The Normal Economy Is Never Coming Back

davfor

This article paints a dark picture. It discusses what the author sees as being a very fragile global economy and a very uncertain path moving forward. Some of the concerns it expresses may help explain the Feds aggressive recent actions. Here are a few excerpts...

The latest U.S. data proves the world is in its steepest freefall ever—and the old economic and political playbooks don’t apply....There has never been a crash landing like this before. There is something new under the sun. And it is horrifying.

Thursday’s news confirms that the Western economies face a far deeper and more savage economic shock than they have ever previously experienced. The coronavirus lockdown directly affects services—retail, real estate, education, entertainment, restaurants—where 80 percent of Americans work today. Thus the result is immediate and catastrophic.

...this year, for the first time since reasonably reliable records of GDP began to be computed after World War II, the emerging market economies will contract. An entire model of global economic development has been brought skidding to a halt.

...we are witnessing the largest combined fiscal effort launched since World War II. Its effects will make themselves felt in weeks and months to come. It is already clear that the first round may not be enough.

We are engaged in the largest-ever surge in public debt in peacetime....Some have suggested it would be simpler for the central banks to cut out the business of buying debt issued by the government and instead simply to credit governments with a gigantic cash balance....And on 9 April that is exactly what the Bank of England announced it would be doing. For all intents and purposes, this means the central bank is simply printing money.

We now know what truly radical uncertainty looks like. A huge part of the world’s population has had the basic functioning of its life radically disrupted. None of us can confidently predict when we will be able to return to our pre-coronavirus lives.

https://foreignpolicy.com/2020/04/09/unemployment-coronavirus-pandemic-normal-economy-is-never-coming-back/

Here is an article that explains the Bank of England's recent actions:

https://theguardian.com/business/2020/apr/09/bank-of-england-to-finance-uk-government-covid-19-crisis-spending

Charles

I had a neighbor once tell me that stocks had to go up because everybody's retirement depends on it. I've started to wonder if that is a goal of all these emergency actions taken by the Fed and Congress. They're not backstopping stocks yet, but indirectly, maybe they are.

Anyway, pretty scary commentary.

LewisBraham

A depressing as heck article. A few questions I have though are: The author discusses the real and expected unemployment numbers and compares them to the Great Depression, but he doesn’t ask about the duration of that unemployment or expected duration. There’s a huge difference between a 25% unemployment rate for three months and three years for instance and the impact that will have. How long will this scenario last is a vital question? Also, he doesn’t examine the nature of employment itself and how that’s changed since the Great Depression. Back then people had trades and jobs when they were working often for life, often in the same locale. Today we have a gig economy where Americans are used to switching jobs and relocating for work. How will that factor into the equation? Then there’s technology itself and how that’s changed our consumption patterns. Will Americans stop clicking Buy when it’s so easy even if the economy worsens? Also, regarding fiscal spending versus previous eras, I wonder how they would look if you inflation adjusted past spending, debt and GDP numbers?

@Charles

I had a neighbor once tell me that stocks had to go up because everybody's retirement depends on it.

The only thing is a significant percentage of Americans have little to no savings so this really isn’t true.

Old_Joe

In the last couple of years there was a discussion in some circles regarding the economic viability of an economy where governments would regularly issue "cash" to all citizens. If I remember correctly, the discussion was centered around the concept that the ever-increasing number of jobs assumed by robots and artificial intelligence would eventually reach a point where there would simply not be enough jobs remaining to allow the world economies to function as they have historically.

Of course this entire debate was dismissed as hallucinatory by the usual suspects- those in the political spectrum who cannot conceive of anything possibly ever being done differently than "it always has been". While I am personally well-removed from that end of the political spectrum, let me concede that this particular concept did not strike me as being highly probable, nor anything that I might live to see.

But lo...here we are! Welcome to a new world where it is very possible that so many jobs and income-producing small businesses may be lost, at least for a significant period of time, that the entire income/spending cycle may be disrupted to such an extent that the world economy may take years to recover, if in fact it ever completely does.

I'm thinking that this is what is really running in the background thoughts of politicians and economists, and likely scaring the hell out of them.

