This coronavirus share market crash is unlike those that have gone before it

ALEXANDROS VLACHOS/EPA

Kylie-Anne Richards, University of Technology Sydney

Stock markets have crashed, we can be confident of that. History suggests there is no quick recovery from crashes like these, which means lasting consequences for investors.

The World Health Organisation declared the COVID-19 coronavirus a pandemic last Wednesday, wiping US$7 trillion off global equity markets. A day later, now marked down in history as Black Thursday, the Dow Jones index in the US closed down 2,353 points (-10%), the worst single day points decline since Black Monday in 1987.

Staggeringly, the index rebounded sharply the following day. Friday saw the US market closing the roller coaster week up 9.3%.

Shares in the Australian S&P 200 index did the same sort of thing.

---

Read more:
Reserve Bank and government prepare fresh emergency measures as markets tumble

---

Prices collapsed 8% after opening Friday, then rebounded throughout the day to end up about where they started, before collapsing 9.5% on Monday.

Not even normal for a crash

The volatility, velocity and magnitude of these swings is not in the playbook of past global market crises.

Generally, markets have been overvalued, with stocks climbing sharply in recent years despite tepid economic growth in the US and elsewhere and heightened economic and political uncertainty.

If we look at Nobel Prize winner Robert Shiller’s cyclically-adjusted price-to-earnings (CAPE) ratio, a standard equity valuation metric, there have been only two other times in modern history when the US stock market has been more overvalued than today.

They were in 1929 and 2000; ahead of the Great Depression and, more recently the 2000 “Tech Wreck”.

---

Shiller total return cyclically-adjusted price-earnings ratio

The data and CAPE Ratio used to create this graph were developed by Robert J. Shiller using various public sources. Neither Robert J. Shiller nor any affiliates or consultants, are registered investment advisers and do not guarantee the accuracy or completeness of the CAPE Ratio here, or any data or methodology either included therein or upon which it is based.

---

What has been so interesting about the bubble that preceded the coronavirus crash is that there was no identifiable underlying economic or social process driving the market to such dizzying heights.

But there was ultra-easy monetary policy (including unconventional policies).

The problem we have now is that with rates so close to zero (or even negative in some countries), central banks are powerless to tame the turmoil by conventionally cutting interest rates.

---

Read more:
Below zero is ‘reverse’. How the Reserve Bank would make quantitative easing work

---

It is making investors worried about governments’ abilities to respond in time to contain or reduce the severity of human and economic devastation.

We are dealing with a global health crisis the likes of which has not been seen for 100 years. It will keep investor sentiment fragile and prone to sudden shifts.

If the last two weeks is anything to go by, the resulting volatility will test the normal functioning of markets.

Faster and more jumpy

There is no formal definition of a market crash, but what we see here has all the hallmarks:

• a 20% decline in equity markets, which defines a bear market, has been achieved in two weeks.

• rates of transacting (velocity) across global markets has been high and a good deal higher than in previous crises. Electronic systems provide a catalyst to embed the panic (uncertainly) into the pricing. We’ve seen huge swings in prices, at increased transaction rates.

In the US, market circuit breakers have been triggered in both falling and rising markets. Black Thursday saw a 15-minute trading hold at the opening to prevent a free fall of stock prices. A day later the New York Stock Exchange’s “limit-up” brake was triggered.

---

Read more:
How will coronavirus affect property prices?

---

Transaction costs have been inflated with the “spread” between buying and selling prices widening significantly compared with pre-crisis levels, and almost twice what it was during the GFC.

Intraday volatility (the swing from high to low within one day) is approaching what was observed during the global financial crisis.

---

US S&P500 Index intraday change from high to low

---

This is not limited to prices; there is also significant intraday volatility in trading volumes, creating uncertainty in the ability to transact effectively, if at all, in the less traded stocks.

The panic response has been quickly entrenched in the price of stocks, distorting effective resource allocation and the management of risk in markets.

That is another way of saying markets are not working well at the moment.

The panic sell-off has seen markets become highly correlated, with “crisis contagion” spreading to all markets and countries. This can be thought of in much the same vein as the COVID-19 pandemic – contagion results from a shock in one or a group of countries or markets, and spreads to others.

