European Resurgence

Bridge Too Far
A Common Solution
Relative Stumbles
Tropical Storms, Hurricanes, and Puerto Rico

One of COVID-19’s many less-than-obvious consequences is the way it makes us look inward. Facing mortality has always done that, of course. West Texas Judge Roy Bean reportedly said, “Nothing focuses the mind like a good hanging.” For the vulnerable and those of us of a certain age (ahem), this virus goes beyond the normal daily risks.

The difference this time is we are vulnerable based on proximity. The virus threatens us only if it is physically near. That’s one reason Americans didn’t take it seriously at first. It was far-way Chinese and Italian news. Like reading about the all-too-terrible prospect of China’s Three Gorges Dam collapsing, or the current famine in Africa. You know it’s bad, but it’s not in your backyard.

Then, as the virus spread here, our protective measures required heightened awareness of local conditions. Whether that stranger is getting too close to you may be more important than events overseas.

As a result, we haven’t paid enough attention to some important developments elsewhere. Big things have been brewing in Europe. The same continent that two years ago I said was going through “monetary drug withdrawal,” is now set to outpace US growth by a wide margin. And US growth, which had led the world for years, now looks likely to lag it.

That turnaround has potential major market consequences, which can be either good or bad depending on the market. We need to pay attention. What happens around the world affects us and our markets. The global connectivity may be slightly less today, but it is not going away. Today we’ll review what is happening and what it could mean for you.

But first, we have to take a quick look at a few US numbers. From Peter Boockvar today:

… we continue to wait for Congress to make a deal with the unemployment benefit extension the main focus. To quantify, with 30mm people collecting benefits, that extra $600 is $18 billion per week of extra cash that people have been getting. That’s about $72 billion per month. That’s $216 billion over the past three months. Big money that Amazon and Apple have been big beneficiaries of since they are vendors of choice. Facebook and Google have certainly benefited from PPP money so any extension of that will be relevant too. To repeat, according to a University of Chicago study, 68% of those collecting this money has been getting more than what they made prior with the median increase of 34% above. I’ve seen a few different proposals on an extension. One, that won’t likely happen, is just reducing it to $200. Another is scaling it down in the coming months to eventually $300 by October. So, an extension will happen, but the rate of change will slow.

If that were to continue, it would further expand US debt, on top of all the other programs contemplated. The US deficit is not going down anytime soon, nor is anyone else’s. China is using massive debt driven infrastructure spending to maintain even 2–3% GDP growth. Anything less will call into question the current government’s legitimacy. Countries all over the world are doing the same: using debt to shore up growth and employment.

Our friends at Quill Intelligence offer this chart. US household productivity has been dropping for two years. Business productivity has begun to drop coincident with the COVID recession.

Source: Quill Intelligence

Two major points:

First, reduced federal and state assistance will negatively impact consumer spending. Clearly, the federal unemployment assistance was being spent. (The PPP program is a disaster, giving money to companies that don’t need it and not to hotels and other small businesses in any usable form. Unless Congress acts soon, the hotel industry will simply collapse and take two million jobs with it, plus another six million dependent upon the industry. I would argue that hotels are at least as important as airlines.)

Second, future headlines will talk about recovery in terms of quarter over quarter. Twelve months from now, we will talk about year-over-year, which of course should be better (we desperately hope!) And while that will be good, true recovery analysis will use 2019 quarterly numbers as the comparison.

Recovery is going to take years. The world is being repriced. By the end of August, I expect well over 100,000 small businesses (and a few large ones) to have permanently closed. It’s going to take these entrepreneurs more time and money than you might think to figure out a new game plan in a completely different business landscape.

And that brings us to Europe. They have their challenges, too.