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all right Nuria we want to turn all of this a little bit more intensively over to you because your thoughts on this global sell-off in in some ways and help all of us understand your concept of a white swan event this should not surprise people that we have a sell-off whether it was coronavirus you were expecting something else that was right in front of our eyes right yes you know I think there are a variety of global tail risk and the one that emerged this year has been coronal virus but we have had those kind of episodes of epidemics from SARS to marys to other episodes like you know the ones we've seen in more recent times in China alone actually this year we have had a swine flu a bird flu now coronavirus so I think the market reaction right now is quite severe and Skirving more severe and then SARS for a number of reasons at the time of SARS that China was only four percent of the global economy today is about 20% of the global economy time of SARS globalization was not as deep as it is right now the Chinese I just joined the WTO at that time the contribution of China to global growth was about maybe 20 percent this year half of global growth is accounted by China and there is all these pillars because now China is key for global supply chains all over the world there are firms that are shutting down they cannot do business because key supplies are not coming out of China so if you compare it and by the way you know in case of SARS as we know there may be what they pick eight thousand cases maybe a few hundred people dead this time around not six months into this thing but a month into it we've already 100,000 plus cases and three thousand plus people and we've not yet seen the spillovers then to the rest of Europe to the United States and so on so I think the markets are now finally you know in the last week they were totally delusional this time around where the correction but think of it this way in the fourth quarter of 18 we're almost like a bear market why because there were worries about the slowdown of growth of China and a slowdown of growth of the United States and the Fed was saying well we're not gonna stop at two and a half are gonna go all the way to three this time around even in the best scenario people talk for example about the v-shape recovery in China let's assume there is a v-shape recovery in China what does it means that output is done the first quarter and then he grows faster than before from the second quarter on now let's assume that Chinese growth in the first quarter is gonna be -2 in the quarter annualized minus 8 sounds like a big number but is not because in fourth quarter of last year in Japan because of the v8 attacks output fell at the annual rate of 6% some generous by saying minus 8 because it's a bigger shock than just everything shock and let's assume Aurora Cali from the second quarter China grows at the analyze rate of 8% that is well above the 6 before this shock so you really have a v-shaped recovery down sharply and then well above the previous trend if you do the math you see that that means that Chinese growth this year is gonna be only 4% rather than a 6% because before the shock and the 5.5 percent that is now estimated by consensus if you do believe more realistically the Chinese growth from the second quarter on is going to go back to 6 percent not to 8 it's not gonna overshoot then you do the matte and Chinese growth this year is gonna be 2 point 5 percent so market are expecting close to 6 in the best scenario even with a v-shaped recovery real big V you get 4 and then in a worse scenario there's not actually that unrealistic you get 2.5 percent think about what 2.5 percent growth in China means for China and then the spillover to the global economy that's before there's gonna be shocks to growth in Europe it's going to tip into recession because of the spread of the virus Italy was already in the recession Germany was a knee recession and so on so China alone is a huge effect on the global economy and the contagion of the global pandemic because this is not anymore a pandemic is a global pandemic is gonna imply even further you add all these things up assuming that maybe wind up just because of coronavirus potentially close to a global recession doesn't look totally far-fetched frankly speaking Nouriel what is the speed of the sell-off tell you about underlying vulnerabilities dangers lurking out there are we reaching what you often talk about Minsky moment well the sell-off for the time being I would say has been kind of orderly I don't think is yet disorderly of course the market was overbought and it make sense that you know that the market was going to higher high is like the middle of February the time we knew there was this coronavirus and would have some effects at least on China on the global economy I think there were just delusion in the market now there's been an orderly correction I don't think that we have yet a situation there is a financial crisis because one credit markets are still functioning high yield spreads are widening but we're not shut down of high yield or of leveraged loans the way we saw in the fourth quarter of 2018 we may get there by the way because if all goes towards 40 then the entire energy highly leveraged sector is gonna be into a shock like in the first quarter of 2016 that you could have a surge in highly spread from 300 to 900 I get that but in 16 and then everything else has contagion to hyal that could happen with all going towards 40 we don't have yet a situation which in the repo market where the problems we've seen before and the fed will of course react to a seizure of liquidity by injecting liquidity but we may be getting close that's why in the markets at this point I think that the Fed will for sure in spite of what Clara says in parts of what Bullard says this morning for sure the Fed is going to cut rate up i mid-march them again and get together but there are already people in the market ask him ourselves under which condition of fat as a intermitting cut and I would not rule it out because if you have another 10% down in the next week if the credit market high-yield leveraged loans shut down and if you have problems our liquidity in the repo market then the Fed cannot wait until mid-march they left to act literally in between meetings hasn't happened a long time but the Fed could do it the CB could do the B DOJ would do it we could get to that point we're not yet a situation which markets are in a total free fall seizure and so on but that cannot be rule out if in the next week the news out of Europe and us is you know a few cases I mean the other day Brazil one case and people panic about one case in Brazil wait until there are couple hundred cases in German in the United States and ask yourself what will be the market reaction rational or not so hey investors Zaku's one
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