Nearly all economists, forecasters, and pundits have abandoned the hope of a “V”-shaped recovery from the global coronavirus pandemic’s effect on the global and U.S. economies. Most forecasts now call for a “U”-shaped recovery, or a slower, more layered return to economic prosperity.
A V-shaped recovery happens when a quick decline in economic activity is met by an abrupt rebound in activity, say within one to four quarters. While, a U-shaped recovery is one where the economy gradually climbs out of a recessionary environment, which can take up to two years or more. This is what we saw post the 2008 Great Recession.
In the worst case, most likely motivated by subsequent wave(s) of the spread of the virus, we may be facing a “W”-shaped, or a rollercoaster shaped, recovery like we saw in 1980-1983. This would be motivated by measured starts and stops due to additional outbreaks manifesting during periods when it appears that we were out of the proverbial woods, only to see viral hot spots flare up again and more people sick and lives lost, forcing additional economically disparaging stay-at-home edicts.
This current wave of sentiment is due to the sobering realization that, as Dr. Anthony Fauchi aptly referenced, we will not be able to turn things back on like we do a light switch. We must have a health recovery before we can have an economic recovery.
Once stay-at-home orders are lifted, we are most likely to see many, but not all, previous employed workers (22 million unemployed and counting, erasing over a decade of employment gains) return to work. But this will itself be gradual, and it likely will not include the same number of workers from the period prior to the crisis. A fair amount of unemployment is expected to remain. Additionally, many workers and their employers have come to realize the practicality of having certain employees work from home, whether it is on a trial or eventual permanent basis. Some workers will choose to work from home, if available, wholly out of fear.
When the world recovers from this silent, invisible killer catastrophe, there will likely be a new “norm” in many aspects of our lives and in the economy. How many people will report to an office for work, as opposed to remaining to work from home? How many restaurants will still exist or must start anew, and how quickly will patrons return? How willing will consumers be to pack into crowded theatres, venues, and events, even with restrictions in place? How will travel, both leisure and business, return to its previous level when it requires being in crowded lines at airports and packed inside planes, trains, ships, buses, and hotels? In all these industries where there will be consumer hesitancy to return to pre-virus levels, there are hundreds of thousands, if not millions, of workers who were involved in their daily operations that will not be returning.
The answers to all these and many more similar societal and economic questions are obviously unknown, but in almost all cases the overriding belief has become that the pace will be slow at first and very likely to climb at a gradual pace. Hence, no one any longer believes in the hope for a V-shaped recovery. This was seen in the markets on Wednesday, for example, as stocks dove and Treasuries rallied with the market waking up to the new realities of the COVID-19 environment: unprecedented poor data and earnings guidance, an inconsistent, wobbly path out of current pandemic lockdowns, and overpricing of the recent news cycle.
The market is used to historical recessions. However, the current crisis was not caused by inflation, government policy, asset bubbles, bad investments, or anything else that has led to recessions in the past. This is all new and we are creating a new paradigm as we crawl along daily. For certain, in any recovery we shall see, damage done to consumers and small business, as well as high private and public debt loads, will act as strong headwinds.
Several experts have released detailed plans for how to transition from the current state of shutdown to reopening businesses, transport, and large social gatherings. The studies primarily hinge on a massive expansion of testing (only about 1% of the nation has been screened so far), contact tracing, and continued phased isolation — possibly with cellphone apps.
In regard to the cost of containment, the U.S. government, both monetarily (the Fed) and fiscally (the Treasury/taxpayer), will do whatever it can to bridge the gap while consumers suffer more damage, cash-strapped small businesses edge closer to the brink, and questions linger over whether the spread of the COVID-19 bug will be only temporary.
This all leads back to the underlying view we have been expressing. As long as these pressures push down on consumers, employees, and corporations, there will be a containment on U.S. yields across the interest rate yield curve, particularly on the long end of the curve. The market, rightly or wrongly, will raise rates when it gleams its first sight of an economic rebound on the horizon, whether it be gradual or rapid. This is when we will begin to see rates rise, slowly if the market view is of a more gradual recovery or quickly if the market view is of a more rapid rebound. Until then, the yield curve should remain fairly flat with long term rates remaining tepid.
When the Federal Reserve initiated their quantitative easing policies post 2008 to help maintain lower interest rates and help the fledgling economy climb out of the Great Recession, their monthly Treasury purchases never exceeded the amount of the U.S. Treasury’s net issuance. But with this current crisis, the Fed is going to be forced to buy double the amount of net Treasury issuance and quite possibly more.
The U.S. national debt has soared to a record $24.3 trillion and growing by the second. The U.S. total debt, which includes unfunded, contingent liabilities, such as Social Security and Medicare, has grown to over $77 trillion (see usdebtclock.org), which is quite obviously untenable under any near-term rebound and strong continued growth scenario.
How high rates can and will eventually rise, and how steep the yield curve can climb, ties back to these monetary and, especially, fiscal policies taken today to rescue tomorrow.
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