Sunday, April 12, 2020   / 05:57PM / By Mir Mohammad Ali Khan   / Header Image Credit: WatPad

Mir Mohammad Ali Khan, finance expert, author of several books and firstMuslim investment banker of Wall Street, explains why the impact of Coronapandemic is more dangerous than previous financial crisis. What is thedifference? Must read for students of IR, finance, media and policy makers.

Paris is not so romantic anymore. Is it? Manhattan sleeps very earlynow. Doesn't it? Giving hugs and kisses is considered a sign of ignorance now.Isn't it? Sitting near your grandparents is looked upon as a risk towards them.Right? It shows world economy is at a standstill.

Well, I read this somewhere today or something similarto it and it imprinted in my mind forever.

The world has run out of gas, it feels like, and even that on a desertedhighway millions of miles away from a gas station. Coronavirus has gripped ourlives. We woke up in 2020 like we are still sleeping through a nightmare. Somesay that the world is going to end and others say that it is the wrath of God.

Well, I would refrain from commenting on the worldending or the wrath part because that would involve an emotional statement andat a time like this, as an investment banker, my duty becomes to guide thepeople as to what I foresee. According to my expertise in finance, I believeinvestment banking on Wall Street depends on the political economy and changeson Wall Street affect the global economy.

So many questions come to mind at once. Will thisaffect the globalization of the past 25 years? Will it tilt the balance ofeconomic power away from one region to another? Will America weaken and Chinaor Russia strengthen? Will it create a new trading or cooperation block/s inthe world? Will the world see new currency dominate instead of the Dollar?

Will the education system shift from the brick and mortar to an onlinedistance learning-based platform, albeit slowly? Will the democracies that willor have failed to protect their people lose value in the eyes of the voters?Will the selfish countries be isolated by world communities based on their memoriesfrom the time of Coronavirus and non-cooperation?

Well, the questions are endless and most of theanswers will be nothing more than speculations. So, let us stick to facts.Facts that can be calculated 12 months forward based on numbers in light of 50 yearsbackward.

Corona pandemic: different thanprevious financial crisis? 

Will the world economy collapse soon? No. But if this ordeal continuesfor another 6 months then we are looking at some very grave consequences.Consequences that this world is not prepared for. Before I go on with my topic,let me shed some light on the facts where people compare this to the events ofthe 2008 world financial crisis. 2008 was a car crash.

This could be a train wreck. 2008 was a sudden eventbuilt up over a period of a few years based on just one financial product andthat product was high-risk mortgage securities. It was not an Armageddon. Itdid not affect logistics. World tourism. Petrol prices. Airline industries.Textiles around the world. So on and so forth. This affects 193 countries. Andall of them at once and in every aspect possible not just financial.

The world GDP as we stand right now is approximately $88,081 billiondollars or $90 trillion. The first three (3) months since (including February and March),we have lost $3.2 trillion in global GDP. World capital markets have lostdouble that amount. Corporations that declared their earnings or will do sowill do it including the month of January when it was not so bad and Februarywhen it started to get bad and March where it has become a pandemic.

Will $2 Trillion package notsave America? 

These figures will not look as bad as for the next quarter whichincludes April, May and June. Apple alone is facing a revenue loss of $1billion a day because of its stores closure around the world. Airlines in Asiaalone have swallowed a loss of $129 billion dollars. This loss can never bemade back because airlines are already a high debt low-profit margin business.Tens of airlines will go bankrupt within the next few months.

America being the biggest economy will pull so manyother countries down with it, but before it pulls others down; and IF this pandemiccontinues for the next 3 to 4 months, America will see damage to its economythat will be absolutely irreversible.

70 million people are working from home right now.Working from home (WFH) very soon is going to change into staying at home withoutwork. The highest unemployment claims came in last week in America, 3.2 millionjobless claims.

This can increase to a number anywhere between 8 to 12million within the next 6 months. 12 million jobless claims o[r even 6 million,half of it, which can be filed next month, spells disaster for America. Why?Because out of work America means mortgage default on homes.

