May 22, 2020
On March 20th, a colleague asked asked how long I thought this would last and I said that the virus will last a long time, but the lock down won’t last for more than eight weeks in a free country.
We are now nine weeks in and things are remarkably busy. While offices haven’t opened yet, traffic is no longer light. Perhaps not heavy but certainly there are periods of bumper to bumper traffic in Toronto. The streets are filling with people and stores are opening, at least for curbside pickup.
The difficulty with all of that is that the virus has a new lease on life. The countries where lock downs have not been forced on the population are seeing significant increases in cases, and there is a good chance that by late summer Canada and the US will see a similar fate.
This morning the John’s Hopkins data showed the largest single day increase in worldwide cases (May 21, 2020) at 106,000, and the countries accounting for most of that are countries like the USA (25,000), Brazil (18,500), Russia (8,800), India (6,000), etc. If the US does experience a resurgence in cases Trump has said he won’t stop the economy again.
Some have expressed a hope that when things warm up, the virus would disappear or at least not be so easy to transmit, but ‘hot’ countries are experiencing significant increases in cases. Countries such as Mexico and Saudi Arabia continue exponential increases in cases suggesting that this outcome is less certain.
In Sweden the herd immunity approach is looking less appealing as well. Sweden used this approach and it has been well covered by the media, but results released yesterday suggest that their country has only experienced about 7% infection rates. While this is slightly higher than estimated rates in other parts of the world, it isn’t anywhere close to the 60-70% infection rates typical for herd immunity. At the same time, the confirmed cases in Sweden remain pretty constant around 600-700 cases per day. That in itself may be a glimmer of hope for those re-opening economies. Perhaps there will be some plateau for infection rates, either due to the typical human immune system being able to fight it off or some other, as yet unknown, environmental factor.
Meanwhile as the world looks to aggressively re-open and recover some of the economic activity lost for the past 60 days, the idea of a ‘V’ shaped recovery is probably lost. Central bankers and politicians continue making statements almost daily and the hopefulness is giving way to the data which is quite dark.
The Federal Reserve in the US has highlighted the ‘extraordinary amount of uncertainty and considerable risks’ due to COVID-19, and while the stock markets are approaching their old highs, the economy will remain subdued for many quarters and the risk in markets is to the downside.
When thinking about the markets, think of it this way: When the market was at this level before the COVID crash, many pundits were suggesting that the markets were overvalued and that things had to go perfectly well into the future to justify the valuations. Low unemployment, manageable debts, low interest rates, low inflation, improving trade, etc. Now, three months later we have the worst unemployment in history, deflation, a massive increase in debt, trade relationships have stopped and when restarted will undergo considerable strain, and while have lower interest rates, it is to try to avoid a deflationary spiral. Other than the government putting a floor under assets, there is no justification for asset prices. The risk is to the downside and it is significant risk. The Chairman of the Federal Reserve, Jerome Powell was clear in statements last week, that much more fiscal support was needed to support the economy to prevent dire, long term consequences.
The real time data continues to show why that will likely be the case. One of the ‘branches’ of the Federal Reserve, the Federal Reserve Bank of Atlanta publishes a regular guesstimate of future US GDP. This blog has mentioned it before with an estimate of -14% for GDP in the current quarter; that is really, really bad.
That estimate is updated regularly and the current estimate is much worse. On Tuesday, the estimate was updated with a guesstimate of -41.9%. That is going to hurt. Meanwhile another weekly update to continuing jobless claims added about 2.4 million people to the unemployed for a total of about 25 million people. But good news, the stock market is up!!
This is going to hurt. While governments around the world pump taxpayer money into markets to cover over poor management, poor planing and financial malfeasance, all of that money won’t feed people, it won’t manufacture necessary items, it won’t resolve anything. There is much pain to come in the coming quarters and it isn’t really clear where it will land.
Government intervention isn’t inherently bad, but it does, in essence, pick the winners and that selection process is uneven. Savers are again being penalized while debtors are given a pass on their bad planning. Small business owners are getting crushed while large corporations are assisted, even when their operations have questionable viability and most importantly, the cost of the entire project is being foisted on a future generation (likely, many generations).
This is going to hurt, and while there is a nice lull, and it may even last for a while, sooner or later the system will need to adjust to a low growth, heavily indebted and perhaps, virus impacted future.