Pandemic Profiteering 2020: About US Senators’ Insider Trading & Chaotic Coronavirus Market

The American nonprofit organization ProPublica and US tabloid Daily Beast have reported that members of Congress sold equities after receiving briefings on the Dow Jones (DJIA) stock market dangers of COVID-19, much before the Trump administration announced it publicly. Two Senators, Richard Burr and Kelly Loeffler that came in the red limelight of insider trading, have conveniently denied the allegations.

Crux of the Matter

Public Servants by Day, Perpetrators by Night?
Senator Richard Burr, the chairman of the Senate Intelligence Committee downplayed the financial threat to the American citizens while he was hastily unloading between $628,000 and $1.72m of personal holdings. Next in the row, Senator Kelly Loeffler, wife of New York Stock Exchange’s chairman, sold a substantial amount of stock while buying shares in the teleworking company Citrix.

Public Servants’ ‘Insider Edge’
Insider trading/dealing occurs when someone who has a fiduciary duty to another person, or to an institution, corporation, partnership, firm, or entity, makes a trade of stock based on information that’s not available to the general public. This can directly lead to the former’s unfair gain and the latter’s unfortunate loss. Just like in the aforementioned cases wherein Members of Congress are legally barred from buying and selling based on the information they get in classified briefings.

This practice wasn’t considered illegal at the beginning of the 20th century and a Supreme Court ruling once referred to it as a “perk” of being an executive. A whistleblower, while in conversation with a popular US Daily, once claimed that members of Congress and higher-ups in government jobs were not only trading on inside information they gleaned from their regular assignments, but were also being fed tips from agencies like the Internal Revenue Service on corporate takeovers.

Nonetheless, after feeling the negative shift in public opinion regarding the decade-old deleveraging, the U.S. Securities and Exchange Commission (SEC) became involved and the Securities Exchange Act was passed in 1934. Section 16 of this act requires that when an “insider“, defined as all officers, directors, and 10% owners, buys the corporation’s stock and sells it within six months, all of the profits must go to the company. Additionally, they ought to disclose the changes in the ownership of their positions, including all purchases and dispositions of shares. This aims to remove major trading activities when it’s impossible for insiders to personally gain from small moves.

STOCK v/s Private Moonlighting
The STOCK (Stop Trading on Congressional Knowledge) Act is a law that was passed during the Obama era, in 2012 and it clearly states that members of Congress and other government employees are not allowed to engage in insider trading based on information they learn through their jobs. Even the President, the Vice President, executive branch employees and judges were included in this law, making it a far stricter enforcement from the previous two trading laws.

However in 2013, it did get rid of a provision that the financial disclosures required by the law be posted online on official websites. Burr, who had opposed the bill passed for STOCK, said in his defence to this ongoing pandemic stock market wrongdoings that he relied solely on public news reports. He tried to offer alternate explanations for choosing to make money at a time when he should have been offering Americans the truth.

Can They ever be Tamed? SEC to the Rescue?

Make blind trusts mandatory for Members of Congress to end Congressional Insider Trading once and for all.

– Peter Schweizer, author of Profiles in Corruption: Abuse of Power by America’s Progressive Elite.

The first thing that pops in the mind now is that can these people be trusted to make laws neutrally, if they are financially invested in only the outcome of those laws? Is this simply an invitation for more corruption? After all, unethical behavior becomes especially more unacceptable in the midst of a deadly pandemic like COVID-19 that has infected more than 450,000 and killed more than 20,000 to date.

Can the eagle clear the current mess ?

SEC has officially announced the provision of conditional regulatory relief for certain publicly traded companies. The order, in an effort to address potential compliance issues, gives public companies an additional 45 days to file certain disclosure reports that would otherwise have been due between March 1 and April 30, 2020. Among other conditions, companies must provide a summary of why the relief is needed in their particular circumstances.

Stephanie Avakian and Steven Peikin, co-directors of the SEC’s division of enforcement, have urged public companies to be mindful of their disclosure controls and procedures, insider-trading prohibitions, codes of ethics and Regulation FD. This step has been rightfully taken to prevent improper dissemination and use of material non-public information.

