{"id":166891,"date":"2020-03-19T13:00:37","date_gmt":"2020-03-19T17:00:37","guid":{"rendered":"https:\/\/www.countingpips.com\/?p=166891"},"modified":"2020-03-19T11:31:01","modified_gmt":"2020-03-19T15:31:01","slug":"are-we-heading-into-a-credit-crunch","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2020\/03\/are-we-heading-into-a-credit-crunch\/","title":{"rendered":"Are We Heading Into A Credit Crunch?"},"content":{"rendered":"
March 19, 2020<\/div>
\r\n<\/div><\/div>

By <\/strong>Orbex<\/strong><\/a><\/p>\n

The short answer: Yes. Definitely. We are already in one now.<\/p>\n

The question really is what\u2019s going to happen, why this one is different, and how best to prepare for the future.<\/p>\n

How do we know there is a credit crunch?<\/p>\n

Well, aside from the stock markets collapsing, the thing to notice is the price of gold. Everyone says you should invest in precious metals to be prepared in times of crisis, because they don\u2019t lose value.<\/p>\n

Well, the price of gold has been falling for a couple of days, erasing all the gains it had during the year, and even during the spike over coronavirus fears.<\/p>

\r\n
\r\n

Free Reports:<\/p><\/div>\r\n

\r\n

<\/a>\r\n\t Get Our Free Metatrader 4 Indicators<\/u><\/b><\/a> - Put Our Free MetaTrader 4 Custom Indicators on your charts when you join our Weekly Newsletter<\/p>

\r\n
\r\n
\r\n

<\/a>\r\n\t Get our Weekly Commitment of Traders Reports<\/u><\/b><\/a> - See where the biggest traders (Hedge Funds and Commercial Hedgers) are positioned in the futures markets on a weekly basis.<\/p>

\r\n<\/div>\r\n

\r\n
<\/div>\n

Now, obviously gold isn\u2019t going to become worthless, and an argument can be made for it going back up again. But this drive down in both equities and \u201csafe\u201d assets like gold shows that there is a desperate need for cash.<\/p>\n

Everyone is selling everything to cover losses, and to retain what value they have. To make matters worse, amateur financial investors are withdrawing their funds out of fear that the market will go down further.<\/p>\n

Liquidity and Credit<\/strong><\/h2>\n

With major banks needing to access cash quickly on behalf of customers, this increases the concern that financial institutions won\u2019t be able to meet their credit obligations.<\/p>\n

This is only a short-term phenomenon. Institutions will be able to pay in the future, but people want their cash now. And if they can\u2019t get it now, it destroys the credibility of the financial institution. This means that they won\u2019t be able to pay back in the future, either.<\/p>\n

This is why central banks are injecting massive amounts of cash into the system, in order to guarantee that payments are being met. The objective is to avert a credit crisis, where financial institutions go insolvent (on a cash flow basis) because they don\u2019t have enough liquidity to cover their credit obligations.<\/p>\n

That\u2019s what\u2019s known as a \u201cLehman moment\u201d, referring to the collapse of Lehman Brothers on September 15th, 2008, marking the beginning of the sub-prime crisis and subsequent \u201cgreat recession\u201d.<\/p>\n

The mere fact central banks are injecting that much liquidity shows that there is a credit crunch<\/p>\n

The question is\u2026<\/p>\n

Will it Unfold into a Credit Crisis?<\/strong><\/h2>\n

Arguably, there is nothing inherently wrong with the financial system. COVID-19 is not infecting credit.<\/p>\n

The question is whether companies who will suffer financially during the economic shutdown in order to prevent the spread of the virus will be unable to meet their credit obligations. And, in turn, whether that will precipitate a domino effect leading to a credit crisis.<\/p>\n

Enough credit flexibility from regulators and\u00a0central banks supplying liquidity,<\/a>\u00a0coupled with a relatively quick control of the pandemic leading a return to normal in the services sector, could mean that there is a credit crunch for a couple of weeks and then the market rebounds.<\/p>\n

If one of those three pillars fails, then we could see a credit crisis forming, leading to a recession.<\/p>\n

At this point, it\u2019s not possible to determine that. And that\u2019s why so many investors and traders are holding on to liquidity, and actually exacerbating the problem.<\/p>\n

What Now?<\/strong><\/h2>\n

The two things to watch out for are:<\/p>\n