The echo and rhyme of Lehman

The Lehman analogy has usually got trotted out whenever stocks have had a drawdown since past decade. Often it’s been by permabears eager to blame central banks for every woe under the sun, a point that’s been emphasised by tweets from Mark Dow (@mark_dow). Using the comparison has been a bit like equating my cooking skills, struggling to scramble an egg, to those of Gordon Ramsey. An example of hyperbole of an overactive mind, I suppose (my attempt at rewording an expletive riddled put down from Gordon Ramsey). I am now going to use a phrase, which when usually used, should result in immediate laughter: this time is different. This time it feels like Lehman, but then again is nothing like Lehman. Well, this time, no one at all can blame Dick Fuld.


Of course, one aspect of the current crisis that really is different, is the origin, a point which was made by Katie Martin (@katie_martin_fx) in her recent interview on Channel 4 News. The Lehman crisis spread from financial markets into the rest of the economy. This time around the shock has been from the real world, the coronavirus, and has spread into the financial markets. Some sectors have obviously been more directly impacted than others, such as the airlines. Then there was the crude oil crash with Saudi and Russia eager to bankrupt to one another or possibly it was a cleverly coordinated attempt by Putin and MBS to encourage folks to think more actively about doing ESG investments? I suppose we’ll never quite know: I guess don’t play chicken when both sides are vegetarian, or something like that. And no, this market crash hasn’t come about because of central bank policy. Although maybe central banks are responsible for the lack of toilet paper in my supermarket (they’re to blame for everything, right)?


The speed of the fall in equities over the past week has been very rapid, with Thursday being the worst day since 1987. The total percentage loss since the highs, of around 20% (including Friday’s rally), is still nowhere near the amount we saw during the Lehman crisis which was around 50%. We’ve reached the point in a selloff, where people get confused about percentages (if something sells off by 20%, and then goes up by 20%, you are still down). A outbreak of lack of arithmetic is an indication that things have got serious (apologies for that pun, in these serious times).


However, it does feel we are not yet at an end, with the obvious caveat that I am not a virologist. Whilst it does appear to be under control in China, it has unfortunately spread, in particular in Italy and elsewhere. If you’d like to look at the data from John Hopkins on coronavirus cases, take a look at my Jupyter notebook here which downloads and plots it. Massive action by governments is the only way to halt the coronavirus and also to help after it has passed. To reuse the famous words of Mario Draghi, who took over from the ever “vigilant” Trichet, they have got to do “whatever it takes”, and not to say it isn’t their job. When in doubt, don’t hike.


Hence, at least from a market perspective, it’s likely stocks haven’t yet bottomed out. From an FX perspective, USD tends to benefit in severe market dislocations, and it’s already rallied significantly, I’d expect this to continue. GBP/USD in particular, in developed markets, has suffered. USD/JPY is more of an unusual one in risk off markets, and tends to fall. I suspect the recent spike in USD/JPY is likely to be a temporary aberration. somewhat more driven by the retracement in Treasury yields, and it’s likely to resume its fall.


When this is all over, and hopefully, the virus has lost its ability to spread quite so rapidly and perhaps later a vaccine has been discovered, I’m sure we’ll look back and be able to understand what went wrong and what could have been done better. At least market wise and in terms of the economy things may go back to “normal”, whatever that means, likely much quicker than after Lehman, but on a fundamental level society will have changed.


Probably the biggest difference is on a personal level. During the Lehman crisis, it was started as a markets thing, which faded once you got home till the next day at work. This time it’s all encompassing, it’s all about home, and markets are pretty much the last thoughts on everyone’s mind. Stay safe everyone and follow all the advice such as washing your hands. Tomorrow, when it comes, will be a better day.