This is a shot taken by yours truly over 43 years ago, entering Wyoming on a trip lasting 3 weeks, camping in a beloved 1970 VW camper bus. I show this picture as entry point to an insightful article by a good friend who happens to know a great deal about finance and the economy and how it may spin out vis a vis COVID-19. We all know economics is not a science, never has been, never will be but it can be really valuable when practiced by guys as smart and humane as Dan. Enjoy.
State of Play
What we are witnessing is the ongoing saga of how a solitary case of COVID 19, imported from China into Washington state, cascaded into a pandemic of epic proportions, triggered an economic crisis on a Depression-era scale, and continues to inflict human suffering on millions of Americans. Our fellow citizens are dying left and right, struggling to deal with the loss of their jobs and how to feed their families. Millions are experiencing a total collapse of everything they had only a couple of months ago.
The Federal Reserve has unleashed everything in its arsenal: reducing interest rates to zero and declaring availability of unlimited liquidity in order to forestall a collapse of the financial system. Congress has declared a panoply of multi-trillion dollar emergency programs with acronyms that read like an alphabet soup.
So where do we go from here?
An honest assessment of what we know and what we don’t, will give us some clues on where the economy is headed.
What we know: a) according to scientists, a second wave of infection is certain to happen, b) a therapeutic drug will show up, we don’t know when, possibly after a year, c) a vaccine available on large scale is estimated to arrive late next year at earliest, and d) lack of observance of distancing in many states will prolong the duration of the pandemic.
What we don’t know is too numerous to list. Among the imponderables: how many will die before it’s over; when will the second wave hit and with what severity; when will safe and effective therapeutics and vaccines be available on a mass scale; will our medical infrastructure be able to cope with the next outbreak; how long will it take to test a large percentage of the population? The list goes on.
Basically, we are in a highly volatile and unpredictable environment. Compounding the problem, management of the crisis by the Administration has been confused, conflicting and uncoordinated. Hence the variability of outcomes can be extremely wide; statisticians would call this a classic high standard deviation situation. That caveat notwithstanding, I will venture several observations:
Given that unemployment claims to-date (mid-May) are approaching 40 million, or 26% of our workforce, we can safely assume that we are deep in the bowels of a depression rivaling the Great Depression when the unemployment rate peaked at 25%.
The Office of Management and Budget and several branches of the Federal Reserve have estimated a 2nd quarter decline in GDP of around 40% annualized - the highest in decades. This is a stark reaffirmation of the severity of the trouble we are in.
As months pass – how many months, is undeterminable - we will gradually creep out of a total shutdown and become semi functional again. At that point, statistics will show a deceleration in the rate of economic decline (as distinct from positive growth). In this phase, unemployment will “improve” from double digits with a 2 handle to something in the teens. At this point the President will no doubt cite the slowing in rate of decline as proof positive that his leadership is working and will restore the country to its former glory.
Overall, the economy will take a minimum of 3 – 5 years to stabilize and create meaningful job growth again. Jobs will come back excruciatingly slowly, and only when consumers build up enough confidence to consume again. Keep in mind that 70% of all economic activity is consumer based. The recovery will be slow and lengthy. Predictions of a V shape recovery are unfounded and unrealistic. Untold hardship will befall millions for years. Social programs will be needed to enable families to feed themselves.
At the macro-economic level, the effects of trillions of dollars of spending on emergency aid will be felt for many years to come. Taxes will certainly rise. As they say, the piper must eventually be paid. Interest rates will initially remain low (a challenge to pensioners depending on interest income) as the Fed keeps financial markets flooded with funds. Over the longer term however, with the national debt far exceeding 100% of GDP, investors in Treasuries will demand higher yields on their investment.
Certain industries will never be the same again. Airlines will be nationalized, go bankrupt or keep struggling financially indefinitely. Many brick and mortar retailers will go the way of JC Penny and file Chapter 11. The cruise business will be decimated, becoming a shadow of its former self. Hotel chains will have to downsize or merge to survive. Office buildings will be financially challenged. Some will go bust as occupancy rates fall precipitously as a result of stay-at-home work becoming the norm for many workers. Many shopping malls will close for good due to lack of shoppers. Tens of thousands of restaurants have already closed and many will be shuttered forever. Note that restaurants are the second largest private employer with 15.6 million workers.
Group-oriented activities will be hard hit, particularly sporting events. The NBA, NFL, AFL and the two baseball leagues will take a long time to recover, resorting to alternative non-audience formats in the meantime.
Not since the Spanish flu have so many depended on the vagaries of a virus for their financial future.
The consequences of COVID 19 will reach far and wide. It will affect every aspect of human activity: from education to travel, from business conferences to contact sports, from grocery shopping to attending social gatherings. Only time will tell to what extent our lives will be modified.
In physics, Newton tells us that every action causes a reaction. All human activity constitutes a collective action that affects the ecosystem. Now we are witnessing the reaction to our action. We cannot encroach on the animal world (bats included) with impunity. We cannot engage in human action that damages the environment and expect no reaction. Unless and until Newton’s Law is repealed, such human behavior is not sustainable. Mother Nature will nurture and sustain us. But we abuse her blessings at our own peril.