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The Butterfly Effect

Scott Minerd profile picture
Scott Minerd


  • The market is finally waking up to the prospects of not just viral contagion from coronavirus, but also to financial and geopolitical contagion.
  • Credit spreads have a long way to expand.
  • As for stocks, technical analysis suggests that there should be support around 2600 on the S&P 500.

If I had written a commentary on how 4,000 people dying from the flu would topple global financial markets, I think I would have been deemed insane. Yet today that is exactly the story.

After all, the World Health Organization estimates that influenza kills 290,000 to 650,000 people per year. How does this statistically small number of 4,000 versus a global population of 7 billion bring the market to its knees? I don't think I have to explain that right now, but if anyone thinks I need to, feel free to reach out to me in a socially distant fashion once you have washed your hands for 20 seconds and then rinsed them in Purell.

Amazingly, the market is finally waking up to the prospects of not just viral contagion but also to financial contagion. The phenomenon of a relatively insignificant event cascading through an unpredictable series of circumstances resulting in a severe outcome has been referred to as the "butterfly effect."

The concept is derived from how a seemingly insignificant phenomenon like a butterfly flapping its wings in Brazil leads to a hurricane on the other side of the globe.

Who could predict the exact chain of events set off by the coronavirus that leads us to the circumstances that we face today. Besides the public health and economic crisis, would anyone have considered that this would also turn into a geopolitical crisis? Russia is attempting to use this critical moment to its own advantage, and the collapse of the Russian-OPEC alliance — precipitated by Russia’s goal of killing off the U.S. shale industry — has turned into an all-out price war that is causing chaos in the energy markets.

Now the financial contagion is spreading rapidly into the credit markets where not only energy bonds are plunging but

This article was written by

Scott Minerd profile picture
As Chairman of Guggenheim Investments and Global Chief Investment Officer, Mr. Minerd guides the Firm’s investment strategies and leads its research on global macroeconomics. Prior to joining Guggenheim Partners, Mr. Minerd was a managing director at Morgan Stanley and Credit Suisse. He is involved in leadership roles at a number of civically-minded organizations, including Cedars-Sinai Medical Center and Strategic Partners Among Nations.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Comments (8)

Kenybouy profile picture
Tell us more about silver Mr. Minerd.
@Scott Minerd I'm on record as of 02/07/20 that a top for the market was in and that a bear market was now commencing. After the drop on 02/24/20 I was also quoted (in Barron's) that because of the character of that day's drop that holding equities would be dangerous. While I agree with most of your comments, I cannot envision the 10 year going that far into negative territory.
Your point about the flu is the most pervasive error I come across in discussions about the new virus. It's how easily the new virus spreads and its fatality rate vs. the flu is where we find the difference. If the same number of people gets the new virus as has gotten the flu, the number of fatalities will be much higher. Google "R0". That tells how fast a pathogen can spread. Hence the fear and reaction to it. People always overreact to an emergency and this is no different. We can flood the economy with fiscal and monetary stimulus, and it helps while the epidemic is in progress, but only an effective response to the virus is the real cure.
Luke Girard profile picture
Mr. Minerd is probably feeling the heat from his institutional clients that are long credit risk in part to achieve higher yields. I think he has a good case, if not sleeping well. The market is hitting insurance company stocks hard. At some point we’ll get through this. Insurers with long high quality portfolios, relative to liabilities, will always do well in this environment.
Chris Valley profile picture
The only long candidates in this market is pretty much insurance stocks.
Sell now and Sleep well tonight.💤
unfortunately, SENTIMENT drives markets. they over shoot both to the
upside and downside. VOLATILITY AHEAD for quite a while.
He's right. Perception has a disproportionate effect upon markets.
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