Meltdown: The Volatility of the future and peeping into history

As the markets have been very volatile since last few weeks this looks like a perfect time to write about the changes in the future and the markets as well as the attitudinal changes that will happen to post virus era but as usual I will be starting with my macro economic views about the oil truce and the markets and probable future changes relating to them.

Macroeconomic view

Various governments of various countries have provided bailouts for their citizens either in kind or cash or a mixture of both and even India has provided a bailout for the country in mixture of kind and direct benefit of cash transfers. Even though we have had a stimulus bill, it is very difficult for MSMEs to survive in near short comings of about 6 months in the market without proper liquidity and RBI has taken all the steps it can take. It is not a time to criticize government at this time as it is doing a tremendous job but we must also look into history as in what must be done for the future and what scale is required.

By history I am talking about the steps take by Franklin D. Roosvelt during the depression of 1930 because it is considered a great recovery and also the steps taken by various governments during 2008 financial crisis by providing a stimulus bill as big as 10-15% of the GDP for a steady recovery considering a long term perspective wherein things are taken care for at least a period of 4-5 years.

Market Volatility

The markets have been volatile since past one month and since few weeks the Indian market have been copying USA markets with almost negligible difference as the markets are responding to the future that is there after 2 years from now. It is a general psychology that most humans have a tendency to form a pattern if three or more dots are connected even if there is no similar pattern from the past. 

There has been a comparison been made of the Volatility index which shows that the market is following the same pattern as it happened in 2008 financial crisis and there seems to be another spike in Volatility index when we will be seeing the stock markets crashing again.

 This above image shows the spike in volatility and NIFTY Index performance wherein if someone who doesn't know are inversely related to each other meaning that when the VIX index rises SENSEX/NIFTY shall crash and vice versa.

We need to look at the volatility and make a careful observation and a thought that whether there will be another spike or not? Also the markets have shown positive results and one must understand the main reasons behind it:

• The positive new of the corona virus relating situation as India has the least number of cases per million residents and also that sample testing have been started showing us the signs of relief and the impact of corona virus on green future.
• The stimulus package provided by the government has been a major relief to most of Indians as well as the FM Nirmala Sitharaman will be providing another stimulus package for the industry.
• Subsume of the industry is also a big advantage as the firms will start it's earnings and there wont be a total loss to the firm.

Change in consumer behavior

The main question arises is that will the consumers start following or go back to routine or will they start saving more?

Again I would like to take you to the history if it provides us any guide or future opportunities and clear vision. If we look at the spanish flu of 1918 there have been few lockdowns of similar nature but once the citizens start developing immunity then there wouldn't be a need for complete lockdown for the same but the major concern is how soon will we develop immunity over corona virus. 

The government is trying to have a 'V' shaped recovery after the first phase of lockdown by infusing liquidity in the market so there is more availability of cash and spending is more, but as we are talking about behavior change it seems that the consumers will be saving more and there can be rise in e-commerce expenditure and buying things from there with regards to safety concerns post virus period. Even the millenials will start saving for future uncertainty. It has also been noted that after every crisis there has been a change in attitudinal behaviour. For eg: After WWII there have been a significant increase in working women class which was not there earlier and now I expect increase in e-commerce expenditure by households but again looking at India it is very unlikely to predict regarding online expenditure.

The longer the lock down the harder it will be to gauge consumer behavior, will people go back to their old habits? Will people be more careful and save more? The longer the lock down lasts, more people will lose their jobs leading to decrease in household spending and it will take much longer to return to normal economic activities. There are still few questions remaining and I expect the readers to have a good discussion:

• Will you be happy to work from home?
• Will you be more happy if the children don't go to school and learn from home through online means?
• Will there be a Universal healthcare system for the India?
• Will there be any increase in budget allocation towards health care and education?

Liquidity Preference

There has been a drastic change in liquidity preference of money among-st the Indian households as the investors do not consider stock and bond market as safe investments during the volatile market. Thus, the demand for gold has increased leading to increase in price of gold also. Any uncertainty in future would lead to increase in gold prices as it is considered much safe investment than any other form and also not only because of the safety concerns but also because the stock and bonds have started giving very less returns to the investors.

OPEC truce crisis

After days of drama the OPEC+ countries have been in truce to produce a limited amount of oil as the demand has decreased in the current period in response to corona virus triggered situation, but the deal would likely to come under pressure or changes when the situation turns normal.

But these are times with unprecedented collapse in demand due to virus and I would not be surprised that while there will be increase in demand the countries would be breaking the truce to fight for the market share. As of now Saudi Aramco has offered it's clients of refineries across Asia and European markets to have deferred payments up to 90 days, this move clearly shows that though there is a truce there will be many attempts by the companies to capture good amount of market share.

I would request to provide me your thoughts in the comments section