Interesting times, for sure.

davfor

The phrase "radical uncertainty" towards the end of this article struck a cord with me. The global economy has been severely shaken over the past couple of months and the storm is still raging. The probable duration of the negative shock is hard to gauge given the ongoing uncertainties surrounding Covid-19's impact on the ability of the global economy to bounce back during the remainder of the year. The longer that rebound is delayed, the more likely it becomes that the new normal that emerges will look substantially different than the old normal...and the longer the rebuilding process will take to complete once it has begun.

Old_Skeet

The stock market will rebound before the economy. Let's hope that it keeps improving and I'm thinking that the economy will follow as people continue to spend with the upward movement of the stock market. If the stock market continues to falter then the economy will continue to suffer as people reduce spending. Pretty simple ... Yes. Not really. But, I think you get my meaasge.

davfor

@Old_Skeet Does the uncertainty regarding the pandemic's duration impact your thinking? Or is that uncertainty irrelevant?

Old_Skeet

@davfor, I entered to work force back in the early 70's ... unemployment around 10%. 1974 was a bad year in the stock market. As it began to turn upward so did the economy. In the mid 80's inflation was running 10+% ... employment was around 10+% as well ... as the stock market began to turn upward so did the economy. In the 90's same thing repeated. In the 2000's same thing repeated with the Great Recession. And, now here we are today ... the same thing is repeating. And, guess what I have been an investor in the stock and bond markets through all of these. And, with this, I bought stocks while their asset values were down. Then trimmed my asset allocation as the recovery took place. As investors we are blessed because I've NEVER seen the FOMC & Treasury step forward and be as aggressive as they have been in injecting money into the system through various avenues. Why, to inflate asset values. In this way folks think they have more than they really have and they spend. These troubling times will pass.

davfor

@Old_Skeet OK. I understand. My personal uncertainty relates to the near term path the stock market will take before it resumes a long term upward trend (and from how low a point the rebuilding process will commence). The balance point in my portfolio is 55% stocks. As of today, I am at 54% due to some investing in stocks done on the initial trip down. As the uncertainty regarding the pandemic's duration has become clearer, my personal uncertainty about the stock market's near term path has increased. So, currently I am only investing 2% of my March cash reserve balance each week into stocks, bonds, or hybrids. Next week, that 2% will go into bond funds.

Old_Skeet

@davor, I have averaged in as well. I brought my equity allocation up to 43%/44% range and it is currently at 48% through growth from the recent stock market rebound. When it hits 49% I'll trim back to 47% by eliminating an equity position from my equity income sleeve most likely LCEAX. Currently, I'm positioning money on the income side of my portfolio. Perhaps, by the end of this quarter I plan to bubble at 10% cash, 45% income and 45% equity and ride from there into the 4th quarter. Once, I reach the 10/45/45 target asset allocation all income that the portfolio generates will go into the cash area of the portfolio. Currently, all income goes towards building the income area. In time, I plan to move back to my 20/40/40 allocation, in steps of course. But, right now, for me, Surf is Up so ride the wave that the FOMC & Treasury are currently making. But, don't throw caution to the wind either. What i'm doing is throttling my asset allocation to take advantage of current market conditions. I'm thinking most of the leverage money is now gone (or greatly reduced). I've been watching the money flow on SPY and it continues to be in an up trend. On March 6th my money feed in the barometer read 23. Today it reads 75. Can it cut the other way ... Absolutely.

WABAC

Charles said:

I had a neighbor once tell me that stocks had to go up because everybody's retirement depends on it. I've started to wonder if that is a goal of all these emergency actions taken by the Fed and Congress. They're not backstopping stocks yet, but indirectly, maybe they are.

Anyway, pretty scary commentary.

I was in the Marina Safeway in San Francisco (Old Joe will know it) early one morning before the dot com bust. And I overheard one stocker say to another that there was no way to lose money in the market, because all you had to do was sell when it started to go down.

catch22

Hi @Old_Skeet
You noted:

"1974 was a bad year in the stock market. As it began to turn upward so did the economy."

Am I to understand your statement that the stock market was front running the economy and knew (somehow) things were improving before the consumer was aware, thus supporting the economic growth??? I fully understand the numerous temporary economic conditions that have existed back to 1974. There is no comparison to any modern (post- 1974) economic circumstance that relates to today.

I'll stick with this below % number, as it has been in place from the math for many years .....

Consumer spending comprises 70% of GDP. The retail and service industries are critical components of the U.S. economy.