Additionally, whistleblowers, including those who reside outside of the United States, can qualify for financial awards under the Dodd-Frank Act’s whistleblower provisions. In case they qualify SEC’s confidential filing procedures, they can file potential fraud violations to the Commission anonymously via the TCR (“tip, complaint, and referral”) form. They are even eligible for a reward once the SEC issues sanctions based on the whistleblower’s information of $1 million or more. The office says it has paid over $300 million to the anonymous tippers in the past.

Complete coverage of the Global Coronavirus effect

Curiopedia

Stock market refers to the collection of markets and exchanges where regular activities of buying, selling, and issuance of shares of publicly-held companies take place. Such financial activities are conducted through institutionalized formal exchanges or over-the-counter (OTC) marketplaces which operate under a defined set of regulations. There can be multiple stock trading venues in a country or a region which allow transactions in stocks and other forms of securities. The leading stock exchanges in the U.S. include the New York Stock Exchange (NYSE), Nasdaq, and the Chicago Board Options Exchange (CBOE). These leading national exchanges, along with several other exchanges operating in the country, form the stock market of the U.S. More Info

The Dow Jones Industrial Average (DJIA), is a stock market index that measures the stock performance of 30 large companies listed on stock exchanges in the United States. The value of the index is the sum of the price of one share of stock for each component company divided by a factor which changes whenever one of the component stocks has a stock split or stock dividend, so as to generate a consistent value for the index. Investing in the DJIA is possible via index funds as well as via derivatives such as option contracts and futures contracts. More Info

Understanding Recessions even as the Globe Locks Down

The collapse of economic activities due to the coronavirus and its subsequent impacts is reportedly leading towards a worldwide recession. But what exactly is a recession? What is an economic slowdown? Can a virus cause a recession?

Crux of the Matter

The state of the world economy is highly uncertain across the world with national health emergencies being declared due to the outbreak of the China-originated Coronavirus. The share markets are plunging down to record lows; central banks are issuing interest cuts and trying to understand the impact of this pandemic to try to safeguard their economies from a recession.

Read Summachar’s complete coverage on impact of Coronavirus

There is a lot still unknown about the coronavirus and amidst this, the world economies are deteriorating which is making it difficult for businesses to sustain in the volatile market conditions. The virus has not spared any sector; it has already resulted in losses of more than $150 billion in sectors like tourism, airlines and hotel industry.

What is Recession and What Causes It?
A recession can be defined as two back-to-back quarters of negative economic growth which is measured by gross domestic product (GDP).

Real changes and structural shifts are major causes of economic recessions. It may include a sudden rise in oil prices due to a geopolitical crisis. There are different prevalent theories which try to explain causes using monetary factors. Financial factors like overexpansion of credit and financial risk during the good economic times preceding the recession can also lead to recession.

One of the major reason for any economic slowdown is inflation which is defined as a rise in the prices of goods and services over a period of time. The higher the rate of inflation means that a consumer will be able to purchase a lesser quantity of goods with the same amount of money as before.

In such a complex environment businesses are forced to cut down on expenditures which may result in decline of GDP and laying off workers to manage costs. Lay-offs would lead to increasing unemployment which could reduce the purchasing power and hence demand in society. This could lead to a vicious downward spiral. All these combined factors may lead the country into a period of recession.

In the current scenario, there is already an ongoing tussle between Saudi Arabia and Russia over oil production which has led to sharp decline in crude oil prices. Further coronavirus is leading to lockdowns across the world with direct negative impact on industrial productivity of most countries. Global markets have been crashing since last month. Investors are not sure of a global slowdown yet but they seem to be preparing for it seeing the global conditions.

Types of Recession
V-shaped recession indicates that the economy suffers a sharp economic decline, but recovers quickly and strongly. It can happen due to increased consumer demand leading to a significant rise in economic activities. Example for such a recession is the 1950s American economy decline which recovered after 12 months.

