Bankruptcies now the key risk as hopes for V-shaped recovery disappear

Governments, financial markets and central banks all originally assumed the Covid-19 pandemic would be over in a few days or weeks. But it is now clear they were wrong. And unfortunately, there is little sign of a Plan B emerging.

The idea was that consumers would have plenty of money in their pockets after the lockdowns, due to all the furlough payments. So by now, it was assumed, they would be coming out to ‘spend, spend, spend’:

  • Businesses would have lost income for a while, but it would be quickly made-up over the summer
  • Very quickly, everything would be back to ‘business as usual’, with pent-up demand leading to a major boom
  • This would confirm policymakers’ view that the pandemic was simply a problem of cash-flow and liquidity
  • And until recently, central banks were suggesting their stimulus was a “job well done” as the Bank of England claimed

“The economy is on track for a sharp V-shaped recovery thanks to a faster-than-expected rebound”.

Unfortunately, this was wishful thinking.


Of course, the $tns of free cash on offer from central banks did lead to a sharp recovery in oil and financial markets.  And millions of frustrated sports bettors have also opened trading accounts with Robin Hood and other platforms:

  • In the short-term, as Ben Graham noted, financial markets are a voting machine
  • So if people are given free money, they will naturally run to bet on their favourite stock(s)
  • But in the longer-term, fundamentals always win out, as the weighing machine takes over
  • Markets are now starting to recognise the main risk is that companies may go bust due to lack of demand

Until very recently, of course, the “voting” machine has been pushing markets higher.

But now the risks are rising, as we saw in 2000 with the end of the dotc0m bubble, and in 2008 at the end of the subprime bubble.


The issue is simply that we are now in a balance sheet recession. Consumers are worried they may not have a job tomorrow. So they are saving more and paying down debt when they can.

Whole industries are also being restructured almost in real time – travel, leisure (including airlines/transport/hotels/restaurants); commercial and retail property (including the retail sector and offices); energy (including oil/gas/petrochemicals.

None of these seem likely to go back to where they were. And at the same time, new business models based on sustainability and affordability are starting to emerge.

So what can we expect now the mood has changed and financial/oil markets have begun to fall again?

Most likely, attention will turn back to the IMF, and their forecast of a decade-long depression scenario where deflation becomes embedded in the economy.  This would tie in, of course, with the demographics. It is still widely overlooked that, as the chart confirms, over 50% of the 750m global population increase over the next decade will be due to the Perennials 55+generation.

Perennials are very bad news for growth as they already own most of what they need. And their incomes are set to decline as they enter retirement.  So it is hard to see where fundamental support for the economy could come from, once the myth of the V-shaped recovery has been exposed.