It was easy to look around our community and towards the larger city communities as Michigan began the shutdown of normal business functions. I fully support these actions; as there remains too many dumb asses who continue to argue that their constitutional rights are being violated. Fine, you'all can move to one location to hang out together until ; well, that is the question, eh?

I don't need an economics degree to see how far down into the previous employed population impacts in all areas. The magnitude of the depth of unemployment is easy enough to consider when looking at all the variables into how many other business companies are impaired when any one business, large or small closes.

@rono expressed this several weeks ago from a common sense view. I remain fully in agreement.

I submit my adjusted quote from the movie, "August Rush":

The "economic" music is all around us, all we have to do is listen.

Lastly. What will it take to move me back into what was "normal", pre-COVID? A hell of a lot more than what is in the Washington, D.C. plan....that isn't a viable plan at this time.
I say this, for myself and numerous others here; by the mere fact of our birth dates, that our survival rate from contracting COVID is low to 0. I'm not ready to leave this third rock from the sun just yet; and will have to adjust my societal involvement.

FD1000

I worked over 35 in IT in several sectors and I can tell you there is still a lot to do and especially eliminating high paying jobs. Just think how many jobs were gone in investing where indexes, computers and simple to more sophisticated processes can do better LT.
Why a degree should cost that much? students who can learn via the internet, should pay a lot less. We can use the best professors to record the best courses, no need to use all these buildings from dorms to food courts, stadiums and more. We can cut faculty members and so on.
The last company I worked for ordered all the workers to work from home and they cut building rents from 4 floors to one floor. Most employees love it and saved on gas, clothes, driving time and work productivity went up.
We are just at the beginning of this process. Computers and robots will start taking away higher paying jobs.

Another idea that was implemented successfully only in a handful of companies. Cut your management by half. Managers are huge distraction and overhead by creating additional processes to justify themselves. Hire the best employees and pay them more. I have seen it so many times in IT, a great developer is cheaper than 2 mediocre ones and accomplishes more when you look at a project life cycle.

The stock market is looking months away, it's a pretty good indicator of the future. What we are seeing now is the above process speeding up. It exposes what are the real necessary jobs/businesses and what are not so much. CEOs are paying attention and will follow with it...unfortunately.

rono

Howdy folks,

@FD1000 mentioned the revolution occurring in education. F2F to virtual. My Econ 101 Prof was so good they taped him in the early 80s and ran his tape for years. Why should I pay thousands in tuition when there's no classroom interaction. Even if I can video chat with the Prof it's not the same. Tuition needs to be cut by 50%. Oh, and scrap intercollegiate athletics once and for all and focus on education.

My huge fear on the k12 front is computers and internet access for all the kids. Damn, we already have to import educated workers and we have so many brilliant people that are simply not receiving the education. Another reason why we need universal education. A step in that direction would be to erase the interest and penalties on all the federal student loan debt. Have them pay off the principal.

And so it goes

Peace and Flatten the Curve

Rono

Crash

Agreed. Very much. @rono.

LewisBraham

I am assuming by the tenor of the replies here most people believe the author of the initial article in Foreign Policy is wrong. Otherwise, why would one be in stocks at all? If this author is right regarding unemployment, GDP growth, etc., this will be worse than the Great Depression. Here's what Investopedia has stat wise regarding the Depression:https://investopedia.com/ask/answers/042115/what-caused-stock-market-crash-1929-preceded-great-depression.asp

Before this crash, which ruined both corporate and individual wealth, the stock market peaked on Sept. 3, 1929, with the Dow Jones Industrial Average (DJIA) at 381.17. The ultimate bottom was reached on July 8, 1932, where the Dow stood at 41.22. From peak to trough, this was a loss of 89.19%.

The price of blue chip stocks declined, but there was more pain in small-cap and speculative stocks, many of which declared bankruptcy and were delisted from the market. It was not until Nov. 23, 1954, that the Dow reached its previous peak of 381.17.

As I've said in previous posts, every day is different, but unemployment, GDP, earnings from the previous two, etc, have driven stocks in the past. If this author is right, then there really is no point in owning stocks at all. Declines like the Depression are unlike anything most investors have experienced in their lifetimes, and taking 25 years to recover exceeds most people's investment time horizons. It is far worse than what happened in the 1970s as referenced in other posts. So, I am hoping he's wrong. And I think there is evidence he could be.

