after year.
Chris Sundo
Chris Sundo Mar 26, 2020 2:28AM ET
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Trump seems only interested in getting re-elected. Is he really willing to put American lives on the line to make a splash with voters? Canadian provinces of ONTARIO and QUEBEC have just now wound down for 2 and 3 weeks respectively. Yet baby POTUS can't handle more than a week before causing a ruckus.
Chris Sundo
Chris Sundo Mar 26, 2020 2:25AM ET
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"It appears that any attempt to resume somewhat normal economic activities while the virus is still active spouts a new wave of infections. " Yet Trump wants to re-open prematurely while his Canadian smarter brother has just completely closed some of its provinces such as Ontario (2 weeks) and Quebec (3 weeks). SADLY TRUMP IS NOT AWARE OF WHAT HE DOES NOT KNOW, AND NOT AWARE HOW STUPID HE TALKS AND ACTS. IT'S NOT SAD FOR HIM BUT FOR HIS PEOPLE, the small people of America, representatives of the non-wealthy 98% who voted for Trump. Does it appear that Trump is willing to sacrifice American lives to get re-elected?
pimpin pips
pimpin pips Mar 25, 2020 11:21PM ET
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I have talked down everything as a relatively new trader even this....at first. I am still 25 percent 3x bear etf long, 25 percent BTC, few selected stocks and options expire 2022 then 35 percent cash. I did this because I had realized how bad this was when it was not affecting children and couldn't be traced to them in most cases where parents even died. that means what we think is x amount of cases needs at least to be a 0 added to total cases. has to global shut down or country by country 100 percent down. us must realize let's go or say like netherlands evolve life goes on but no point this way
Thomas Koiro
Thomas Koiro Mar 25, 2020 9:07PM ET
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Appreciate the analysis. What should be not forgotten is the high levels of debt being held by governments, businesses and individuals BEFORE this crisis unfolded. Now more debt and lowered economic activity. It's understood that world economies need a jump-start, but the debt will be the anchor that limits growth. The only way out of that will likely be extracting from those who don't have political power. You know, wage earning taxpayers and entitlement recipients.
Kwee Ngee Koh
Kwee Ngee Koh Mar 25, 2020 6:45PM ET
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Fair assessment. Useful.
 
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