by Phil Martin, Founder Co-CEO
The St-Louis Federal Reserve President, James Bullard, reported yesterday that they believe Jobless claims could soar to 30% of the entire US workforce. He also anticipates a 30% catastrophic decline in GDP for Q2, something we have never seen. The massive Stay at Home orders across the country have all but shut down the entire economy and it’s about to get much worse before it gets better.
The EPI (Economic Policy Institute), Morgan Stanley and Capital Economics all have similar predictions estimating Q2 jobless claims topping 17 Million Americans. Although the recent stimulus package signed by the Senate last week will help, it still remains a fact that 200 Million+ Americans are in some considerable degree of isolation. I’ve attached a synopsis graph of the entire US workforce and I feel that although unprecedented unemployment estimates seem far fetched, I’m of the opinion that the number is rather conservative.
To add insult to injury, economically speaking, we’ve just created a massive snowball and it's about ready to roll down a very dirty hill. The economy is a massive engine that has many moving parts and a practically instant shut down of nearly every industry means our problems will get far worse before it gets better.
Our economy was stuttering before this crisis due to an 11 year, near 0% interest rate Fed policy. We basically kicked the can down the road from what caused the crisis in ’08 and were just never able to get to normalized interest rates. Here is what started this monster bubble avalanche that the pin called the Coronavirus just pricked - waves of QE (Quantitative Easing) led to massive stock buybacks by our nation's top Corporations which gave the illusion of solid growth and economic expansion. The ugly truth is since this economic expansion began, earnings failed to follow the DOW and the S&P, which is a complete disconnect from the past 50 years. This has set up a number of bubbles in the system. Let me go through two for you to think about. Each one of these bubbles deserve their own articles and there are several more but, I won’t go into detail today:
- Public and Private Pension Plans
- In order to meet the demand of the aging boomers, Pension plans have to earn approx. 6.7% return annually. With the near 0% monetary policy of the past decade, pension fund managers have had to get creative and have moved from secure Bonds into somewhat risky equities to achieve that yield. We’ve also seen these managers invest in REITs to achieve these targets. A side mention here is that REIT’s own a vast majority of US shopping malls...shopping malls that are about to completely collapse for the next year plus. At the very least, companies will need to expect that shoppers aren’t going to race back to malls that fast when cases of Coronavirus start coming down. It will take time, and hopefully pension liquidity can keep up with existing pensions and new retirees cash requirements.
- Automobile Finance/Leasing
- Car makers have to build cars and they have to put them in people’s driveways. Declining credit ratings following ’08 meant they needed to lower standards to qualify for a loan or a lease. The non-existent regulations for lending in the industry means that when a Coronavirus hits, all of these people lose jobs and you’ve got a ton of cars coming back. All I have to say is, they better not ask to get bailed out this time!
I figure we have a good dozen bubbles that are intertwined and all will be impacted one way or another this year. It is important to realize how Global economic monetary policy can impact your small- to medium-sized business. Never before have we seen macro economic issues have near instant reach into main street America but, it’s about to and we all need to get ready for it. The ultimate risk of the Fed easing upwards of $14 Trillion in the next few quarters is a devalued and leveraged Dollar. We ultimately don’t know, but one thing we do know is that you can’t taper a Ponzi scheme! When you go down this QE road, it’s really hard to stop and the reality is we don’t have a manufacturing sector that is robust enough to compensate for the time it will take for the service sector to ramp up. I believe the result will be hyper-inflation, meaning every day items can end up costing 50 times what we’re used to seeing. The level of inflation will depend on how much the other Central Banks in the world have to ease their own currencies. Hopefully, for us, they end up doing more, therefore reducing our own inflation storm. At Iversen Martin, we have extensive experience and practical knowledge of how to plan and limit a businesses’ exposure in these unprecedented economic times.
There's one item I’m not bringing up because I am more corporate focused for the purposes of this article, and that is It doesn’t mean that Americans aren’t living through extreme hardship just two weeks after the start of this shut down. Most people who have been laid off will also be facing the cancellation of their Employer Health Care coverage. There will likely be some aid for food, furloughs on car, credit card, rent and mortgage payments until things can get better. For many, this won’t be enough, and it will be important for all of us to help each other so we can come through this with an increased appreciation for the smaller things in life.
For now, listen to the advice of our leaders and the scientific community and stay safe, vigilant, grateful and kind. In crisis times, there is always a silver lining and we will come out of this. If you would like to discuss how we could help with the challenges your organization is currently facing, please contact me or any member of our team. We are here to help anywhere we can.