Dead-Cat Bounce and Stagflation?

Donald J. Trump and those around him (outside of his medical staff) are hopeful people. This was why 64 million Americans elected him. Trump’s entire life experience is one of tenacity, ambition, and hope. In a stunning (to those of us who have not had the president’s life experience as a real estate magnate in the hyper-competitive world of Manhattan real estate) move, the president has basically decided to quit the COVID-19 pandemic.

Courtesy of Al Jazeera.

Believing that an experimental anti-malaria drug coupled with antibiotics can be ameliorate the worst effects of the COVID-19 strain, the president has insisted that he will be reopening the economy within the next two weeks.

Of course, everyone knows his medical team opposes this move.

Courtesy of Reuters.

Be Suspicious of the President’s Decision (Until This Summer)

Already, there has been a 110 percent increase in deaths in New York over the last 36 hours. New York City, the epicenter of this disease outbreak, has a medical system at its breaking point (and people continue leaving the state and going to other states, potentially spreading the novel coronavirus to those other states). There are ventilator shortages. Personnel shortages. Testing for the disease, which is essential in stemming the pandemic, is still much farther behind than where it needs to be in order to stem the disease outbreak.

Over the previous few weeks in the United States, the Trump administration has mandated the shuttering of most businesses and for all citizens practice “social distancing” in order to “flatten the curve” over the next 15 days (we’re heading into day 11).

The nation’s hallowed healthcare system is not so great in times of crisis. The 15 day mark, though, was a guesstimate (and hopeful one at that) on the part of the administration. The data set most in the medical community are operating on indicates that the disease will be at its most severe by mid-April (lasting potentially into June), precisely when the president might reopen the economy.

Fearing a total collapse should no preventative measures be taken to keep people away from each other (in order to slow the propagation of the novel coronavirus to the wider population), medical experts are urging Americans to isolate away from each other and hunker down in their homes until the warmer months of Spring and Summer can come about (the assumption is that COVID-19 does not thrive in warmth and if we can put our lives on hold nationally we can avoid the worst case scenario that befell Italy).

In response, there has been a run on basic household supplies; the stock market has collapsed; unemployment is through the roof (at levels unseen in decades in this country); and we are experiencing the beginnings not only a recession but also, potentially, of a depression. By Q2 the St. Louis Federal Reserve Bank assumes that we will have 30 percent unemployment–higher than what unemployment levels were at during the peak of the Great Depression (back then, unemployment reached 24.9 percent before declining).

As I wrote previously, the president was right to be fearful of how the country would react–and how his political fortunes could reverse as we move into a contentious election this November. I suspect that is the real reason that Trump opted to declare his intention to reopen the economy by Easter this year.

Naturally, the markets positively reacted to the presidential statement…even as medical experts on Trump’s own staff urged Americans in public to respect social distancing lest we collapse our healthcare system in the coming weeks (note the predictiveness of their statements, not the retrospection of those claims from the medical community).

Although, the Trump administration has enjoyed near-perfect information dominance, even if in action their response has appeared haphazard. Judging from statements administration officials made in public and measuring it against actions they eventually took, it appeared as though the White House was preparing us for a long-term national lockdown of some sort.

Reports came in from the Midwest and places like Baltimore that US National Guard units were being moved to strategic locations en masse, slowly-but-surely, for example. Trump’s declaration yesterday seems to undercut this theory that the administration was seeding the public perception ground; managing expectations and subtly preparing the wider population for sterner controls imposed upon their liberty in order to forcibly flatten the curve.

Perhaps, though, everything is not as it seems. The president undoubtedly wants to stabilize the economic situation as long as possible in order to prolong the positive news about his leadership as we move closer to the November election. His supporters (of which I am) are more than happy to take him at his word, as the prospect of a Joe Biden presidency looms on the horizon.

Meanwhile, small business owners and workers alike breathe a sigh of relief as there appears to be a proverbial light at the end of the recessionary tunnel we’ve entered into this last month, courtesy of the coronavirus. Investors are sensing opportunity as they believe we either near or have reached the bottom of this market (which was long overdue for a correction anyway).

If Trump goes through with reopening the economy, without some kind of vaccine or reliable treatment protocol (such as the cocktail of chloroquine anti-malaria medication and antibiotics that one doctor successfully used to treat more than 300 patients infected with COVID-19), the market will not stay up.

Earlier today, the president indicated his belief that the market will return to similar highs that it enjoyed up until the end of January (nearly reaching a record of 30,000). Certainly, the fundamentals, as the president proved over the last few years while in office, are basically sound. But, when one injects a negative externality, such as a persistent pandemic event that perpetually disrupts the global supply chain–suppressing global demand–those basically sound economic fundamentals no longer apply.

Understanding Risk

When someone thinks of a businessperson, the average American tends to think of a freewheeling prospector; a brash and somewhat braggadocios person who can turn most situations to their advantage. Donald Trump, for many Americans, fit that bill. It’s his personality and it is indicative of the industry from which he came (I also dabble in real estate, fyi, so I know).

Yet, most successful investors that I’ve met do not tend to share these personality traits. Most of the Wall Street types that I’ve known or went to school with are nerds: they love numbers and they like a sure-thing (or, as close to one as you can get). The old axiom from that fantastic 2011 film, Margin Call comes to mind: be first, be smarter, or cheat.

Courtesy of Lionsgate, 2011.

Evoking Jeremy Irons’ CEO character from that film, investors like to think they’re smarter than their competitors but that’s never a sure-thing.

