So Much For That ‘V’

July 22, 2020

It is with great regret that I wish to inform you that the ‘V’ shaped recovery many have been hoping for is not happening.

Of course this isn’t obvious to those who use the stock markets as a barometer of such things, but for economists, governments and central banks the answer is pretty clear. Without getting into all of the details, I will let the words of some others take centre stage.

China – Still Not Normal

China is held up as an example of the fast snapback in economic activity, alas today we find out that it might not be as good as it looks [Read this Bloomberg Article for more insight]:

[Premier Li Keqiang] reiterated that the employment situation in China is “severe”

This is despite showing 3% growth in the economy after their lockdown lifted on April 7th and almost zero virus cases. Also worth noting, the improvements in employment are partly the result of changing the definition of what employed means.

China recently broadened the definition of a job to include more flexible forms of work for graduates. Those starting their own businesses, such as opening online shops, or taking freelance jobs, like bloggers and e-sports players, will now be classified as employed, the education ministry said.

Central Bankers Unite!

Ben Bernanke and Janet Yellen, former heads of the US Federal Reserve suggest that hedge funds played an outsized role in the markets collapse in March. This is a reasonable hypothesis, but as part of the comments reported by CNBC [you can read the article here], there was another intriguing statement that follows a familiar theme.

Based on our experience in the global financial crisis, we think the Fed may find it needs to go further,” they wrote. “Although banks are currently strong, it is possible the pandemic will so damage the economy that credit losses mount rapidly. For a successful recovery, the banking system must remain strong and able to lend.”

It is reasonable to expect that the bank needs to go further, but holy cow, how much further? After committing $6 trillion dollars how much more is the US central bank going to do to support asset prices (at this time it looks like only about $4-5 trillion has been used.) The same is true for other central banks. The future for our children and grandchildren will almost certainly be massively constrained by this debt burden and the requisite taxation.

In similar news, 27 governments of the EU have agreed to raise 750 billion Euros to be distributed amongst the countries to help recover from the COVID crisis. A further 1 trillion Euros will be raised in the next EU budget. The agreement is a watershed moment because all of the countries agreed to do this as a common block for the first time.

The Layoffs Keep Coming

As highlighted a few days ago, the layoff pain is quickly morphing from service industries into higher paying roles. Yesterday LinkedIn, a service for buttressing your career and looking for jobs announced 960 people would be let go. The CEO of LinkedIn commented:

“Our Talent Solutions business continues to be impacted as fewer companies, including ours, need to hire at the same volume they did previously,” Roslansky explained.

Companies like Microsoft (who own’s LinkedIn) don’t make these kinds of cuts based on short term demand issues. Either they were overstaffed before, or they expect a long term dip in their business. In any case, it is likely if they need to hire more people, they will be easy enough to find.

The New Normal

There is broad evidence that the economy is picking up from the lows of the spring, but it is too early to extrapolate into the future. The pandemic continues to rage in the US, Europe is seeing increases, particularly where travel has restarted, and there will be a new normal.

The number of factors affecting the new normal is massive. First among them is the likelihood that any immunity to COVID-19 may prove temporary, and that is a big deal. Dr. Fauci made some interesting comments yesterday:

When you look at the history of coronaviruses, the common coronaviruses that cause the common cold, the reports in the literature are that the durability of immunity that’s protective ranges from three to six months to almost always less than a year,” he said. “That’s not a lot of durability and protection.”

The long term implication of short term immunity is long term health problems for some, and shorter life spans, particularly for the sick and elderly. It will also change the behavior of consumers, adjust priorities and much more.

The one aspect that many believe is holding up the economy is the stimulus money provided to individuals. It has allowed people to buy food and pay rent. (Despite the fact that almost a third of Americans and 20% of Canadians are now failing to pay rent.) That stimulus money will run out very soon; in the US, it stops next week. The prevailing signals from US politicians is that there is no consensus on the next round of stimulus for individuals. That means it is unlikely to happen in time to help some of the most needy.

The Bank of Canada announced yesterday that they are scaling back their bond buying program. While other central banks have not made similar announcements, it has been clear that central bankers are worried about creating asset bubbles and with many asset markets now above their pre-COVID levels it should be expected that banks will reduce their participation or return to normal.

Not Going There

The CEO of AirBNB, Brian Chesky suggested that travel will never be the same.

I will go on the record to say that travel will never, ever go back to the way it was pre-COVID; it just won’t. There are sometimes months when decades of transformation happen”

All of those gig workers, driving for Uber, tourist guides, etc. may become the new unemployed and under employed. Meanwhile cruise lines, hotels, business travel and more will be hard pressed to return to pre-pandemic levels.

In the end some businesses will disappear, some will shrink but the debt levels will force businesses to re-asses spending, raise prices and eliminate employees. All of this will impact growth. Governments will have to raise taxes and/or reduce services to accommodate the increased debt and the effect will be to slow the economy down.

There is a lot of evidence that the economy was slowing prior to the COVID crisis, and the ‘pent up demand’ being experienced now may prove to be a realignment to home offices, home schooling and home cooking. There is a good chance that it peters out after a quarter or two and you are left with a society that is less mobile, less service oriented and less interested in the next cool gadget or getaway. [RBC has a great report online to show the changes through this year in Canada, just click here.]

Only time will tell, but the evidence to support a ‘V’ based recovery looks less appealing from an economic standpoint at every turn.

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