L-shaped refers to an economic recession where the recovery is characterized by a steep decline in economic growth followed by a slow recovery. It is the most dramatic type of recession and its recovery can take a long time. Such a recovery period can also be called a depression. Example of such a type is the 2008 financial crisis.

Apart from these 2, Economists also categorise recessions as U-shaped, W-shaped depending on the recovery patterns.

History of Recessions
Credit Crisis of 1772
In London, after a period of rapid expansion of credit, Alexander Fordyce, a partner in a large bank, lost a huge sum shorting shares of the East India Company and he fled to France to avoid repayment. It led to more than 20 large banking houses going nearly bankrupt. The crisis also then spread to Europe.

Stock Crash of 1929
On October 24, 1929, share prices collapsed due to drastic oversupply of commodity crops and drought eventually leading to the Great Depression. It is the most severe economic depression which resulted in loss of 90% of stock market value and failing of 11,000 banks. More details in Curiopedia section below.

OPEC Oil Crisis
In October 1973, OPEC members launched an oil embargo targeting countries that backed Israel in the Yom Kippur War and at the end of it, a barrel of oil rose from $3 to $12. Since modern economies depend on oil, the higher prices and uncertainty led to a major stock market crash with the Dow Jones Industrial Average losing 45% of its value.

Asian Crisis of 1997–1998 
After the collapse of the Thai baht in July 1997 there was a crisis of foreign currency and the Thai government was forced to abandon its U.S. dollar peg and let the baht float. This resulted in huge devaluation that spread to much of East Asia and increasing debt-to-GDP ratios.

The 2007-2008 Global Financial Crisis
This was the biggest financial crisis after the Great Depression of 1929. It began with a lending crisis in 2007 which later expanded into a global banking crisis with the failure of Lehman Brothers in September 2008. Huge bailouts and other measures to control the damage failed and the global economy fell into recession as many economists had suggested.

I see more than a 50% chance of the United States going into a recession.

– Alan Greenspan, Former Federal Reserve Chairman (6th April 2008)

On 29 April 2008, Moody’s declared that nine US states were in a recession. In 2008, an estimated 2.6 million U.S. jobs were eliminated and the unemployment rate in the U.S. grew to 8.5% in March 2009. This number reached 5.1 million by March 2009.

The impact in the US was so devastating that it led to 8 million home foreclosures, S&P 500 declined 38.5% in 2008, $7.4  trillion loss in stock wealth which is approximately $66,200 per household and price of the houses dropped by 40%.

In this period the private consumption fell for the first time in nearly 20 years. The depth and severity of the recession were very high. With the consumer confidence being extremely low, the economic recovery took a long time.

Looking Ahead
It is very clear that seeing the ongoing global developments right from coronavirus to oil crisis there is a huge threat looming over the global economy in the coming months. The small businesses are going to be the most impacted with millions of people expected to lose their jobs. In this current scenario of uncertainty, it is now important to think of possible scenarios like what if the virus spreads more broadly with a higher mortality rate or if the outbreak continues in the next year as well then the economic impacts would be much more than anyone would have thought of. The severity of impacts would solely depend on the length and seriousness of the pandemic. It is the need of the hour to study the past data while keeping a close watch on current situations and strategically prepare for tough times ahead.

Curiopedia

The Great Depression was a severe worldwide economic depression across nations; in most countries, it started in 1929 and lasted until the late 1930s. It was the longest, deepest, and most widespread depression of the 20th century. The Great Depression is commonly used as an example of how intensely the world’s economy can decline. It started in the United States after a major fall in stock prices that began around September 4, 1929, and became worldwide news with the stock market crash of October 29, 1929, (known as Black Tuesday). Between 1929 and 1932, worldwide GDP fell by an estimated 15%. By comparison, worldwide GDP fell by less than 1% from 2008 to 2009 during the Great Recession. Personal income, tax revenue, profits and prices dropped, while international trade fell by more than 50%. Unemployment in the U.S. rose to 23% and in some countries rose as high as 33%. More Info

Global Recession Deja Vu?

recession

Goldman Sachs and Morgan Stanley economists in Wall Street are predicting a second global recession in 2020 after its 2008 edition fall in economic growth. With the coronavirus pandemic shaking the stock market, bankers, companies and individual investors have started jumping in. There has been a surge in cash stock up amongst other assets like bonds and loans, to fight back against the S&P 500 plunge of nearly 12%, that is the worst one-day decline since 1987.

