March 9, 2020
Last week, we were facing a virus-induced economic disruption. It's complicated, but from an economic perspective, the uncertainty: How long? Maybe a quarter, or two.
Today, the geopolitical landscape changed and so did the complexity of the outlook.
Russia was unwilling to cut production, to support the oil market, to support global stability. And in an act of retailiation, the Saudi's reset global oil prices, much lower.
For Russia, their move back-fired. A 30% plunge in oil prices destabilizes U.S. shale producers, and becomes a threat to U.S. banks and creditors. But it also destabilizes Russia and puts them on default watch.
This type of environment for oil prices alone (the level of oil prices) nearly plunged the world back into recession back in early 2016. Central banks had to respond. This time around, central banks are already pressing the accelerator. And today’s plunge in global markets, has global governments moving (now, rather than later) on stimulus plans.
The U.S. should be ready to support the shale companies with aid – to keep them afloat. But for countries (or regimes) that are highly dependent on oil revenue (economies funded by oil revenue), we have the makings of a cascade of global debt defaults.