It’s shutting down markets

This has real repercussions. New debt issuance has ground to halt around the world.

Even the highest quality government borrowers are finding it hard to sell new securities in this market. Corporations have no chance. This increases the re-financing risk for large corporations, and even banks.

For wage earners, the market crash should be of little consequence. What matters to workers is employment and the number of hours worked.

---

Read more:
We’re staring down the barrel of a technical recession as the coronavirus enters a new and dangerous phase

---

The fate of workers, particularly those employed in heavily-exposed industries, will be determined by whether the economy can navigate the crisis without a surge in unemployment and business failures.

Superannuants, on the other hand, will be directly and immediately affected.

Superannuants at risk and noticing

Large super funds (super funds with more than four members) held A$912 billion of Australian and international listed shares at the end of 2019, according to Australian Prudential Regulation Authority data. That’s 47% of their total assets of $1.928 billion.

With digital technology, superannuants can get almost real time portfolio valuations.

For those who are invested in the standard growth fund and care to look up the latest numbers, they are down at least 10% in two weeks.

Retirees might spread contagion

For self-funded retirees, Australian bank stocks are very popular. An investment of $100,000 of Australian banks stocks at the start of February is now worth about $75,000. And that is after the spectacular rally on Friday.

This greater access to information and the baby boomer retirement bulge means the wealth effects from large falls in share prices will probably be felt more than in the past.

If the crash turns into a sustained bear market, the risk is that this will become one of the key mechanisms by which the economy is driven down.

Kylie-Anne Richards, Lecturer, Finance Discipline, University of Technology Sydney

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Australia: Bushfire Crisis Update

Iran – USA Crisis Update (Including Plane Downing)

Iran – USA Crisis

What investigators should be looking for in the Iran plane crash: an expert explains

Geoffrey Dell, CQUniversity Australia

While there is much speculation about the cause of the Ukrainian airliner that crashed after take-off from Tehran’s airport this week, killing all 176 people on board, there is presently very little factual information to go on.

Western intelligence has indicated a surface-to-air missile likely hit the plane in what may have been an “unintentional” act – an assertion Iran quickly dismissed.

As with any other crash, the world aviation community needs to know what caused this one in the interest of ongoing flight safety.

Political tensions between Iran and the US may make the investigation more challenging, but they should not prevent a thorough systematic analysis from occurring and the cause of the crash to ultimately be established.

---

Read more:
Iran and US step back from all-out war, giving Trump a win (for now)

---

Who will have access to the black boxes?

The flight recorders hold the key to establishing what actually happened and why. And here’s where the political tensions are most problematic – Iran initially said it would not hand over the black boxes to the manufacturer of the aircraft, Boeing, or the US.

But new reports say Iran has now invited the US National Transportation Safety Board and Boeing to take part in the investigation.

Under the International Civil Aviation Organisation Annex 13 convention, the US has the right to appoint an adviser to the investigation, as does the aircraft manufacturer. The convention presumes a level of cooperation between all parties involved in crash investigations, which could prove difficult in this case. But that doesn’t necessarily mean a proper investigation won’t or can’t be conducted.

Responsibility for the investigation sits with the Iranians, but under the UN Civil Aviation Conventions, they can request assistance from any other country, if they don’t have the capacity to conduct it themselves.

There are many other countries with the necessary expertise to assist, including recovering flight data from recorders with very significant damage. France, Canada, UK, the Netherlands, Germany and Australia could all help, for example.

Other countries can only step in, however, if invited by Iran or if Iran chooses not to conduct the investigation.

What’s most important is that whoever leads the investigation must have access to all the information – the wreckage itself, flight data, radar data, maintenance records, crew data, flight plans, load sheets, and passenger and cargo manifests. Otherwise, the wrong conclusions can be reached.

Why is a field investigation important?

There also needs to be a parallel field investigation analysing the wreckage.

First, investigators should be ensuring they have accounted for all the wreckage. If some parts separated from the aircraft in-flight, they may be found some distance from the main wreckage site and may hold key clues that could lead to a better understanding of the cause of the crash.

As such, the terrain under the flight path needs to be surveyed carefully to locate all items from the aircraft.

Clearly, it will also be important to examine the wreckage of the engines for any evidence of pre-crash damage.

