Juggling Dynamite

Thinking people know that present financial conditions are a train wreck in motion and controlling our own behaviour is the most valuable risk management available.

An excellent essay from former Fed-insider, now independent analyst, Danielle DiMartino Booth, is a helpful fact check in a mad time, see Monetary Policy Gone Wild.  A Lost Generation of US Growth?  Financial engineering, zombie companies, bankruptcies, retail speculators, urban-exodus real estate and implications, it’s all here…a few highlights:

The duct tape holding the façade together today is 2021 earnings estimates off of which markets are theoretically trading. Investors are looking past a full year of a bloodletting at the bottom line and that’s a best-case scenario.

For context, in 2008, there was no shutdown of the US economy and earnings fell 69%. In the 2015–2016 industrial recession, S&P 500 earnings slumped by 15%. All things considered, it’s fantastical to accept that full year 2020 earnings will only be down 21.5%. The absence of share buybacks, which accounted for about 40% of earnings per share in the past cycle, will introduce a separate source of pressure. For the moment, according to Citadel Securities, corporate volumes have been somewhat offset by retail traders who are estimated to account for a fifth of trading as speculation and valuations hit historic highs.

…An acceleration in bankruptcies cannot be ruled out against such a backdrop. Forecasts call for 25,000 retail stores to close in 2020 on the heels of the record 9,800 in 2019. By 2025, estimates call for the tally to hit 100,000. One-third of office space in North America is in metro areas that rely heavily on public transportation. CoreLogic has warned residential real estate prices to fall by 6.6% in the 12 months through May 2021. Once the pent-up demand for housing is exhausted and the minor exodus to the suburbs by those with the financial latitude to make that move concludes, the reality of a six-year low in mortgage availability and sellers who need to monetize the equity in their homes will settle in.

Economist Stephen Roach’s latest piece in Project Syndicate is worth reading, see America’s coming double-dip. The fallout will not be contained in America.  Here’s a taste:

The daunting history of the US business cycle warns against complacency. Double dips – defined simply as a decline in quarterly real GDP following a temporary rebound – have occurred in eight of the 11 recessions since the end of World War II. The only exceptions were the recessions of 1953-54, the brief contraction of 1980, and the mild downturn of 1990-91. All the others contained double dips, and two featured triple dips – two false starts followed by relapses…

Partial and asynchronous normalization in the aftermath of the worst economic shock on record signals lingering vulnerability in the US economy. And failure to contain the virus underscores the distinct possibility of aftershocks. This is precisely the combination that has led to previous double dips. Yet frothy financial markets are wedded to the narrative of a classic V-shaped recovery. The rhymes of history suggest a very different outcome.

Studies show past major pandemics led to higher wages for survivors. However, fatalities from COVID-19 have, so far, been highest among the elderly, so it’s unclear what impact that may have on the labour force.  On the other hand, new studies show that even survivors can be left with lasting impairments that may reduce their productivity and ability for years thereafter.  See:  COVID debilitating effects and economic costs may linger for years:

It’s now known that SARS-CoV-2 will leave a portion of the more than 23 million people it’s infected with a litany of physical, cognitive and psychological impairments, like scarred lungs, post-viral fatigue and chronic heart damage. What’s still emerging is the extent to which the enduring disability will weigh on health systems and the labor force. That burden may continue the pandemic’s economic legacy for generations, adding to its unprecedented global cost — predicted by Australian National University scholars to reach as much $35.3 trillion through 2025 as countries try to stop the virus’s spread.

I have long thought that fitness, whole foods and healthy body weights would come back into popularity and official policy targets when present habits and sick care systems are understood as too financially destructive to continue.  COVID may well accelerate this process, of necessity.