This article is based on a presentation from John Mauldin’s 2020 Virtual Strategic Investment Conference, which is being held from May 11 to 21. To register for this conference, click here. The Strategic Investment Conference was just approved by CIMA and CFP for 14 hours of continuing education credits.
Wall Street will proclaim that any increase in economic activity is a good sign. But, according to Jim Bianco, even a recovery to 90% of pre-crisis levels will be terrible.
The dismal implications of a 90% economy were first presented in the Economist. Bianco amplified that message in a talk he gave as part of John Mauldin’s 2020 Virtual Strategic Investment Conference. Bianco is president and macro strategist at his own firm, Bianco Research, L.L.C., which is based in Chicago.
GDP fell only 4% as a result of the financial crisis, so 90% would be twice as bad as that, he said. Early evidence from China is that 90% might be the best we can accomplish.
“This is a relative, not absolute, game,” Bianco said. “But the pundits look at it on an absolute basis – any recovery is good. Like the Economist, a 90% recovery is not good.”
The economic drawdown following 2007 was the worst since World War II. It was a drawdown of 4% (the U.S. economy operated at 96% of its pre-GFC output). But that resulted in 10% unemployment and a 50% stock market correction, along with social unrest, Brexit and Trump’s rise to power. The estimate for Q2 shows approximately twice as big a contraction as 2008 – about 9%.
“This will be unlike anything we have seen in terms of its decline,” Bianco said.
The worst decline was in the Depression, when the GDP was down 26%. “This will go down as one of the worst in our economic history,” he said.
“We need to get all the way back,” he said, “or else we will have lasting unemployment and business failure.”
Where we are in the restart process
Based on data from OpenTable, restaurants have “basically shut down,” Bianco said. The best city (Naples, FL) is operating at about 60% of its pre-crisis level, but many major cities are down 100%. Some people are starting to go out to eat, he said, but we are not even close to the revival we need. Among 50 major cities, 39 are still at 0%. Restaurants have to get to 97% to survive, according to Bianco.
Based on data from Apple, which tracks personal locations, vehicle traffic is 70% of what it was on January 13; walking is at 50% and mass transit 25%. To get back to normal we have to exceed the January 13 level, which was depressed because it was in the winter. Levels need to be 40% or 50% higher than mid-January, now that we are in May.
The TSA data shows that air travel is at 8% of pre-crisis levels.
The New York City subway is running at 10% of its level a year ago.
“Everything is getting better,” he said. “That is not the issue. The question is whether we get back to at least 96% of pre-crisis levels. Getting to 70%, 80% or even 90% is not enough.”
Commercial real estate faces a crisis, he said, particularly if only two people can ride in an elevator at a time, which is the restriction imposed by many cities.
A survey of those unemployed in California showed that 85% of respondents expect to get their jobs back. Similar surveys on a national level put the figure at 77%. Even with those numbers there would still be an unacceptable 9% unemployment level, he said. “That will cause social unrest.”
In China, businesses were told by the government to restart. Those businesses turned on the lights, but did not do anything. They have no orders. They are trying to give the appearance of activity and are reporting numbers that everything is normal, Bianco said.
China is inflating its numbers and it is at only 90% of pre-crisis activity. “Without the police marshaling people to go back to work,” he said, “we will be short of that level.”
To get to 100%, we need put the virus behind us – through a therapy or a vaccine, according to Bianco. Worldwide, excluding the U.S., cases are still growing. Monday, May 11, had the highest number of reported cases. May 12 had the highest reported level for a Tuesday. “This virus is not slowing down and will keep the global supply chain impaired,” he said.
In the U.S., excluding New York and New Jersey, the number of cases is level but it is not clear it is past its peak. But it is past peak in those two states, he said. Yet, New York and New Jersey are the slowest to want to recover. From a public policy standpoint, Bianco said he doesn’t understand what we are doing, particularly with respect to the metrics that will determine when cities and states open up.
“There are no uniform metrics across states or cities to dictate policies,” he said. “Are we waiting for zero cases? We may never get there without a vaccine. If we hold back the economy in any way, it will look more like the Depression.”
The markets
The 10-year Treasury yield has been stable at approximately 61 basis points and its volatility is low. But stocks, gold, and foreign exchange rates have had volatility that is significantly higher than a year ago, he said.
Interest rates stand apart from everything else. Why?
The Fed’s QE purchases in the Treasury market (not commercial paper or corporate bonds) are the reason, according to Bianco. It purchased $2.18 trillion of Treasury securities in the last two months. That is “too big” to understand, he said. It drove the 10-year yield from 96 to 72 basis points the day after the Fed started this program. Under non-crisis conditions, Bianco said that activity should have driven yields to zero, but inflationary fears are keeping yields higher.
Everyone other than the Fed has been liquidating fixed income securities, and they are being “sopped up” by the Fed. There is a fear of insipid inflation some time down the line, according to Bianco, but not in the short term.
Among those who had a job paying less than $45,000 year in February, 40% lost job that in March. More losses will be reported in April. Those workers will be subsidized through unemployment. They will not lose income, according to Bianco, and will continue to participate in the economy. But a lot fewer good and services will be available than before the crisis. Those workers will bid with the rest of us for the limited goods and services. That could cause inflation, Bianco said.
We are now coming to the point where government will crowd out private buyers in the securities markets. The government had a $738 billion deficit in April. Normally, April is when we pay taxes and is the biggest surplus month. That deficit was because the tax payment date was reset to July.
The Treasury will need to do a lot of borrowing, Bianco said. In January, the Treasury said it would borrow $360 billion in Q1; last week that number ballooned to $3 trillion. “The bond market is struggling,” he said. “The Fed is the buyer, while everyone else is liquidating.”
Yield curve control, where the Fed targets long-term in addition to short-term rates, has arrived. It is the de facto reality, Bianco said. “In the short term, this might be okay, but in the long term we will follow Japan.”
There is no private securities market in Japan, he said. The only player is the Japanese government. “That is the danger we face.”
Read more articles by Robert Huebscher
This article is based on a presentation from John Mauldin’s 2020 Virtual Strategic Investment Conference, which is being held from May 11 to 21. To register for this conference, click here. The Strategic Investment Conference was just approved by CIMA and CFP for 14 hours of continuing education credits.