---

Read more:
Here’s how airplane crash investigations work, according to an aviation safety expert

---

For example, if a fire had been burning inside the engine cowling, there may be evidence of scorching. Analysis of the internal engine components should also make clear whether the engines were still delivering power when the plane made impact with the ground or if there was a pre-crash structural or component failure.

Investigators should also look at the wing and fuselage surfaces next to the engines for any pre-impact damage. If an engine failure occurred, there may be evidence of impact damage from engine components after they burst out of the armoured casing.

This was the case with the fatal Air France Concorde crash in 2000, as well as the uncontained engine failure that nearly caused Qantas flight QF32 to crash en route from Singapore to Sydney in 2010.

Can evidence show if a missile hit the plane?

Analysing the aircraft engines, wing and fuselage surfaces may also provide evidence if the aircraft was struck by a missile.

This was the case with Malaysia Airlines flight MH17, which was shot down over Ukraine in 2014, killing all 298 people aboard. There was clear evidence of the aircraft structures being penetrated from outside the plane by high-speed particles.

Similar forensic analysis can be conducted on the remnants of the Boeing 737 in Iran, even if a high degree of fragmentation occurred in the crash. This should reveal the truth if a missile was responsible.

One of the engines of the crashed Boeing 737 in Iran.
ABEDIN TAHERKENAREH/EPA

Would Boeing’s exclusion hurt the investigation?

Of course, it would be usual for the aircraft manufacturer to be involved. After all, it knows more about the technologies involved in building and operating the aircraft than anyone else.

That said, there are many global agencies that also know a lot about the engineering and operation of the B737-800 plane, such as the airworthiness authorities in other countries, who could be called upon to participate.

No doubt, Ukraine will be heavily involved, as will Canada, due to the number of Canadians who lost their lives in the crash. So, if Boeing was excluded from the investigation, it might be a set-back, but not a show-stopper.

---

Read more:
MH17 charges: who the suspects are, what they’re charged with, and what happens next

---

Boeing is, however, responsible for assuring the ongoing safety standards for the global B737 fleet, so whether it is directly involved in the investigation or not, it is imperative the reasons for the crash are shared with global aviation agencies, the manufacturer and all other airlines.

It is worth reflecting in these sad occasions that the purpose of a crash investigation is to prevent future incidents. Unless the actual cause of this crash is understood, any possible problems in the global flight safety system may go unrectified, making the risk of future crashes higher than it otherwise would be.

The impact of the crash on the families of the victims is also immense and immeasurable. This is another reason why a proper, thorough and systematic investigation is so important. It ensures those who have tragically lost their lives, and their families and friends, will not have suffered in vain.

Geoffrey Dell, Associate Professor/Discipline Leader Accident Investigation and Forensics, CQUniversity Australia

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Iran – USA Crisis (Including the Plane Disaster)

USA – Iran Crisis

Also this:

Two ways to fund NSW election promises as property prices crash

Previous NSW election promises were easily funded. Not so this time.
Shutterstock

Gareth Bryant, University of Sydney and Frank Stilwell, University of Sydney

State elections are always about spending promises, but this time not much is being said about how they will be funded.

Last minute costings on individual announcements tend to rely on the general presumption that the state economy will keep growing and somehow produce the needed revenue.

This is evident in the costings released by the NSW Parliamentary Budget Office, which show that new spending promises from both major parties exceed new revenue promises.

The Labor Party has managed to find some new revenue through increased taxes on luxury cars, boats and vacant properties, while the Coalition has unveiled no new revenue initiatives at all.

While the property market has been climbing this needn’t have mattered that much. But for the past 20 months Sydney prices have been falling. Projected stamp duty revenues are being repeatedly revised downwards. The latest wipes A$9.5 billion off what was expected at the time of the 2017 budget.

---

NSW state revenue by type, A$ billion

University of Sydney Policy Lab

---

Austerity, or an alternative?

It’s looking as if the incoming NSW government will need to moderate spending including spending on essential services and infrastructure, but there might be a way out.

Today, we published a new report for the Sydney Policy Lab outlining two ways in which the NSW government can ready its budget for a post-housing boom economy.

Politicians of all parties tell us that fiscal rules create binding constraints for state governments and they are right.