Crux of the Matter

Recent Stock Market Crash Says It Out Loud
Morgan Stanley’s team, led by Chetan Ahya, has predicted a worldwide recession is at its base form and its growth is expected to fall to 0.9% this year. Goldman Sachs, meanwhile has seen a slump of 1.25%. Diane Swonk, chief economist of Grant Thornton, says that “Losses are likely to equate in the thousands, with travel and tourism and manufacturing being affected, with the labor force sick or quarantined. The 3.5% unemployment rate, a 50-year low, could rise to 3.8% to 4.1%.”

COVID-19 The Main Culprit?

Over the last century, recessions have almost always been started by a sustained period of higher interest rates. Never a virus.

New York Times

Data from numerous sources show the COVID-19 pandemic’s effects: Investor confidence in the German economy has plummeted to levels last seen during the European debt crisis while U.S. retail sales fell the most in a year in February even before coronavirus containment measures began rippling through the economy.
In case of a longer lasting and more intensive coronavirus outbreak, the global economic growth could slump to 1.5%.

Who Stands To Lose In The Numbers Game?
China’s Purchasing Managers Indices (PMI) have collapsed for February – the manufacturing PMI fell to 35.7 and non-manufacturing PMI to 29.6, both well below market expectations. Suggesting a sharp fall in the first quarter growth of the country having a 17 % share of the global economy, the Organisation for Economic Co-operation and Development (OECD) has cut its 2020 forecast of global economic growth from 2.9% to 2.4% – a figure that borders on a recession.

However the dragon land has managed to stealthily accumulate U.S. Treasury securities over the last few decades. As of May 2019, the Asian nation owns $1.11 trillion, or about 5%, of the $22 trillion U.S. national debt, which is more than any other foreign country.

In the other part of the world, France’s finance minister, Bruno Le Maire announced a 45 billion Euro aid package to help businesses and employees cope with the escalating health crisis.

Meanwhile Russia and Saudi Arabia, two of the world’s biggest oil producers, are entangled in a who-rings-the-bell-first race to grab market share. The former has launced an oil war against the latter by announcing that it will hike oil production 12.3 million barrels per day (mb/d) from April, and has also offered deep discounts to its buyers, potentially swamping an already oversupplied oil market.

Could India come out as a winner ?
The impact of the virus has been less in India so far compared to other geographies.
As per TV Narendran, CEO and Managing Director, Tata Steel, the de-risking of supply chains originating from China, is likely to be heightened in this outbreak.
The centre has identified 21 agricultural products, in which Indian exports could benefit from trade restrictions against Chinese goods which amounted to $5488.6 million in 2018. India exported $4,445.9 million worth of these commodities in the same period.

With the age old trade issues between US and China and now COVID-19, India can understand how over-dependency on any one country can be a reckless decision in the wrong run. The only primary problem that India might face is that it does not have a work-from-home economy and a large number of people depend on manual labour till date.

Then and Now: 2008-09 vs 2020 Recession
Since central bankers have the memories of last decade’s crash, banks are in better shape today. According to Rodgin Cohen, senior chairman of Sullivan & Cromwell LLP and a top advisor to major U.S. financial firms. In 2008, banks had far less capital and liquidity than they have now.

The risk this time arises from the pandemic’s impact on the real economy and corporate growth: Drop in car, house sales and business capital spending. He adds that the liabilities are however similar since if you own a restaurant and you borrow money for the rent, you’ve still got to make the monthly payment.

NBER Says There’s Still Hope
The NBER or National Bureau of Economic Research is a widely-recognized arbiter of recession beginnings and endings. As per their observations till date, during a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year. The opposite happens in cases of expansion.

