Winter Has Come*

Winter Has Come

It’s Economic Winter in America … and it’s cold. How much colder might it get? Very cold indeed!

In a period of 4 short weeks, a sudden Covid-19 medical and economic blizzard dumped record “snowfalls” on Washington State, California, New York, Illinois, Florida, the Deep South … in fact everywhere in America, piling up so quickly that it buried the stock market … and the economy. The snow was so deep that it unexpectedly threw America into Recession. Forebodingly, the clouds continue to threaten. More blizzards are possible, and the fallout snowfall from those that already have occurred are themselves likely to have far-reaching economic consequences. Moreover, should the cold deepen or, worse yet, further blizzards occur, the American economy will be buried … and the current Recession will become a Depression. No prior economic blizzard, medical or economic, has come at such a vulnerable time and frozen both supply and demand, and done so as completely.

A Depression is a sustained, long-term downturn in economic activity characterized by duration, abnormally large increases in unemployment, a fall in the availability of credit, shrinking output, increased bankruptcies, a significant reduction in trade and commerce, and highly volatile currency markets. Benchmarks used to define a Depression include a decline in GDP of more than 10{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} and a Recession lasting more than 2 years. We shortly will have unemployment, credit issues, volatility and a GDP decline … and we have a Recession. Duration will be the only variable.

All but one of the ingredients for a Depression therefore is in place. The supply and demand destruction being caused by Covid-19 are pointing to a hopefully temporary 1930s’ levels of unemployment. Some analysts have predicted that more than 20{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} of American workers soon will be out of a job or furloughed – Goldman Sachs is more “optimistic,” predicting only 9{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} unemployment in Q2. (In order to preempt precisely this level of nationwide layoffs, the UK government on Friday guaranteed 80{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} of businesses’ salary obligations (subject to a cap).) Business and personal credit already is tight … and it’s getting tighter. Manufacturing output has plummeted and can be expected to drop further over the coming months. Service industries, including bars, sports clubs and restaurants, retail outlets, travel, arts and leisure, have virtually ceased operations. International trade and commerce have been stopped in their tracks. And the securities and currency markets are experiencing unprecedented volatility. This at a time when long-term interest rates are functionally at 0{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}, the lowest in history, the February U.S. budget deficit – before Covid-19! – is at a record $235 billion, and the U.S. has a national debt exceeding $23.5 TRILLION.

The duration risk that could turn the current Recession into a Depression depends in large part on (1) the fiscal steps the Federal government now takes to support Americans and the American economy and (2) whether Covid-19 can be successfully suppressed over the next few months and its recurrence thereafter avoided.

In the meanwhile, winter is here …, meaning that business is at a standstill. Workers are sitting at home waiting for the storms to pass. With proper planning, reasonable execution and a good bit of luck, the world will resume turning by early July. How long will this last? How cold will it get? And to what depth will the snow be allowed to accumulate before Washington takes decisive action?

From all angles, China is likely to provide helpful answers. To its credit, after a poor beginning, it appears to have successfully suppressed its domestic Covid-19 epidemic. How it fares hereafter is likely to be determinative of the weather facing the U.S. and the rest of the world.

The Chinese government first acknowledged the Covid-19 epidemic on January 23rd but, before Wuhan and 3 other cities could be put on lockdown, it allowed more than 4 million residents to leave and join relatives and friends in celebrating the Chinese New Year. Those vacationers brought Covid-19 to the rest of China … and to the world. China recognized that it had made a mistake and, the next day, on January 24th, extended the lockdown to cover more than 36 million people. Because of its “control economy” and the government’s willingness to take extreme action in dealing with civil issues, China brutally and efficiently isolated disease carriers and, by March 20th, ~2 months after acknowledging the problem, had brought the contagion under control (reporting no new domestic cases over a 48-hour period). The Chinese government recently lifted restrictions on travel and ordered the re-opening of all businesses and manufacturing and, at the same time, unleashed massive – and necessary – fiscal stimulus. International economists are closely watching to see how the Chinese economy responds. The international medical community also is closely watching to see whether Covid-19 can continue to be successfully suppressed and, because there is not yet a vaccine (which medical experts believe is at least 12 months away), whether it will return. The Spanish Flu pandemic of 1918 saw a devastating second wave of illnesses. Will Covid-19 follow a similar trajectory? Because the threat remains, the resiliency of the Chinese healthcare system and the Chinese economy will provide insights into how the rest of the world should address Covid-19 issues … and how it will fare.