But there are imaginative ways to strengthen state finances and to interpret those constraints.

Alternative 1: taxing residential land

Although land used for holiday homes and rental properties faces land tax, land used for owner-occupied housing is exempt in NSW, meaning as much as A$1 trillion of land is exempt.

It is a source of wealth – one of the few covered by state tax powers – that the budget can no longer afford to ignore.

Extending NSW land tax to owner-occupied residences with safeguards could fund much of the state’s needed service and infrastructure spending and wind back the outsized reliance on stamp duty.

With so many people locked out of home ownership altogether, it would make the tax system fairer.

Alternative 2: redefining ‘investment’

Under NSW budget rules spending on services is defined as cost that needs to be matched by immediate revenue. Spending on infrastructure, often on infrastructure which will later be privatised, is defined as an investment, meaning it doens’t have to be matched by immediate revenue.

It is why there is talk about a squeeze on services in the midst of record spending on infrastructure.

There’s room to change those definitions.

While there are good macroeconomic and budgetary reasons to differentiate day to day spending from investments, much of what is defined as day to day spending is in fact an investment.

There’s no reason why the state’s power to borrow to invest in infrastructure couldn’t also be used to invest in public services like health and education. With a change of rules, governments could borrow to invest in nurses and teachers at interest rates currently reserved for toll roads.

First steps

A practical starting point would be to connect spending on public services to the savings they create in other parts of the state budget, and account for this as the return on the investment.

As an example, “justice reinvestment” could fund programs aimed at reducing Indigenous incarceration out of the savings those programs would eventually deliver in other areas.

The redefinition would remove the present bias towards programs that build only physical infrastructure that has to be paid for later with tolls or privatisations.

Both ideas could help whichever party or parties form government after Saturday’s election, and help NSW. Without them, budgeting will become more difficult.

---

Read more:
NSW election likely to be close, and Mark Latham will win an upper house seat

---

Gareth Bryant, Lecturer in Political Economy, University of Sydney and Frank Stilwell, Emeritus Professor, Department of Political Economy, University of Sydney

This article is republished from The Conversation under a Creative Commons license. Read the original article.

All Boeing 737 MAX flights grounded – and travellers could feel it in the hip pocket

Chrystal Zhang, Swinburne University of Technology

With investigations under way into two crashes of Boeing’s 737 MAX 8 aircraft, the US manufacturer has caved to pressure and grounded the entire global fleet totalling 371 planes. That includes both model 8 and 9 versions of the aircraft.

The company issued a statement saying this occurred:

… out of an abundance of caution and in order to reassure the flying public of the aircraft’s safety.

---

Read more:
Flights suspended and vital questions remain after second Boeing 737 MAX 8 crash within five months

---

But the impact on passengers and air travel could last for months as airlines try to reschedule flights and seek other aircraft to meet demands. While things are still evolving, what should you anticipate as a traveller?

Everybody down

US President Donald Trump’s order on Wednesday prompted the Federal Aviation Authority to ground all 737 MAX aircraft flying in and out of the US.

While it is legitimate for a government to issue regulatory orders to intervene in an airline’s operation due to safety or security concerns, it is unprecedented that such a large number of countries are taking action.

At least 45 International Civil Aviation Organisation member states had already either ordered their airlines to ground 737 MAX aircraft, or suspended entry of such planes into enter their airspaces.

Countries affected include China, Indonesia, Germany, UK, France, the Netherlands, Singapore, Australia, New Zealand, Canada and now the US.

While investigations into the two crashes could last for months or even years before any conclusion is drawn, the length of suspension is also unknown at this stage.

Yet holiday seasons such as Easter and school vacations are approaching, and many of us will no doubt be looking to fly away for a break.

Expect disruption

Airlines face disruption almost every day: airline operation is a complex system. Disruption can be caused by unforeseeable weather conditions, unexpected technical or mechanical issues of an aircraft, or associated safety hazards or security concerns.

Airlines therefore have strategies in place to manage or at least mitigate the effect of the disruption and reduce any potential delays. This could include but is not limited to:

• changing or swapping an aircraft type

• combining two or three flights into one operation

• arranging alternative flights for travellers

• moving travellers to other airlines if their tickets have been issued.