However within an expansion, a brief period of decline can occur, and during a recession a brief rebound might happen. Such a non-recession was the oil industry collapse in 1986. Oilmen felt a severe decline, and Texans thought they were in a recession, but other industries and other parts of the country were expanding quite nicely.

G-20 Summit To The Rescue !
The Group of Twenty (G20) leaders should rise together, like they did at the Pittsburgh G20 Summit in 2009, and form a joint plan of action to address the upcoming crisis. This should contain measures to intensify scientific cooperation to develop a vaccine and coordinated economic steps to stabilize the global economy. Fiscal stimulation can be the main tool to revive economic growth.

Curiopedia

Recession in economics is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock or the bursting of an economic bubble. In the United States, it is defined as “a significant decline in economic activity spread across the market, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales”. In the United Kingdom, it is defined as a negative economic growth for two consecutive quarters. More Info

The Great Depression was the worst economic downturn in the history of the industrialized world, lasting from 1929 to 1939. It began after the stock market crash of October 1929, which sent Wall Street into a panic and wiped out millions of investors. Over the next several years, consumer spending and investment dropped, causing steep declines in industrial output and employment as failing companies laid off workers. By 1933, when the Great Depression reached its lowest point, some 15 million Americans were unemployed and nearly half the country’s banks had failed. More Info

Inverted yield curve is when the yields on bonds with a shorter duration are higher than the yields on bonds that have a longer duration. It’s an abnormal situation that often signals an impending recession. In a normal yield curve, the short-term bills yield less than the long-term bonds. Investors expect a lower return when their money is tied up for a shorter period. They require a higher yield to give them more return on a long-term investment.
A steeply inverted yield curve that goes on long enough is like having 108° fever. Both banks and shadow lenders go upside down on their “book” and stop making loans. That can freeze the economy and make a garden-variety recession even worse.More Info

Summachar’s Coverage on the expected recession in 2019

Inverted Yield Curve

Wall Street mimics Dalal Street nosedive

Stock markets across the globe are bleeding because of the impact of the Coronavirus. Wall Street took a hit as US’s New York Stock Exchange declared that it will halt all trading floors but keep electronic trading open as two people tested positive for Coronavirus at the exchange. Stock markets across the world have on average lost 30% value since last month.
Complete Coverage: Coronavirus

Crux of the Matter

Market Meltdown Continues
Markets across the world seem to be heading towards a recession after the ripple effect of crashing oil prices and Coronavirus lockdown compelled many nations to take preventive measures like reduction of interest rates. Oil prices have plummeted nearly 20% from $30 at the beginning of this week. With the real economy coming to a halt – shutdown of manufacturing, businesses, shops, etc. – a recession tougher than the 2008-09 Financial Crisis awaits.

Wall Street Mimics Dalal Street Circuit Breaker
US benchmark index Dow Jones hit circuit breakers on March 9 and March 12, 2020, as the US Federal Reserve announced an unexpected interest rate cut, which leveled the 2008-09 Global Financial Crisis rate. On Wednesday, 18h March 2020, as US index S&P 500 dropped 7%, circuit breakers triggered again and trading was halted.

India’s benchmark index SENSEX also triggered circuit breakers on Friday, 13th March 2020, as it dipped nearly 10% in the opening session. Stock markets of both India and the US have taken a hit of nearly 30% since the outbreak exacerbated in February.

Complete Coverage: Monday Market Mayhem After Circuit Breaker Friday

Curiopedia

The Great Depression was a severe worldwide economic depression that took place mostly during the 1930s, beginning in the United States. The timing of the Great Depression varied across nations; in most countries, it started in 1929 and lasted until the late 1930s. It was the longest, deepest, and most widespread depression of the 20th century. It started in the United States after a major fall in stock prices that began around September 4, 1929, and became worldwide news with the stock market crash of October 29, 1929, (known as Black Tuesday). Between 1929 and 1932, worldwide gross domestic product (GDP) fell by an estimated 15%. By comparison, worldwide GDP fell by less than 1% from 2008 to 2009 during the Great Recession. More Info