America has approximately $15.8 trillion in mortgagedebt. $11.1 trillion or the highest portion of the debt is in home loans. $3trillion is in commercial properties. $1.6 trillion is in multi-family units orwhat you may call apartment buildings. And $254.1 billion approximately in farmloans.

Add to it the national American debt which rose byanother $3 trillion in 60 days to above $23 trillion because of the $2 trillionrelief package announced by Trump. $2 trillion cannot and will not help Americamore than a few months, Not even 2. It will require a package of $6 to $10trillion. Which will take the American national debt to its highest level ever?Money that America does not have or maybe has spent on wars, $14.8 trillion,instead of domestic spending or savings.

Back to the mortgages. Out of work Americans means nomortgage payments. No mortgage payments on top of a sinking economy due todeserted roads, no retail, no food, no traveling, no tourism and no money, willcreate a snowball of foreclosures. Foreclosures unlike the 2008 bad loans.

Here it will be the people with the best credithistory and decades of great payment history will be declaring bankruptcies.Corporate earnings for the next 2 quarters dwindling will force companies tolay off people. That will be an icing on the cake.

American capital markets may have a few Dead CatBounces (quick upward rallies) but the future of it is dependent upon thecorporate earnings, not Trumps' plans to inject funds. No corporate earningslike earlier mean no investor confidence and no investor confidence means ableak outlook for the markets.

Oil & other Commodities: Absenceof Demand? 

No airlines. No cargo ships. No cars on the roads. No winter where oilis needed as energy. A war of production between Russia and Saudi Arabia whichhas absolutely backfired in their faces because neither of them foresaw theCoronavirus spreading to this magnitude within weeks when they were fightingover production numbers in Vienna three weeks ago. 100 million barrel a dayworld consumption has already dropped to 89 million barrels a day. To addinsult to the injury, then Kingdom of Saudi Arabia (KSA) announced that it will increase its daily productionfrom 9.7 million barrels a day to 12.8 million barrels a day.

Keep in mind that KSA cost per barrel at the well isthe lowest in the world, $2.4 cents. But add all the other costs to it, and thefiscal break-even comes to $83 dollars a barrel.

Russia, on the other hand, has a cost per barrel atthe well for extraction is, $22 dollars a barrel, add the fiscal break-even,because not all of Russia's income comes from oil sales, like KSA, Russia thenstands at a cost of $43 dollars a barrel. Oil trading near its 52 weeks low ofvery low $20s, no future demand immediately, high output numbers, high debtsituation of KSA, Russia and other oil-producing countries, we can expectbankruptcies coming around the world.

Oil trading in low teen numbers for a long period oftime can cause devastation to the concept of Petro-Dollars. The concept thatkeeps the Greenback alive. Petro-Dollar evaporates into thin air like thepetrol itself when left out of the tank.

If Petrol trade is delinked from the Dollar, thatwould be the death of American currency stability. It might be great news formany other countries but not for the ones whose income depends on oil sales.

Copper, Silver, Gold, Platinum, and many other metalsare human intensive extraction processes in confined places, may it be themines or the refineries. Some of the biggest refineries of metals like Platinumare based in Europe, many in Italy.

A slowing demand, no extraction, and no refinementwill not increase the prices but lower them because of one factor being absent,the demand.

Why Europe is crucial to worldeconomy? 

If anyone thinks that the European Union is immune to an economic shock,they need to just realise that except for a few strong economic powers likeGermany or England or France, most have a very fragile economy. Greece andItaly and Spain and Portugal have barely come out of their debt trap. But theproblem is that the strongest economies of Europe are also under the grip ofthis virus.

Germany being the King of Europe has been hit thehardest when it comes to loss of economic activity. We are looking at afinancial contagion more dangerous than the viral contagion because by the timewe recover from the virus, economies would have been so weak that recovery willtake years. Most of the world runs budget deficits and Current AccountDeficits. It's like having a bad heart, weak kidneys and getting Coronavirus ifone puts it in non-financial terminology.

Almost $20 trillion dollars is the European GDP whichrepresents 23%+ of the global GDP. If one thinks that 23% of ones' body can beaffected by cancer and the rest of the body will remain healthy then needs aPsychiatrist more than an Oncologist.

