Coronavirus is Y2K Bug

As coroanvirus becomes less of a concern, the parallels with the Y2K bug are piling up. The focus here is not the thing itself, coronavirus and Y2K, but the social response. The extreme overreaction to coronavirus parallels extreme overreaction to the Y2K bug. In the end Y2K ended up being an easily solved problem, but the response triggered a tripling of the Nasdaq and made the ensuing bear market all the worse. Lockdowns and other extreme responses to coronavirus appear useless and arguably worse than the disease itself.

As for the markets, stocks corrected in 1998 almost 11 years from the 1987 crash. March 2020 is 11 years from the March 2009 low. Oil plunged to single digits in 1998 amid a bear market sparked by the Asian Crisis, LTCM and Russian default. Oil plunged to single digits (and below zero for those holding into delivery) in the wake of slowing Chinese growth and rising U.S. production. In both cases, the Fed panicked and used an excuse, Y2K bug and coronavirus, to pump liquidity at the tail-end of a long-term bull market. The result in both cases was soaring asset prices.

I previously mapped the 1998 correction to the 2018 correction. Timewise it doesn't line up anymore, but it could be part of a larger scale topping pattern with 2018 a tamer version of the Asian Crisis if I look only at the timing of market events.

I've discussed the parallels in previous posts:

About That 1998 Analog and Y2K Scenario

Incorrectly here: Coronavirus Update: Y2K Scenario Fades to Mist

1998 Again: The Greatest Bubble in History

Sept 2018: It's 1998

Feb 2018, the weekened before Volmageddon: End of Rally or End of Bull: Is It 1987, 1994, 1997, 1998, 2000, 2007 or 2014?

Finally, here in Feb 2020 before the coronavirus hit U.S. markets: That 1998-1999 Analog Again

To press the inexact analogy, coronavirus is the new Y2K. Clearly these are different issues, but they absorb attention. Both are unknowns. There was concern about what would happen when the year 2000 started. Companies were spending money on the problem. COBOL programmers were being paid. Today, we don't know how long the Chinese economy will be hampered. Companies have shut their doors or announced delays in production because of supply chain problems.

Analogs tend to play out because of higher order factors though. History doesn't literally repeat. History rhymes because human nature and human psychology do not change. What's going on when bull markets enter their final phase? I'm reminded of the line from The Matrix when Agent Smith tells Morpheus that the early versions of the matrix were a paradise, but humans were waking up because they realized it was a false reality. Similarly, let me posit that even bullish investors start having a nagging feeling that the good times can't go on. Y2K and now coronavirus become this great fear that causes authorities such as the Federal Reserve to overreact. Their actions to keep the bull market alive in the face of a threat become the factor that brings about the bull market's suicide.

In 2000, it was the turn of the calendar that revealed no apocalypse. Stocks ran into March, the Fed announced it would no longer provide liquidity, and then it was all over. If the analog fits and coronavirus proves to be an overblown risk, stocks will rally off their highs with the Fed providing liquidity. Supply chain disruptions in China will create pricing pressure later this year. The Fed will turn hawkish, either discuss rate hikes or announce the end of repo, and the advance will terminat

For the analog to hold going forward, economic damage being covered up by policies such as letting people pay no rent (in California) and mortgage forbearance, along with various corporate bailouts, would have to be hiding far more economic damage than Fed policy or $1.9 trillion in stimulus can overcome. Or time stretches and there is an incredible blow-off top with the Nasdaq doubling by late summer and maybe BTC Bitcoin hitting $100,000. The bigger the bubble gets, the smaller the pin needed to prick it and the larger the intervention needed to stop it. At some point, the size of the bailout exceeds the political will of politicians, particularly with opposition to Wall Street and corporate bailouts already nearly as high as they were in 2008 and 2009.