28 Jun The Covid-19 Alphabet*

The Covid-19 Alphabet

America is suffering through a pandemic that’s ravaged its confidence, its health and its economy … with only the most tenuous signs of possible abatement. Covid-19 has further undermined America’s already-weakened role as global leader and confirmed that the global order of the past 75 years – Pax Americana – is now history …, with consequences that can only be guessed at. Meanwhile, government, corporate and individual debt continue to pile up, international trade tensions proliferate and extremist political views continue to gain traction in nation after nation, society after society, littering the internet – literally – and increasing racial, religious and ethnic tensions. All have coalesced in 2020 with devastating effect, creating what some are calling a Second Great Depression Recession the earmarks of which forebodingly resemble the 1930s.

What to extract from such seeming chaos?

With so many things going wrong on, both globally and in the U.S., and with no historical precedent for any similar combination of calamities, it’s no wonder that pundits are reaching for whatever speculative outcomes they can guess-at – whatever sells! “Covid Math” (see the June 14^th TLR) makes it clear that we are, indeed, living at a time that’s materially different from prior periods.

As TLR has highlighted, a unique element of our modern world is the existence of both too much and too little data. Medical and economic experts have amassed an awful lot of facts about Covid-19, as well as data about trade wars, tariff barriers, economic cycles and international relations …, but those facts and that data do not provide the information necessary to reach scientifically-verifiable conclusions or to ferret out historically-relevant analogues. It’s been impossible to filter the relevant data from the myriad of extraneous facts, impossible to distinguish the actual from the circumstantial and the constructive from the irrelevant. The absence of hard scientifically-derived data nevertheless hasn’t dissuaded a good many medical and economic prognosticators from forecasting outcomes that dwell largely at the extremes – whatever sells! A plurality of pundits are predicting a fast and favorable recovery from both the pandemic and the Second Great Recession – a “V-shaped recovery.” However, there are others who see a W-shape … yet others a U-shape … or an L-shape … or no recovery at all, a simple I that dives to a long-term bottom. Which letter in the Covid-19 Alphabet accurately depicts America’s future? Who will win the Covid-19 Alphabet Challenge?

To a significant extent, the economic prognosticators – some of whom bear a striking resemblance to that “prognosticator of prognosticators,” Punxsutawney Phil – see the exercise as a straightforward application of 21^st Century technology and modern medical science enhanced by crowd-sourced research: They assert that Covid-19 will be tamed in the near-term by technologically-enhanced social distancing coupled with a cocktail of treatments/medications that will reduce hospitalizations and deaths in much the same way that Tamaflu has tamed influenza. With the taming of Covid-19, economic growth inexorably will resume, fanned by the flames of Modern Monetary Policy (the successor to what only last year was often derogatorily referred to as Modern Monetary Theory (for example in the April 10, 2019 TLR)). TLR sees this as aspirationally valid, well within the realm of possibility, noting, however, that no one can have a sufficiently clear crystal ball.

There are many who have been predicting such a V-shaped recovery … with the V standing for Victory over the Covid supply-demand dragon. President Trump is one such leading proponent. At a news conference on June 5^th, he said “We’ve been talking about the ÔÇÿV’ ÔÇö this is better than a ÔÇÿV.’ This is a rocket ship.” The President’s view is supported by many on Wall Street (whatever sells!), with Morgan Stanley this past week reiterating its prior guidance, stating that it has “greater confidence in our call for a V-shaped recovery given recent upside surprises in growth data and policy action.” It has predicted a short recession with GDP growth of 3{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} by the first quarter of 2021. Goldman Sachs CEO David Solomon agrees and had repeated Goldman’s prediction that the U.S. economy will experience a V-shaped recovery at least through 2020, stating that the U.S. is somewhere in the middle of its rebound and that recent re-openings will sharply boost economic activity.

If the rocket ship doesn’t take off as the V-ers predict, a recovery would be more modest, more a “U” than a “V,” maybe even one with a flatter bottom. That is the belief of economists who are skeptical of the V-ers’ reliance on two assumptions that they believe to be unrealistic: First, that Covid-19 can be controlled post-lockdown by appropriate social distancing coupled with technological back-up; and, second, that consumers quickly will return to their pre-Covid spending habits. If either doesn’t happen or doesn’t quickly happen, a recovery at best would be U-shaped. At their most optimistic, those who predict a U-shaped recovery expect the economy to re-open at a measured pace with people gradually returning to their pre-Covid habits over a year or so. If so, the U.S. recovery would not reach its pre-Covid level until the end of 2021 or thereafter.

