Thursday, October 1, 2020

Recession or Depression?

I am not going to offer any commentary on this column by David Rosenberg. You may know him as one of the world’s most astute market strategists. He runs a private research firm and will happily sign you up for his analysis. Though it is not free. 

Anyway, Rosenberg has often been somewhat of a Cassandra, someone who sees risk and danger where others do not. These days he is glum about our economic prospects. I suggest that one not dismiss his views unthinkingly. His timing might be slightly off, but his analyses are often on the mark.

In his Financial Post column he argues that we are currently experiencing an economic depression, not a recession. If you think that our economy is going to bounce back you have been puffing on the wrong cigarettes:

We are in a depression — not a recession, but a depression. The dynamics of a depression are different than they are in a recession because depressions invoke a secular change in behavior. Classic business cycle recessions are forgotten about within a year after they end. The scars from this one will take years to heal.

He takes his statistics from reliable sources:

The Federal Reserve Bank of Chicago conducted a survey in the spring and found that three-quarters of companies say the U.S. economy needs at least a year to fully recover from the pandemic. There were 670 respondents in the poll and half told the Chicago Fed that the recovery will take between one and two years to develop. The other half was split between a recovery in less than a year and one that would take more than two years.

Some sectors of the economy have been bombed out.

“Many of the small businesses we heard from — especially those in the entertainment, tourism, recreation, restaurant, and retail sectors — are in danger of financial distress,” the report said. “Many businesses are facing very difficult challenges that are unlikely to go away quickly.”

Tally up those sectors and they supported 32 million jobs before the crisis, or about a third of the private-sector workforce, and it looks to me as though half of their workers are not going back to their old jobs. I’m not sure many people understand that amusement parks, airlines, hoteliers and restaurants cannot stay in business at 50-per-cent capacity (or even 75 per cent in the case of restaurants).

People have to understand that a cyclically-sensitive consumer-oriented sector, such as restaurants, spends 30 per cent on labour, 30 per cent on rent and 30 per cent on food — they have a 10-per-cent margin. So good luck with a partial reopening and social distancing.

This, at a time when California refuses to allow Disney theme parks to open, costing thousands of people their jobs. New York City restaurants are now opening for inside dining, but outside dining will soon be shut down by the fall and winter weather.

Rosenberg continues:

As it stands, the United States Chamber of Commerce said that 25 per cent of small businesses have already shut down. Another survey by Ipsos concluded that two-thirds of people are still nervous about leaving their homes; 59 per cent say they intend to remain locked down on their own until signs emerge that the virus is “fully contained.” A YouGov/CBS poll concluded that 85 per cent of American households say they wouldn’t get on an airplane even if they could — that’s why the industry needs a bailout.

One wonders whether it was merely the pandemic that seems to have crushed the American spirit, or whether the riotous insurrection sweeping America’s cities has contributed.

All these polls say basically the same thing: it will not be “business as usual,” as the bulls will try and convince you, and the best we can hope for is a partial recovery — at best.

He continues to suggest that we should not take the stock market as an infallible indicator of future economic conditions.

What we had on our hands was a vertical economic decline with job losses on an order of magnitude higher than anything witnessed since the Great Depression. Even as the stock market tells you that it has it all figured out, I can assure you that what we face at this very moment is a very uncertain economic future. And, unfortunately, most of the longer-term risks are to the downside.

Outside of the Treasury market, asset prices still don’t reflect the economic depression because they have been so heavily sedated by unprecedented fiscal and monetary policy stimulus. Beneath that veneer, there is rot.

We shall see how long governments can mask what is really happening organically in the economy. At some point, the well will run dry. Nothing lasts forever, not even what seems for now to be an endless lifeline of government support.

Sorry to rain on the parade, but still, one should give full consideration to someone as savvy as DR.

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