There are multiple economic recovery scenarios, and varying expectations for how long each one could take. These scenarios are often described as letters of the alphabet.
- A “V-shaped” recovery is the best-case scenario. In a V-shaped recovery, the economy bounces back as quickly as it fell. V-shaped recoveries are fast and vigorous.
- A “U-shaped” recovery is the middle-of-the-road scenario. There is a flat stretch of time at the bottom of the recovery, and then a near-vertical return to normalcy.
- The “L-shaped” recovery is the toughest road. This is the one that takes the longest. Unlike the other two, with an “L-shaped” recovery there is no vigorous bounce-back at all. Instead the bottom of the L stretches out, over a timeframe of multiple quarters or even multiple years.
Some are hoping the United States will have a V-shaped recovery. It will not. This is simply impossible.
The odds of a V-shaped economic recovery — though many hope for it, and some pundits predict one — are zero in our view. There is just no chance.
By “zero” we, of course, mean statistically zero, because theoretically speaking anything could happen.
Someone could come up with a miracle Covid-19 vaccine overnight, while someone else simultaneously comes up with an energy breakthrough bigger than fracking.
But those aren’t remotely plausible possibilities; they are akin to betting on a miracle.
And a flat-out miracle, a kind of combination reverse black swan and deus ex machina, is what the U.S. would need to actually recover quickly from what it faces now. We don’t see it. Or if there were odds on this kind of thing, we would put them at 0.00001% or something of that order.
The news is not all bad. There will be good things ahead when the economy recovers, and attractive trading and investing opportunities long before it recovers.
But we need to be realistic about the odds and probabilities of what is likely to happen next.
In the months, quarters, and years ahead, profitable investments will be found in various corners of the market where local optimism is justified. Optimism with respect to the market on the whole, or the economy on the whole, will mostly be false hope.
To understand why this is true, think of the U.S. economy like an athlete who has just sustained an injury.
It’s never a pretty sight when a professional athlete is sidelined. If the athlete is still in their prime, the question is almost always, “How soon can they be back?”
The answer depends on the injury.
With a lightly sprained ankle, the recovery time could be weeks. With a bone fracture, recovery could take an entire season. With a more severe injury, recovery and rehabilitation could take years.
What the U.S. economy has to recover from now is very different from anything that came before. In sports terms, the injury is far more severe.
What’s more, over the past few decades, investors have been spoiled by a pattern of financial crises followed by liquidity injections fueling a fast rebound.
This pattern of crisis-and-quick-recovery began with the stock market crash of 1987, when Federal Reserve Chairman Alan Greenspan, relatively new on the job, responded to the crash by flooding the system with liquidity.
After 1987, the market bounced back immediately, and Greenspan learned in his gut that this is what a central banker should do: Whenever there is a crisis, throw liquidity at it.
Greenspan’s successors, Ben Bernanke, Janet Yellen, and now Jerome Powell, all inherited the same playbook: To bounce back from a financial crisis, smother it with interest rate cuts, liquidity, and bank credit.
But the recession created by the pandemic — and we are surely in a deep recession now — was not created by a financial engineering blow-up, and thus does not have a financial engineering fix.
As a result of coronavirus “shelter in place” measures and mandated business closures, the St. Louis Federal Reserve estimates U.S. job losses could hit 47 million.
They further note that 67 million Americans are in jobs with high lay-off risk, and that unemployment levels could hit an astonishing 32%.
“These are very large numbers by historical standards, but this is a rather unique shock that is unlike any other experienced by the U.S. economy in the last 100 years,” one of their researchers writes.
There will be happy talk about how the U.S. can get over this quickly. But the numbers don’t add up.
Consider the job count in just three industries — restaurants, retail, and travel:
- Restaurants: 15.6 million jobs (National Restaurant Association)
- Retail: 42 million jobs (National Retail Federation)
- Travel and Tourism: 15.8 million jobs (U.S. Travel Association)
Those three industries alone — restaurants, retail, and travel — account for 73.4 million jobs by trade industry estimates, which amount to roughly 47% of all jobs in the United States.
Those are also the three industries hit hardest by the pandemic. There are other hard hits to be sure, but restaurants, retail, and travel are the big three.
And many of the job losses there will be structural, long-lasting, and permanent.
The restaurant and retail sectors were already in retreat heading into 2020, after years of overexpansion and growing competition from e-commerce.
Travel will also be significantly curtailed, on both an international and local level.
Casual travelers are more likely to stay home. Businesses are more likely to go remote. The industry will bounce back, eventually, but in a leaner state.
But what about the $2 trillion worth of stimulus? Won’t that be a huge shot in the arm for the economy?