Yet other prognosticators see a W-shaped recovery, one where the economy begins to recover rapidly and then falls into a second period of decline. This would result in a double-dip, two successive recessions in the shape of a “W.” Economists at JP Morgan are proponents of the “W,” fearing that surging debt and deficits will force governments to winddown their massive Modern Monetary Stimulus. They believe that such a turn in fiscal policy will lead to an incomplete recovery followed by a second dip.

And then there are those who believe that there is too much medical and economic adversity for any recovery to take hold, certainly not within a reasonably predictable future. For them, a recovery requires too many things going right too quickly. They predict an L-shaped economic future where the U.S. economy continues to weaken and a recovery takes years. For them, the official recession may – or may not – end sometime during 2020. It may then take several years before a recovery takes hold …, meaning that the economy continues its decline and then flattens out in an L-shape. They believe that not only is a treatment for Covid-19 some distance away, that not only will government, corporate and individual debt burdens ttake years to unload, that not only have globalization and the global order been shattered, that not only are international trade and political relations in a state of novel flux, and that not only have supply and demand decoupled from each other, but that these all are ongoing problems that will require a long-term healing process.

There are two primary forces that will determine the outcome of the Covid-19 Alphabet Challenge.

First is the trajectory of Covid-19 itself. It’s a highly contagious disease (its RO is 2.5-3) the health effects of which as yet are not well-enough understood. There are too many anecdotal facts, too little in the way of scientifically-derived information, and not enough experience – the pandemic began only six months ago. Whenever Covid-19 is brought under control – whether by technologically-enhanced social distancing or by a cocktail of medications or by a vaccine –, economic recovery will quickly follow. That recovery could well be spectacular. The question, of course, is when that’s likely to occur. No matter who is making the prediction or how reputationally-renowned the prognosticator is, no one today knows the answer (whatever sells!). However, if Covid-19 cannot be brought under control quickly, there can be no possibility of a V-shaped recovery, or even a W-shaped one and, more importantly, there is significant risk that an “L” may be the shape of things to come. What we may then be looking at is a non-alphabetical sine wave of successive economic growth and contraction with rotating geographical concentrations and alternating periods of Covid-19 infections, hospitalizations and deaths.

Of economic importance is how governments and Central Bankers respond to what at best already is a Second Great Recession … if not a Second Great Depression. As TLR has frequently been highlighted, the world has been experiencing a massive set of economic blows that have created unprecedented government, corporate and individual debt burdens. Those burdens are now being exacerbated by Covid-19’s lockdowns and supply-demand dislocations. The response of governments and Central Bankers to-date has been to print enormous quantities of fiat currencies and thereby create truly gargantuan additional debts … with promises of more, far more, to come. Federal Reserve Chairman Powell has said that, in addition to the more-than $2.3 trillion the Fed already has pumped into the U.S. economy in 2020, the Fed will continue its stimulus program at least through 2022 by doing “whatever it takes.” “We will continue to use our tools to their fullest extent until the crisis has passed and the economic recovery is well under way.” European Central Bank Chairman Christine Lagarde agrees. She urged a “swift, sizeable and symmetrical common European fiscal response” … and already gotten it. These are only the beginnings. China, Japan, Switzerland, Australia … all other developed countries’ governments and Central Bankers have followed suit. Even though the White House and Congress already passed over $3 trillion in fiscal stimulus, House Democrats have proposed a further $2 trillion in spending and the White House is considering its own multi-trillion-dollar further stimulus package. In addition, this past week former Fed Chairs Ben Bernanke and Janet Yellen signed a joint letter with 130 economists saying that “insufficiently bold” action by America’s government risked leading to “prolonged suffering and stunted economic growth.” That urged “more.”

They are not expecting a V-shaped recovery. Neither should anyone else.

Finally (from a good friend)

Half of us are going to come out of this quarantine as amazing cooks. The other half will come out with a drinking problem.

• I need to practice social-distancing from the refrigerator.
• Homeschooling isn’t going well. Two students suspended for fighting and 1 teacher fired for drinking on the job.
• I don’t think anyone expected that when we changed the clocks we’d go from Standard Time to the Twilight Zone
• This morning I saw a neighbor talking to her cat. It was obvious she thought her cat understood her. I came into my house and told my dog …. We laughed a lot.
• Quarantine Day 5: Went to this restaurant called THE KITCHEN. You have to gather all the ingredients and make your own meal. I have no clue how this place stays in business.
• Day 5 of Homeschooling: One of these little monsters called in a bomb threat.
• I’m so excited — it’s time to take out the garbage. What should I wear?
• I hope the weather is good tomorrow for my trip to Puerto Backyarda. I’m getting tired of Los Livingroom.
• Classified Ad: Single man with toilet paper seeks woman with hand sanitizer for good clean fun.
• Day 6 of Homeschooling: My child just said “I hope I don’t have the same teacher next year….” We agree.

*┬® Copyright 2020 by William Natbony. All rights reserved.