China is an authoritarian state and its government uses an absolutist approach in dealing with its people problems, which it has employed in dealing with Covid-19. The U.S. is a democracy with an empowered citizenry … as are South Korea, Japan and Taiwan, each of which also successfully dealt with the Covid-19 pandemic. South Korea, Japan and Taiwan have controlled its spread and, to an impressive extent, its economic fallout. The U.S. thus far has done neither. In fact, until a week ago, there was no coordinated Federal initiative whatsoever to address the spread of the disease or to mitigate its fiscal impact on the U.S. economy. Only belatedly were America’s borders mostly sealed. The Trump Administration explicitly delegated leadership responsibility for fighting Covid-19 to State and local governments. It provided no national guidelines or Federal financial support. State and local governments dithered. They were slow reluctant to accept that responsibility and take decisive action. Only recently did 45 States close their schools and only California, New York, New Jersey, Pennsylvania, Illinois, Connecticut and the City of New Orleans have ordered advised their residents to stay home and venture out only as necessary for supplies and medical care. The failure of America (on many levels) to timely and firmly address Covid-19 means that its impact on the nation will last longer and be more destructive. Goldman Sachs estimates that America’s GDP will decline by 24{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} in Q2 of 2020! (Other economic guesses range from -8{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} (horrible) to -16{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} (catastrophic), and continue to be adjusted downward on a daily basis.) The U.S. is snowed under and America, Inc., accordingly has ceased operations. There is reason to believe that it will be unable to attempt a restart until at least July.

Winter is here, and it will last several months … or longer.

The Chinese government already has increased its spending, cut taxes, supported its stock, bond and commodity markets, injected money into its banks, cut interest rates, cut social security contributions, and required state landlords to cut rents while subsidizing private-sector landlords. It recognizes that, even with the best of Covid-19 measures and the greatest of luck, avoiding a Depression further economic pain requires “whatever it takes.” The U.S. is starting later … with non-existent inadequate health supplies, scattershot planning and execution, and a belated acknowledgement that there is even a problem … and with the Federal Reserve now pushing on a string … and with unaffordable Federal debt and deficits … and with a Congress riven by partisanship … and with the reality that further Covid-19 surprises could be devastating in terms of lives and livings. At the least, what is necessary is for Washington to take a leadership role – and unprecedented fiscal steps – by injecting trillions of Dollars as quickly as possible into the economy. The Fabulous Federal Reserve already has “done whatever it takes.” It’s past time for Washington to do likewise. “Come senators, congressmen please heed the call….”

If the Chinese government can successfully restart its economy (which it ought to be capable of doing within the next 6-8 weeks) and if it simultaneously avoids a Covid-19 relapse, it will provide a template for America and the rest of the world. That would mean that, even after its delayed response, but with the right mix of medical and fiscal initiatives, the U.S. should be able to both defeat Covid-19 and restart its economy, hopefully by September. Notwithstanding China’s success in controlling the spread of Covid-19, Covid-19 nevertheless has good reason to be labeled a “novel coronavirus.” It has no precedent, either medically or economically. A Depression consequently may be unavoidable even if America adopts the best of measures. Without those measures, however, America will be doomed all-too-vulnerable to a Depression.

JP Morgan’s Michael Cembalest has relied on a variety of well-researched, well-thought-out medical and economic analyses in reaching a more optimistic conclusion – his most recent analysis is at Cembalest-3-20-2020. TLR hopes that he is right. However, the combination of a “novel coronavirus” and today’s extraordinary economic environment – created by limitless money-printing, unprecedented interest rate cuts, and unconscionable Federal deficits – means that This Time Is Different … which makes predicting the future based on the past impossible all-the-more challenging.

TLR repeatedly has written about the parallels between today’s world and that of the 1930s – economically and politically. The challenges faced in the two eras are likely to continue to be uncomfortably similar. We can only hope that the outcomes will not be the same, that common sense, history and science will win out. In short, let’s work towards achieving the best …, but prepare for the worst.

Finally (from a good friend)

A man went to the doctor for his annual physical examination. After the doctor had examined the man, he asked “Is there anything else you’d like to discuss today?”

The man thought a moment and said, “Yes, as a matter of fact there is. My wife has gotten so hard of hearing that often she doesn’t hear me and she refuses to get her hearing checked. What can I do about this?”

The doctor thought for awhile and then said, “Next time she is not looking, say something to her and see if she hears you. Then see how close you have to get before she hears you.”

So the man went home and went into the living room. He saw his wife with her back to him. She was at the kitchen counter getting dinner ready and he stood at the far end of the living room and asked in a reasonable voice, “What’s for dinner tonight Honey?” As usual, she did not respond.

So he took a few steps closer and said again, Whats for dinner tonight Honey? Again she did not hear him and there was no response.

So he took a few steps closer and asked a third time, Whats for dinner tonight honey? Again there was absolutely no response. So he gets right up behind her and asks again, Whats for dinner tonight Honey?

At this point she turns around and faces him and says For the FOURTH time, Beef Stew!!!!

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



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