Eq: Total Market
(Washington)
President Trump is changing his view on coronavirus. When the virus first started sweeping the world, he maintained a cavalier attitude. He then pivoted to be very focused and concerned about protecting against the virus. Now he is moving back in the other direction, saying that at the end of the current 15-day lockdown, he is considering opening the economy back up, joining a chorus of business leaders who say that the “cure cannot be worse than the virus itself”.
FINSUM: This is a difficult and risky decision—lives or livelihoods? However, Trump proceeds, it seems unlikely New York, California, and Washington, will take his lead.
(Washington)
The forecasts for growth have been reverberating through markets. When this whole crisis started, Goldman Sachs initially said there would be a 5% drop in GDP in the second quarter. Oh how delightful that sounds now. Things have escalated considerably since then. Here is a smattering of various Q2 GDP forecasts: Goldman Sachs at 24% decline, Morgan Stanley at 30%, and the St. Louis Fed at a whopping 50% decline.
FINSUM: We think it is safe to assume that the GDP decline in Q2 is going to massive. So much so that the actual figure matters much less than the pace at which the economy bounces back thereafter. Is it going to be a V-shaped recovery, or a U, or the dreaded “L-shaped” recovery?
(New York)
Wall Street made a grim prognostication today. The street reminded investors that so far the losses in equities have been modest compared to prior routs. The S&P 500 is down (before today) 32% since its peak. That compares to 57% during the Financial Crisis, and 49% in the Dotcom bubble. Goldman Sachs says the S&P 500 will see a 41% fall from peak to trough, while Bank of America thinks it will be 47%.
FINSUM: It is easy to imagine a couple more weeks of double digit losses before peak case-load hits and markets start to calm down. In our opinion, the rise and eventual decline in US cases will be the switch that turns markets on.
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(Berlin)
Germany has been very successful over the last three decades with a fiscal stimulus strategy that helps to offset mass unemployment during economic downturns. The tactic is called “kurzarbeit”, or short work, and a policy by which instead of getting laid off, workers go on shortened hours and the government pays a portion of their salary to offset costs for the company who employs them. A typical example would be a factory that needs to cut a group of workers’ hours by 80% as demand shrinks. In this case, the employer would pay 20% of the previous wage, with the government covering something like 60%. This leaves the worker with 80% of the previous wage, and the prospect of still having a job so that when the economy improves, they just go back to full-time.
FINSUM: Our team has family in Austria and Germany that are currently on a kurzarbeit program and have done so in the past (during the European debt crisis nine years ago). It works very well and is something that the US should seriously look at right now. That said, Germany has some advantages that make it more feasible—it has lower property rents, and it is a nation of savers, meaning there is more margin for error in household budgets.
(New York)
This week has a very worst-case-scenario vibe to it, and thus we wanted to examine what the worst economic effects of the coronavirus outbreak might be. With a recession seemingly a foregone conclusion at this point, the question on economists’ minds is whether a depression could occur. A depression is an economic contraction that lasts for a long time, as in years, not a couple quarters. Since 1854, there has been 33 recessions and only one depression—by 1933 the US economy was only half the size that it was in 1929.
FINSUM: Many factors led to that huge downturn, and it takes a perfect storm for them to lead to a depression (e.g. the Fed raising interest rates at the same time as a huge drought in the Midwest). That multitude of factors does not seem to be in place right now.
(New York)
In what was one of the most emotional and scary markets-oriented interviews possibly ever, famed hedge fund manager Bill Ackman gave some very stern warnings to America yesterday. Ackman favors a complete shutdown of the US economy for 30 days, instead of a gradual rollout of measures. “America will end as we know it. I’m sorry to say so, unless we take this option”, he argues. He continued “Capitalism does not work in an 18-month shutdown, capitalism can work in a 30-day shutdown”. He further warned companies to stop buybacks because “hell is coming”.
FINSUM: Whatever you may feel about the health threat of the virus itself, the economic situation with the coronavirus has escalated so quickly that it is hard to know what forecasts are outlandish and which need to be taken seriously. What we do know is that there is no end in sight to the contain measures (and thus the economic damage), which means there is going to be a huge wave of unpaid bills by consumers and a resulting financial crunch for many companies.