Yes and no, because “stimulus” is actually the wrong word. The $2 trillion was more like an emergency blood infusion to keep the patient alive than a B12 booster shot for pep.
To put it another way, the real purpose of the $2 trillion was not to get the economy back on its feet.
It was to avoid an immediate repeat of the Great Depression.
If the $2 trillion can help the United States avoid another Great Depression, and the U.S. merely experiences a brutal recession it can fight its way through with a long, drawn-out recovery, the rescue package will have done its job.
Because the real aim was not bounce-back. It was keeping the patient from dying on the table. That should tell you something about where we are.
In 2008, the global financial system went into cardiac arrest. In 2020, it was not the financial system but the real economy that went into cardiac arrest.
As a result of the pandemic-related shutdowns, you had supply and demand come to a screeching halt simultaneously, even as consumer psychology patterns went from “carefree spending” to “panic-buying toilet paper” in record time.
Supply is gone. Demand is gone. Consumption patterns were halted like a needle scratching across a record. The return will be hesitant and cautious at best, and won’t even start for another month.
We have never, ever, seen anything remotely like this. V-shaped recovery? No.
One of the best things about the $2 trillion rescue package, besides the $1,200 that will go to Americans who desperately need it, was a $600 top-up in weekly unemployment benefits.
For many, the rescue funds will be a godsend. But ask yourself, what will they spend the money on?
We would wager that, for tens of millions of Americans, both those who are unemployed and those who fear job loss in future, the rescue cash will likely go toward four areas:
- Saving the cash for an emergency
- Paying down debt
- Paying rent
- Buying food
Does that sound like a bounce back recipe to you? It certainly shouldn’t. The ability to pay rent, buy food, pay off debt, and save for a rainy day is very helpful. But in terms of bringing the economy back, it’s like filling in a hole. The $2 trillion will help fill in a hole. It’s not a launching pad for anything.
Then, too, for years the “real economy” got weaker as the financial economy prospered. We are facing the consequences of that now.
The real economy, which centers around Main Street instead of Wall Street, is the one where 70% of the country lives paycheck to paycheck, and where 40% of Americans would struggle to come up with $400 cash for an emergency expense.
Monetary policy doesn’t help the real economy, either. The Fed can loan cheaply to banks, and make it easier for big corporations to borrow, but it can’t create consumer demand where none exists.
The $2 trillion stimulus will have transmission problems, too.
Any mass-spending effort by the government will only be partially effective at best. If it were otherwise, rich-world economies would never have recessions at all, because fiscal stimulus packages could reverse them every time. We normally avoid fiscal stimulus because it’s a lousy option, best used as a last resort.
On March 29, Treasury Secretary Steven Mnuchin said Americans can expect their cash payments “within three weeks.” In an interview with Face the Nation, Mnuchin further explained that people without a direct deposit connection will be able to sign up on a government website.
Three weeks is a long time to wait. Hopefully the website works correctly the first time, and doesn’t crash under strain the way multiple state websites did recently in a rush of unemployment filings.
(With a government project heavy on technology, built to service tens of millions of users, the odds of delay or failure seem about 50-50.)
Meanwhile the clock is ticking, the economy is shut down, and landlords are still asking for rent. With every day in limbo, more Americans get closer to the edge.
In some places, rent and mortgages have been suspended, but that leads to a whole different set of issues (think mortgage REITs with share prices falling toward zero as the mortgage bundlers face insolvency).
The point of recounting all this is not to be a Gloomy Gus or a Debbie Downer.
It’s to help inoculate you with facts and logic against the “rah rah rah, sis-boom-bah” type mentality that suggests the economy can bounce back quickly and so stocks can bounce back quickly, too.
That isn’t the case. The old economy, and the old stock market multiples, are not coming back.
One last point to consider here: The pandemic is landing at the tail end of a 10-year bull market, when valuations were already extreme, debt and leverage levels were high, broad economic indicators were already slowing down, and a bear market was already due.
This is all the more reason not to bank on a “bounce back quickly” scenario.
The quick bounce-backs were for financialized markets, in a financialization trend that was still ongoing, with stock buybacks aplenty (those are over now, too) and central banks in control of the narrative.
That world is gone now.
It’s not all bad news by any means. There will be huge opportunities in the post-pandemic landscape.
In fact, there are big opportunities even now, and trading and investing ideas to be excited about, both bullish and bearish. (We wrote about another big one just today, in a new trade note to Decoder subscribers.)
To prepare for this new landscape, throw away the false optimism. Stick with justified optimism instead, which will only be found in local pockets of the market with selective digging and hard work.
There is no V-recovery coming, no magical resurgence of market multiples to look forward to.
It’s a new reality now. But we can help you navigate it. And when there’s treasure to be found, we can help you find it.