With only 371 Boeing 737 MAX family jets in operation, this is a small percentage of the total of more than 6,000 of the previous model and gives airlines the ability to use other jets in their fleet as a replacement.

A snapshot of Boeing 737 models in flight at 7:52am UTC Thursday (6:52pm AEDT) shows 1,500 aircraft. Not a 737 MAX in sight.
Courtesy of Flightradar24.com

But the current suspension will present significant challenges for some airlines.

Subject to their fleet size, the scope of their network, and other resources and capacity available, big airlines with multiple types of aircraft in their fleet are more capable of managing such disruption.

For example, Air China, China Eastern, China Southern, American Airlines and Southwest will have more resources to arrange for travellers to fly to their destinations.

In contrast, low-cost or regional carriers will be limited in their capacity to manage the disruption.

For instance, SilkAir and Fiji Airways have six and two Boeing 737 MAX aircraft in their respective fleets. Grounding the model means that both carriers will lose 16% of their total capacity.

Fares could go up

While airlines are making every effort to minimise the disruption, all these arrangements come at a cost.

Airlines might have difficulties in sourcing capacity to replace the aircraft, resulting in inevitable delays or cancellations. And delays and cancellations also result in additional cost to airlines operation.

Travellers could soon see an increase in airfares. The rising fuel cost and shortage of pilots have already put global airlines under pressure to manage operational costs.

Impact on Boeing

Boeing and Airbus are a duopoly, said to dominate 99% of the global large aircraft orders, which make up more than 90% of the total aircraft market.

Over the past few decades, Boeing has weathered problems before and maintained an exceptional reputation for its reliable and efficient aircraft design, manufacturing and service.

In 2018 , Boeing received US$60 billion for 806 aircraft deliveries, comparing to Airbus’s US$54 billion for 800 aircraft deliveries.

Of all the aircraft sales, the Boeing 737 MAX series – designed to replace the current 737 family – was becoming one of the most popular airliners, despite being only introduced to the market in May 2017.

But the two recent crashes have raised concerns about reliability of the 737 MAX 8 autopilot system, the Manoeuvring Characteristics Augmentation System.

Some pilots have complained about a lack of training for the MAX 8. Others have complained of problems.

The aircraft represents a significant change from its predecessor models, including new engines, new avionics and different aerodynamic characteristics.

Potential risks

The risk for Boeing now is the potential consequences flowing from any investigation into the aircraft crashes. These could include:

• complete or partial cancellation of orders placed by global airlines yet to be delivered

• litigation by the affected airlines and the victims of the ill-fated aircraft, seeking damages caused by any product defect (if proof of any defect could be established)

• new opportunities for its rivals to promote their aircraft; this could allow, for example, China’s state-owned aircraft manufacturer, COMAC, to make new waves in the industry.

Regardless, Boeing could face enormous financial losses and devastating economic consequences.

Boeing’s shares dropped after the Ethiopian Airlines crash on Sunday, but have started to recover.

While Boeing surely carries enough insurance coverage for losses, it is inevitable the damage to its brand is more far-reaching in the medium to long term. This will affect the confidence of aircraft operators and the general public.

Even if any technical defects discovered are quick to fix, a damaged brand tends to require more time and much more significant efforts to recover.

Is it safe?

Of course there is a question everyone wants answered: is it safe to fly?

The answer is definitely. Statistically speaking, flying on a commercial passenger airliner is the safest mode of transportation.

A recent study of US census data puts the odds of dying as a plane passenger at 1 in 188,364. That compares with odds of 1 in 4,047 for a cyclist, 1 in 1,117 for drowning and 1 in 103 for a car crash.

Globally, 2017 was the safest year in aviation history with no passenger jet crashes recorded.

The most advanced technology used in aircraft design and manufacturing, and in air traffic control management, and the comprehensive, efficient pilot training and management are aimed at a safe flight.

So the decision of Boeing to suspend flights of its 737 MAX aircraft is welcomed, for now. But, pending the findings of the investigations, the questions as to how long the suspension will be in effect and how Boeing will address the issue remain unanswered.

Chrystal Zhang, Senior Lecturer in Aviation, Swinburne University of Technology

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Searchers Have Spotted the Wreckage of the Missing Indonesian Plane