Most Americans know, in their gut, that the economy is in bad shape.
Lots of people are out of work, and the businesses that have reopened are running at partial speed. And, that tepid effect is occurring while the government’s “stimulus” funding has yet to extinguish. Once that sugar high is gone, the grim reality will kick in.
So, why is the stock market doing well? Optimists.
The “market” is made up of investors, big and small, who want to believe that good things are about to happen. They’re gamblers, and, like all gamblers, believe that a slot machine jackpot is just one pull away. Any sign that there’s hope ahead (like a Trump tweet to that effect) is all they need to stay the course.
Unfortunately, there’s a lot of “fake news” out there, and investors are known to gobble that stuff up, too.
I recently heard two interviews of David Rosenberg, a well-respected investment analyst who had a long and influential career with Merrill Lynch. He is known as a fairly cautious investor and his “Breakfast with Dave” is widely read by Wall Street pros.
To be honest, I’m not involved in the market and I’m not an economist by any means. However, I find myself agreeing with a lot of what Rosenberg is saying these days…because the evidence is right there in front of my eyes.
The economy was not in good shape before the pandemic. Corporations were feasting on low interest rates, but they were buying back stock rather than investing capital in their businesses. Unemployment was at a historic low, however many of the jobs that have been added in the past ten years were low-paying leisure or service industry jobs. Personal spending was high, but personal savings was low. Consumers were purchasing goods made primarily in foreign lands, so the multiplier effect was limited.
The stock market, which is not really a reflection of the economy, was overheated…i.e. stocks were overvalued…based upon the optimistic feeling that consumerism was on an upward climb. Spending drives the Gross Domestic Product.
The pandemic, and the subsequent quarantines and business shutdowns, basically kicked the legs out from under the teetering economy. Rosenberg feels strongly that America is entering a Depression, not a short-term recession, and that the economy will languish for a considerable amount of time…three years at a minimum.
He pointed out that the Federal Reserve has pumped more money into the 2020 economy to keep it afloat in the past three months than it did in the seven years of the Great Recession (2008-2015). They’ve, once again, bailed out poorly run corporations and…they’re not yet finished printing money.
(I watched an interview today with a well-known economist. He noted that approximately 16% of companies traded on Wall Street were “zombies” before the pandemic. A zombie company is one that is not economically viable, but is still operating, using cheap, borrowed money. The Fed, under Trump, has made this possible. This expert noted that, five months into the pandemic, the percentage of zombie companies is now around 19%. That is, one in five companies are being kept alive not by business but, rather, by government credit.)
Something like 40 million Americans have lost jobs since the beginning of the pandemic. A high proportion of those jobs were in leisure and service industries, and they will be slow to recover in the “new normal” economy where spending will be decreased on vacations, trips to Disneyland and Las Vegas, air travel, and purchasing adult toys, and big ticket items like cars and homes. People are going to prioritize expenditures on food, rent, and basics like clothes for children, utilities, gas for the car, etc.
This economic crash has reminded the working class of the importance of savings: many households live paycheck-to-paycheck and have foundered as soon as their monthly income was disrupted. In the coming years, our wiser citizenry will set aside more cash for “rainy days”, which means less consumer spending, which means a de-energized economy.
Until an effective Covid-19 vaccine is developed and distributed, and the population is immunized (probably 2021 at the earliest) many sectors of the economy are going to be shut down, like big conventions, arena events, and college and major league sports. Colleges and universities may be limited in attendance. All of the ancillary businesses which service these endeavors will suffer.
Bars and restaurants, which employ lots of people, and which consume great quantities of produce, meat, dairy, liquor, paper goods, flowers, etc. will have a very tough time. These businesses normally operate on thin profit margins, so restricting the “crowding” in these establishments virtually wipes out profitability. Even if restrictions are lifted, many patrons will not return until the pandemic ebbs. Accordingly, non-leisure businesses across America will suffer greatly as leisure spending ebbs.
Rosenberg is incredulous about the stock market’s magical resurrection amid the horrible unemployment situation. “It’s pure fantasy”, he says, to think that normalized earnings are not going to be seriously dented by the likely permanent loss of ten million workers. Lots of people will be out of work, and not spending, therefore the impact of that deficit will be multiplied, as there will be fewer dollars circulating in the economy.
Warren Buffet, generally acknowledged as the world’s savviest investor, has substantially backed out of the stock market for the time being, selling 100 percent of his airline stocks. That’s a pretty bleak assessment of the leisure economy.
Rosenberg is similarly advising his clients to avoid stocks and, instead, buy gold.
A problem we have right now, in the panic of the pandemic, is that the government is paying people not to work; i.e. just giving them money. Nothing substantial is being accomplished except staving off the inevitable for a few months. A lot of suffering is coming.
(In addition, the cheap credit infusion by the Fed is propping up the stock market. That’s why the market hasn’t yet collapsed. And, probably won’t. Because the market and the financial system is “too big to fail”; the Fed won’t let that happen. That’s why Wall Street brokers are optimistic…they can’t lose right now.)
During the Great Depression, the government helped people and the country by funding jobs which built infrastructure, like roads, bridges, dams, public utilities, and the like. I don’t hear either candidate talking up a plan for that in June 2020, but I can guarantee you that one will unfold once the election is over and the unlucky winner and his political party has to make lemonade out of sour lemons.
We are part way to a socialistic government right now, with the Federal government carrying the load for failed companies, providing cheap credit to successful ones, and flooding the economy with “stimulus” money to keep Joe Public from starving.
It’s going to get worse before it gets better. The world economy is in the same boat. There are no easy answers.
It must take a lot of guts to want to be President in the face of this catastrophe.