How markets will reveal what the future holds

The crash would have happened even without the virus, says Tim Lee. To gauge whether we are headed for another decade of steady gains or a repeat of the 1970s, watch volatility.

Will central banks always come to the rescue? © Getty Images/iStockphoto
(Image credit: Bank of England © Getty Images/iStockphoto)

Most people assume that economic and financial market recovery will be based on coronavirus cases peaking. Unfortunately, it is much more complicated than that. The crash in global financial markets would have happened anyway at some point, even without the virus. There were clear signs that it was coming. These included stresses in the US repo market that emerged in September and the decline in real and nominal interest rates, which implied that underlying global economic growth was already weakening.

The financial crash is what Jamie Lee, Kevin Coldiron and I, in our book The Rise of Carry, call a “carry crash”. A carry crash is not merely a big stockmarket decline but an almost straight-down crash in stockmarkets and credit markets, together with an evaporation of liquidity across all financial markets and a surge in the major funding currency for global leverage (the US dollar). All of these features were clear in the recent crash – as they were in the 2008 crash.

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Tim Lee is an economist and a co-author, together with Jamie Lee and Kevin Coldiron, of The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis (McGraw-Hill, 2019)