This world cannot assume to have a healthy global economy without a healthy Europeaneconomy.

In my opinion, the EU is more important to the globalGDP than China. Because of its maturity of markets and a strong financialsystem based on hundreds of years of foundations. China lacks both thesequalities. China is emerging, Europe already has. A fall of the Europeaneconomy along with a slowdown in the American economy plus a laggard India andover production-based China with no buyers in sight, it is a recipe for a souplaced with unseen traces of cyanide.

Political & Social changes: Willworld be the same again? 

Well, regimes standing on long-overdue promises, a huge percentage ofpopulation below the poverty line, a neglected healthcare system and mere pastfocus on sending based growth, will come falling down. Every country is not asdisciplined or controlled as China. China has a grip on its population. Manyothers do not.

The country that would be hit the hardest would beIndia in this region. I had written an article almost nine (9) months ago predicting the slowdown of the Indianeconomy to a dangerous level already.

Many had questioned the article for a few months untilit all started to come true. It was the most in-depth article I had everwritten on the Indian economy. I had taken the entire Indian economy apart,thread by thread and put the kit back together without a sewing machine.

And nowhere in my wildest dreams had I incorporatedeconomic shocks of Coronavirus for an Indian economy. It gives me no pleasureto predict doom for any country, even India because my differences are loud andclear but they are with the bigoted regime of Modi and his sidekick Amit Shah.The people of India have just as much place in my heart based on "humanity" asthe entire world is, minus the RSS and BJP hatemongers.

Please take time out to read the article referenced above to understand the severity of what is about to happen to India andmultiply it by 4 or 5 times. Along with all that I wrote in the articleabout India and its economy, let me add that now India will see a food crisis.A severe food crisis without a drought. It will be a human drought wherecommodities and vegetables will be ripe enough to be plucked but there will beno one to pluck them because they are locked up at home hiding fromCoronavirus.

Elections in countries like ours, Pakistan, will nolonger be based on the promises of roads and bridges. Hospitals and healthcaresystem will be demanded by the voters. Educational system betterment will beasked for. Corona will force the leaders to listen to the voters.

Something that has never happened in 73 years inPakistan. This time is the time when the voters will have the say and not thevote taker. Election debates will be based on healthcare and education.

Again I say, if the cure is not here by August, theworld can see an armageddon.

So the conclusion is that IF this continues tillAugust, we are in a depression that this world has not seen earlier not even in1929; 1929 was not even 5% as dangerous as the coming one because there was notmuch to lose at that time, GDP was minuscule. There were no Trillion-dollarcompanies. Globe was nowhere near to be connected enough to have a globaleconomy. Comparing 1929 to 2020 is like comparing the injuries of a personfalling off a sidewalk and the other falling off a 10-story building.

Time is of essence: why? 

You see, when I see or forecast something really terrible based onresearch and numbers, I do not get scared or fear. Why? Because if it is that evidentthen it is going to happen, then do what you can do to protect yourself andremain calm. If nothing can protect you then no need to worry because thatwill only create anxiety and anxiety lowers your immune system and a weakimmune system in the Coronavirus days is more dangerous than a future-basedfinancial Armageddon, because that is in the person with a job to pay forfuture, and this is today.

Read more: 7 immediate economic solutions for government - Mir Mohammad Ali Khan

Take care of your today. Yes, I think if we do nothave a cure within the next six (6) months, we are looking at an economic disasterthat this world has never seen before. 

The world debt alone is $194 trilliondollars, add to it $29 trillion of the American debt, plus the $15 trillion ofmortgage debt and then add the Corporate debt which is not included in it plusmuch more; and then realize that there is no person with a job to pay for all thesedebts.

The 'House of Cards' will be coming down. And the cards maybe made out of solid steel when they fall on our heads.

Thank you. 

Credits

The post Why world economy is at the brink ofcollapse? Investment Banker explains first appeared in GlobalVillageSpaceon Monday, March 30. 2020. 

About the Author

Mir Muhammad Ali Khan is the first Muslim founder of an Investment Bankon Wall Street. He is the author of four (4) books and has published over eighthundred (800) articles.

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