FD1000

The usual, doom and gloom sell better and why you see a lot more headlines like that. Simple example: the DOW declined 200 points or triple digits, why not say 0.8%? because it's not catchy.

"It was not until Nov. 23, 1954, that the Dow reached its previous peak of 381.17."...that is another claim far from the truth. You must include distributions. See a (chart) of VWELX + LC blend since 1929

LewisBraham

@FD1000 You're right that doesn't include distributions which are important but VWELX is not an equity fund and has always included high quality bonds in its portfolio, so looking at its performance during the Depression is wrong as well. VWELX fell significantly less than the stock market because of its bonds during the Depression. Moreover, looking at annualized total returns in an environment where 30% of people lose their jobs and stocks fall 89% is misleading as well as total annualized returns assume one reinvests dividends into the falling stock market. I wonder how many people who've lost their jobs or see the stock market fall off a cliff would want to or be able to reinvest those dividends to capture that total return. Very few I suspect.

bee

A read I came across:

Fed's Kashkari paints gloomy view of coronavirus economic recovery

feds-kashkari-paints-gloomy-view-of-coronavirus-economic-recovery?

FD1000

@LewisBraham, I know that VWELX is not the SP500 and why I posted and included in the chart LC blend which is close to the SP500. I don't know many funds with history all the way to 1929 and M* chart includes dist.
One thing I'm sure we will not experience 1929 again because the Fed learned an important lesson but it's great to mention it as a selling point and why the media mentioned the Spanish FLU too.

LewisBraham

@FD1000 That "Large Cap Blend" category data is also wrong for that period of history because it can not include survivor bias of all the funds that went out of business that far back and there were many. Of the ones that did survive__ MFS Massachusetts Investors Fund (MITTX) 1924.
Putnam Investors Fund (PINVX) 1925.
Pioneer Fund (PIODX) 1928.
Century Shares Fund (CENSX) 1928.--I suspect they must have had bonds in their portfolio for that. Dividends I'm sure helped but who would have the mental fortitude amd/or financial wherewithal to reinvest in the market when it falls like that? In other words, the data you're providing shows large-cap blend funds falling about 55% when the market fell 89%. That cannot be correct for a pure stock portfolio even if you factor in dividends, which I believe peaked at 14% during the Depression.

WABAC

While the 70's stock market did not drop as much as the Great Depression market, it did creep to an end with Business Week proclaiming the death of equities, before bottoming out at a PE ratio of 6.68 later that year. If you had invested near the peak in 1961 you would have had to wait until 1991 to see that peak again.

If you invested in December 1894 you would have died before seeing that peak again.

We don't hear much talk of capitulation. Everyone is looking to buy the dip.

As of the last close, the PE sits at 20.59. Today, M* is claiming that the tech sector is "decently undervalued." The PE for the NASDAQ 100, perhaps not the best proxy, is roughly 22.09.

The Gods of the Copybook Headings keeps coming to mind. Especially the first and last stanzas.

AS I PASS through my incarnations in every age and race,
I make my proper prostrations to the Gods of the Market Place.
Peering through reverent fingers I watch them flourish and fall,
And the Gods of the Copybook Headings, I notice, outlast them all.

[ellipses]

And that after this is accomplished, and the brave new world begins
When all men are paid for existing and no man must pay for his sins,
As surely as Water will wet us, as surely as Fire will burn,
The Gods of the Copybook Headings with terror and slaughter return!

Seems to me that the Fed is now dead set on making sure no one dies for their sins of leverage in the market place.

A less sanguinary description might be found in the last stage of Hyman Minsky's financial instability hypothesis.

Old_Skeet

According to this NYT article that I have linked below it took only 4.5 years for the stock market to recover from the 1928 stock market crash. It goes on to say that the average investor recovered by mid 1932.

https://www.nytimes.com/2009/04/26/your-money/stocks-and-bonds/26stra.html

davfor

Recent massive central bank and fiscal policy interventions -- and the promises of more to come if needed -- appear to make it less likely the stock market will move dramatically downward over the next several weeks. But, it will take the passing of two or three quarters worth of earnings seasons for me get a meaningful sense for how seriously corporations are being impacted. Relatedly, it will take that long for me to get a sense for how difficult and time consuming reopening the economy for "business as usual" will prove be and for what "as usual" will look like moving forward. So, its too soon for me to conclude the recent stock market decline marked the final low point for this bear market.

