The COVID-19 Crisis – What are the Implications for Family Wealth?

Preliminary Observations & Opinions

by Sascha Janzen

as per 28/04/2020

Like most people, I am closely following the news and debates about the ongoing COVID-19 crisis and the respective responses by governments across the world.

As a family business responsible for preparing investment advice and decisions, we keep asking ourselves what the ongoing COVID-19 crisis means for us and our investors. We are firmly grounded in property investment but are asking ourselves if and how we should re-allocate or diversify to be more robust in times of crisis. We are looking beyond the current challenges to position ourselves for the next phase of the crisis.

While we have not yet come up with a full answer, we have observed the situation and reactions and have started to form our opinions about what is to be expected. I am inviting you to join our process of making sense of it all and to share your take on the situation and sensible responses. Let me know how you react to the current situation in terms of asset allocation, tactics and strategies. Before you do, here are my current

Socio-Economic Implications

Observations:

• Politicians, the media and people still do not seem to fully realise the far reaching consequences all the worldwide lockdowns will have on the world economy.
• The domino effects that are yet to show up are not yet incorporated in any adjustments to growth expectations. The negative growth implications will be far more serious.
• The current crisis is often compared to the Great Financial Crisis (“GFC”) of 2008. The extent of the current crisis is far larger than that of the GFC because it directly and deeply affects the real economy and not primarily the financial sector.
• Actual consumption has fallen off the cliff due to the worldwide lockdowns.
• Consumer sentiment and demand has fallen off the cliff and is unlikely to (fully) recover any time soon.
• Unemployment has started to rise sharply in many countries and will continue to rise well after the lockdown has been relaxed. Rising unemployment will further dampen consumer demand.
• Production has also fallen off the cliff. Many supply chains are at least temporarily broken. With expected increasing insolvencies, supply chains may take longer to recover than is currently expected by many. Supply shortages in some sectors could emerge.
• Supply is currently far larger than demand.
• Lockdowns in poorer countries will have significantly more serious impact on the local populations. Food shortages and hunger are likely to be the result in some of those countries. Increasing refugee movements can be expected.

Opinion:

The medium and long-term economic implications of the COVID-19 crisis will be significantly more severe than what is currently communicated by media and politicians. The negative growth implications will be far more serious.

Serious side effects such as hunger and refugee movements are likely to develop into fully grown crises on their own.

Fiscal and Monetary Implications

Observations:

• The general perception regarding governments’ rescue and stimulus packages is largely positive. Central banks across the world are printing money at full capacity. Critical questions about how this is being financed seem to be far and few between.
• There is little room to stimulate economies by reducing interest rates which suggests that debt financed stimulus attempts will prevails as the only option for the foreseeable future.
• As opposed to the GFC, the current stimulus money is not just poured into financial institutions but to everyone (helicopter money). As opposed to the GFC money stimulus that lead to asset inflation, the helicopter approach is likely to lead to a full inflation across economies.

Opinion:

The generous debt financed rescue and stimulus packages as well as the direct costs of the COVID-19 crisis will burden generations to come. The magic money tree is growing at full speed and will burst at some point in the future.

The sovereign debt crisis will flare up again in a number of countries and could well lead to break down of entire economies and currencies. This, in turn, could create further domino effects on the creditor side.

Political Implications

Observations:

• Similar to the lack of realistic economic expectations, there seems to be a lack of awareness about the structural risks the ongoing crisis brings along.
• Politicians, the media and people still act as if the ongoing COVID-19 crisis would just disappear and everything will continue as “normal”.

Opinion:

The enormous money printing, the resulting debt burden and potential inflation will increase uncertainty. Nationalism that was already on the rise prior to the COVID-19 crisis could become yet more popular.

Climate-Change Implications

Observations:

• The current reactions to the COVID-19 crisis divert attention from the climate crisis. Much needed action steps are not being taken.
• The ease with which enormous stimulus packages were agreed and acted on shows that countries can act decisively if needed.
• The same sense of urgency was and is not being applied to the ongoing climate change crisis.
• Valuable time is being lost to limit the effects of climate change.

Opinion:

Recovery and stimulus packages need to clearly and strongly favour sustainably and climate friendly behaviour. The overall situation is serious but at the same time a one off opportunity to rebalance economic and consumer behaviour in favour of our climate.

Please Comment

The above are preliminary impressions on the deeper effects of the COVID-19 crisis that are likely to evolve within the next weeks, months and years. Do you have any comments, opinions or questions? What should the responses be in your view? Send me a message. I am looking forward to engage with you.

Sascha Janzen