Expect widespread loan defaults during a major deflationary period.
As the 2020 edition of Robert Prechter's Conquer the Crash notes:
Near the end of a major expansion, few creditors expect even the weakest borrowers to default, which is why they lend freely. At the same time, few borrowers expect their fortunes to change, which is why they borrow freely. Deflation involves a substantial amount of involuntary debt liquidation because almost no one expects deflation before it starts.
Indeed, even now, anticipated defaults are already in the headlines.
Here's an April 15 article excerpt from the Associated Press:
The major banks in the U.S. are anticipating a flood of loan defaults as households and business customers take a big financial hit from the coronavirus pandemic.
JPMorgan Chase, Wells Fargo, Bank of America, Citigroup and Goldman Sachs raised the funds set aside for bad loans by nearly $20 billion combined in the first quarter, earnings reports released over the past two days show. And Wall Street expects that figure may go even higher next quarter, a possibility bank executives acknowledged on earnings conference calls.
Bank of America and Citigroup said Wednesday that their profits sank more than 40% in the first quarter as both set aside billions for potentially bad loans. A day earlier, JPMorgan Chase and Wells Fargo reported even steeper drops in profit as those banks also set aside large sums to cover loan losses.
Even the investment banks were not immune to the pandemic. Goldman Sachs' first-quarter profit dropped by 46% from a year earlier, due to significant losses on its own investments as well as a buildup in reserves for potential loan defaults.
The coronavirus outbreak has bought the U.S. economy to a virtual standstill in just weeks. Most economists -- and bank CEOs -- expect the U.S. to go through a depression. The only question is how severe: Second-quarter gross domestic product is expected to drop from 30% to 40% and the unemployment rate is seen rising as high as 25%.
Yes, COVID-19 has struck with a vengeance. At the same time, the financial downturn makes it evident that social mood has made a transition from positive to negative at a large degree of trend.
This suggests that the financial waters will become even more turbulent in the days ahead.
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