Another Black Monday. The Dow Jones Industrial Average closed down nearly 3000 points. The S&P down almost 12%. These were the biggest daily declines since 1987. The world stock index fund VT closed down 11.62%.
On the bright side, gold was down around 1.60%. Not bad in rising dollar terms. Treasuries were again the biggest winners, with the Treasury index fund GOVT closing up 1.60%.
What’s ahead? So much is unknown. It should be obvious that Synthetic Systems is of no use in a situation like this because it knows nothing about the new coronavirus. I intend to publish results as usual at quarter end but would consider it just an exercise for at least another quarter or two.
So we’re down to intuition and judgment. My guess for the Dow and S&P would be to be prepared for as much as 60%-90% declines from the highs. Prospects will have to be evaluated in real time, but the 2016 lows would be a tentative technical target. Treasury yields have already sunk below 1% across all maturities, and that seems likely again. The Fed and other central banks are unlikely to give up on inflation, however, and once their leaders finally get their minds around the futility of what they’ve been trying for the last ten years and start trying something truly new, we could see inflation with a vengeance. Stock prices will rebound, but gold could skyrocket as manmade currencies lose value. Other commodities could follow. The sequence and magnitude of these developments is, of course, still mostly speculation at this point.
Will there be a recession? When I hear econopundits saying the odds of recession have risen I want to yell at them. A recession is already a fact on the ground. People and things are moving around vastly less than mere weeks ago and little is being produced beyond essentials. As usual, official recognition will come well after the fact. Some are saying there could be a hit to consumer confidence. Really? People lining up at grocery and department stores for hours to try and get bottled water and toilet paper tells me more about consumer confidence than any number ever could. It’s gone. It’s gone negative. It’s been replaced by consumer fear.
GDP has likely plunged by anywhere from 10%-40% in a matter of weeks. It will likely remain at this depressed level for at least a few more. So literally the economy is in depression. The real question is how long the depression will last. Again, I can only offer speculation, but the most likely scenario is that having gone over the cliff, the economy will get worse for a few weeks and then enter a rebuilding process. The vision of a quick V shaped rebound is wishful Wall Street thinking. The biggest risk to this scenario is overzealous central planning beyond what is required to minimize the threat of the virus to life and health and to reestablish financial order and security. Further attempts to increase credit, limit freedoms, play favorites, and micromanage the economy would likely extend the time required for recovery, as it did in the 1930s. The economy must recover from not one, but two, perils. SARS-CoV-2, and years of central planner “stimulus” in the form of reckless monetary policy, insane debt buildup, and frivolous malinvestment.
What would actually help? The first step is to realize we have two separate problems, a health crisis and a financial crisis. Health first. For this, we need readily available testing, for starters. Aside from its value to life and health, the economy ultimately is the production and movement of people and things, and just knowing where the virus is and isn’t would facilitate that bigly. Those who know they don’t have the virus can freely associate with others who don’t, and those who know they do can freely associate with others who know they do. It would only be a matter of time before these two groups could freely mix again.
That in turn would be when a treatment is available, which takes us to our next policy action. Remove bureaucratic obstacles. If you listen closely you’ll hear it said that there are no currently approved vaccines or therapies. In fact there are both vaccines and therapies in existence now. Technology isn’t standing in the way; bureaucracy is. The decision whether to try a vaccine or antiviral should be up to the patient and doctor.
As it develops, information resulting from these trials would then be invaluable to the next iteration of patients and doctors, and so on. We have amazing technological capabilities, which in a free market can accomplish amazing things.
On the financial front, the business news is overflowing with ideas of ways to help companies, business, institutions, markets, etcetera. The Federal Reserve is pumping literally trillions of dollars into the financial markets. How about directing some of this monetary largess to actual people? Although I haven’t been an advocate of the UBI (universal basic income) or MMT, the fact is that the Fed is already creating trillions of dollars from nothing and tossing into various markets. These dollars may as well be distributed democratically. The Fed creates dollars, gives them to Treasury, and under the direction of Congress and the President, Treasury cuts checks to every citizen in America. Everybody gets the same amount.
Overcoming coronavirus is a difficult, but doable challenge.
Ending deflation would be child’s play.