As Wall Street has shown repeatedly over the years, they can cheat their way to success–but usually the cheaters get their comeuppance one way or another. Ultimately, despite the popular notion, most Wall Street-types are not cheating per se because that’s too risky.

Instead, most big-time investors like to be first. And part of being first is knowing your risks.

This is why, by the way, various firms spend hundreds of millions of dollars collectively on risk analysis; it’s why “political risk” firms, such as the Eurasia Group, led by Ian Bremmer have become so popular and fabulously wealthy over the last couple of decades, too.

Knowing risk is a key component of investment that people often talk about in public, but few actually grasp. Those who are successful in business, though, particularly in the Wall Street part of the economy get it.

It’s one thing to take a chance with your wad of cash on a Harvard dropout who wants to create a world network of faces, it’s another thing to sink that money into a company run by a gonzo South African genius that wants to launch reusable rockets (this is why Peter Thiel was such an instrumental figure for the early survival of Elon Musk’s SpaceX: he was one of the few willing to invest considerable money into the “world of bits,” as Thiel identifies SpaceX as representing today).

Courtesy of Reagan Foundation.

Obviously, not all investors get it right.

Yet, they tend to make many investment decisions based on their perception of risk. All of this is to say that the injection of the coronavirus into the world economic discussion has blown up uncertainty among investors and raised risk to unmanageable levels. I’ve made this case to various groups since late 2015: all of your models are broken.

With the progression of time, the predictable, stodgy, standard operating procedure that has defined our world since at least 1991 (likely since 1945) is slowly ending.

By the decade’s end, the United States and the world will have gone through such a turbulent period–and our systems and population will have had to adapt so much–that we living today will not recognize the world come 2030 (I agree with George Friedman, by the way: whatever new world comes into being by 2030 will be better than the one we are enduring today).

Courtesy of The Conference Board.

Until we adapt fully to the changing environment, though, we will continue experiencing these swings and long bouts of uncertainty and chaos. Come back to the COVID-19 pandemic. The president believes that by simply declaring “victory” over the novel coronavirus without an actual, viable cure or a clinically proven treatment protocol, we will be able to ride off the positive vibes investors, business owners, and workers are feeling at getting life “back to normal” until November.

What will more likely happen, though, is that the market will crash right back to Earth the moment the disease continues hammering New York and other metropolitan areas; swamping the medical systems there, and propagating more rapidly as travel and “normal life” resume for our “open” country.

At that point, the country’s medical system will be broken and the markets will be in free-fall. If we do as Steve Bannon has advised: shut the country down for five weeks, drop stimulus from the helicopters as needed, and establish firm social distancing protocols we’d be able to flatten the curve and avoid looking like Italy over the long-run.

If we do things Trump’s way, though, we likely create a situation where we’ll have to kill the economy again (just as it gets moving), piss everyone off right before voting, set up for a six month (minimum) recovery time economically, lose many people along the way, and skirt the shoals of depression (if not endure one). We will, in effect, be Italy. No one should want that.

From Dead Cat Bounce to Stagflation and Depression?

Without either a cure or a viable treatment regimen for the COVID-19 outbreak, the president even hinting his desire to reopen the economy “by Easter” is irresponsible and risks tarring his credibility with the market, which can move on inputs from the White House. I understand the president’s desire to return to normal, but there is no going back. Even if we were totally free of the disease, after experiencing what we did, the idea that the economy would just “snap back” into place right away is silly.

As my colleague, Spengler, has argued at Asia Times, we’re experiencing what investors refer to as a “dead cat bounce.”

This is not a real recovery.

Like both he and Nouriel Roubini of New York University’s Stern School of Business, I do not think we’ve hit the bottom of the market (so Dave Ramsay’s recent argument about “buying on the dip,” while generally sound should probably not apply yet). At the end of this 15-day period that the administration has concocted, should the cocktail of anti-malaria meds and antibiotics be proven effective, we can then reassess.

Until that day arrives, though, Trump should not be saying he’ll be reopening the economy by Easter.

If this is a dead cat bounce rather than a slow recovery, we will be in a depression soon. We are staring down a credit crisis (the Fed and other central banks can only pump limitless stimulus–a form of Modern Monetary Theory that Bernie Sanders loves–for maybe a year). We are already starting to see, as Roubini observed recently, bottlenecks in supply chains in California, such as food producers (though the government insists there’ll be enough food for everyone and there is some reason to believe that).

Yet, even if food producers don’t suffer shortages, there might yet be shortages of workers and transporters to move the food to the storefront. There will also likely be increased demand if we end up having to endure longer shutdowns of the economy. Meanwhile, the long-term economic condition of this country may eventually mirror that of the 1970s: stagflation.

The president can say what he wants.

Ultimately, though, no one can decide when this country reopens other than the scientific and pharmaceutical communities as what we are experiencing is a negative externality run amuck on the economy and global supply chain.

The president would have been better off just keeping mum on whether he’d be reopening the economy soon (he can’t) and focusing instead on galvanizing the population to a “war-footing” against the disease while worked to impose structural changes to the country that would have set us up for a more durable, greater economic recovery at the end of this thing (at the high-end 18 months, when an actual vaccine could believably be made available).

Of course, as I’ve said before, all of this goes away if by next week the president is somehow proven correct. That’d be great for everyone and I hope he is proven correct. I do, however, find it unlikely that the majority of the medical community would be wrong about this thing.

As the president loves to say, though, “we’ll see.” I’m rooting for him (and, therefore, the country). But I am advising my readers to brace themselves.

©2020, The Weichert Report. All Rights Reserved.

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