LewisBraham

@Old_Skeet That article factors deflation into the equation, which I also feel is cheating in certain respects, too. The assumption is well everything is cheaper, therefore it only took X for the market, which is also cheaper, to recover. But If you had a 100k portfolios that fell to 50k but so did the CPI so everything was 50% cheaper, this article would have it that you broke even. While a valuable exercise in the abstract, I want to know how long it took to recover without this inflation/deflation legerdemain.

Old_Skeet

@LewisBraham, I looked for additional information on this to see if I could come up with something more inline with what you are looking for. I did find something. But, it might just not be what you need; but, I feel it provides addition information that might in someway be helpful. At least it was for me.

https://finance.zacks.com/1929-stock-market-recovery-6003.html

LewisBraham

@Old_Skeet Thanks! Interesting nonetheless.

FD1000

LewisBraham said:

@FD1000 That "Large Cap Blend" category data is also wrong for that period of history because it can not include survivor bias of all the funds that went out of business that far back and there were many. Of the ones that did survive__ MFS Massachusetts Investors Fund (MITTX) 1924.
Putnam Investors Fund (PINVX) 1925.
Pioneer Fund (PIODX) 1928.
Century Shares Fund (CENSX) 1928.--I suspect they must have had bonds in their portfolio for that. Dividends I'm sure helped but who would have the mental fortitude amd/or financial wherewithal to reinvest in the market when it falls like that? In other words, the data you're providing shows large-cap blend funds falling about 55% when the market fell 89%. That cannot be correct for a pure stock portfolio even if you factor in dividends, which I believe peaked at 14% during the Depression.

The above has nothing to do with your post "The price of blue chip stocks declined, but there was more pain in small-cap and speculative stocks, many of which declared bankruptcy and were delisted from the market. It was not until Nov. 23, 1954, that the Dow reached its previous peak of 381.17."

These numbers for the DOW were way off. I'm not surprised the 24/7 media is all about making headlines for you to read and how they get paid.
Almost every day you hear the DOW is up/down triple-digit because 0.8% isn't selling news.

LewisBraham

@FD1000 If so, prove it using primary sources. Here's another article making the same claim regarding the price return:
https://thebalance.com/stock-market-crash-of-1929-causes-effects-and-facts-3305891
If you have direct access to daily Dow Jones price data from the market peak in 1929 to its nadir and recovery, please show it to us.

FD1000

I don't have a direct Dow with distributions but I already proved with M* chart that includes distribution I'm correct.
How about you prove I'm wrong.

Since I know you will not find it I will do my best. This is a 100 years DOW (chart). That chart shows similar numbers as your previous post.
BUT
If you look at the DOW prices (here) 10 years, you will find the DOW went from 11019 to 23949. This means it made 129% in 10 years.
If I look at M* for VFINX+DIA(which is the Dow ETF) for 10 years (chart) you will see that VFINX (SP500) and DIA are close.
In 10 years DIA made 168% which is higher than the above 129%.

Maybe the numbers are not very accurate but enough to make my point and I'm not going to spend more time on that.

LewisBraham

@FD1000 In other words, the numbers for the Dow from 1929 to 1954 in the articles were not "way off" as you claimed and you don't have a leg to stand on. Meanwhile, you are busy quoting stats for the Dow and S&P that have nothing to do with the 1929 to 1954 period. The 100 year link you provided pretty much echoes the articles already cited for that period, only makes it seem worse than described, taking even longer than until 1954 to recover, probably because it is monthly price data as opposed to daily. As I've stated the Morningstar data for the "Large Blend" category back then is inaccurate as there is survivor bias, plus the funds that did survive almost certainly held bonds of some sort or the numbers are off. When stocks fall more than 80%, there's no way a 100% large-blend fund falls only 55%. Heck, Morningstar didn't even exist back then and there was no such thing as a "large blend category." Funds were free ranging and were not constrained by style boxes or even prospectus mandates like they are today. The Invesment Company Act of 1940 hadn't even passed yet restricting their activities. The dividend argument is an accurate one and would've reduced the recovery period assuming one had the courage to reinvest those divideds as stocks went into free-fall, but otherwise there is no case here.