Wednesday, April 15, 2020

What's That Sound? Shit Hitting The Fan!

The worst is yet to come, in terms of economics. The coming economic tsuanmi will make the Corona Virus look like patti-cake.

The "if it saves even one life, it's worth it!" crowd really has no idea what is about to hit them square between the eyes.  So far, the economic impact of the virus shutdown has really yet to be felt.  Sure, you read newspaper articles about some poor slob who lost his job - but he's getting unemployment, right?  And his landlord will forgive the rent this month or his bank will add this month's payment to the end of the mortgage.  We'll all be back to normal by the end of the year.  So what if some rich dude loses a lot of money in the stock market?

Oh, but the rich dude isn't losing money in the stock market.  He's making it, or at best, breaking even. I cashed out last year.  The really rich folks shorted.  The middle-class and the poor, they are about to get socked right in between the eyes and they can't see it coming.

To be sure, a recession was coming in any event.  A lot of companies like JC Penny, which just defaulted on its bonds and has closed almost all of its stores were probably headed to bankruptcy court in 2021 or 2022 - this just accelerates the process.  And Sears?  They went down the drain and were barfed back up.  That floating turd in the toilet bowl - with its half-assed attempts at "revival" - surely won't last the year, unless Eddie Lampert is willing to spend his very last dime keeping it afloat until 2021.

"But the market is doing so well, considering!" some say.  The market crashed and then went up and then down, and then up - the same pattern of volatility we saw in 1929 or before any major market crash.   The problem is, the world economy is in the toilet.   You can't just erase one or two month's productivity from the GDP of every country in the world and expect things to recover quickly.

The snowball effect kicks in - rather rapidly.  Fear dominates the market.   People who lost their jobs stop spending - we expect this.  People who still have their jobs or have money, cut back as well.  The idea you could be destitute on a moment's notice puts the pause on major purchases - or even minor ones - particularly when they are discretionary.  I know we've been cutting back - you don't spend when your confidence in the economy is waning.

The RV business was tanking last year - which some say was a sure sign the economy was headed toward recession.  Car makers reported slower sales and resorted to "employee pricing" back in November, just to move cars.  Today?  In many States they aren't even allowed to sell cars, and almost every car plant - worldwide - has shut down for a month or so - only now are they just re-opening.  Harley-Davidson, seeing slowing growth and declining sales as their target market ages out, is now facing an economy where discretionary spending is cut to the bone.  Toys like motorcycles and jet skis are the first thing cut from the budget.   Food, shelter, and clothing are the last.

We are living in a dream world right now - distracted by virus stories dominating the airwaves.  "Everyone is dying!" people say, and indeed some are.  About 0.01% of the population so far, and maybe 0.02% of the population, if current projections come true.   A far greater number may die in the coming years due to extreme poverty, if the economy crashes in the next few months.

We will start to see earnings reports and sales reports in the coming weeks.  The first quarter of 2020 (which for many companies is the end of their fiscal year) will be a blood bath.  Let's see, sales at General Motors: 0.  Expenses: same as before.   Maybe they will still pay a dividend, eh?  Year-end bonuses for executives?   Actually, probably yes - some companies are already getting flack for this.  But going forward, second quarter 2020 won't be much better.

People will pull back on spending, and even when the economy "reopens" no one is running out to buy a new bass boat, Harley, jet ski, RV, or brand-new car.  Oh sure, some will, but not enough to keep the plants running like before.   And vacations?  Do you want to spend the money when the future is uncertain?  Do you want to go on an airplane, a cruise ship, or to Walt Disney World and spend time with crowds of strangers in an enclosed space?

No, those industries are not coming back in a hurry.  And hotels and restaurants will also feel the pinch. "Stay at home" sounds swell, but it cripples the economy, which means massive unemployment, and not just on a temporary basis.

Or just in the US.

Worldwide, this will have a domino effect.  We stop buying crap from China, what will the Chinese do?  What will the Germans do, if they can't sell overpriced cars to Americans (many of which are made in America?).  Again, most of these world economies were already headed to recession or in it already.  Many were mired helplessly in debt (as we will be shortly) and are in no position to pay it back - in fact, cutting back on spending is probably the worst idea for world governments.

A major recession - or depression - will be severe for the United States, but will be dire for other countries, particularly in the third world.  We worry about making our car payments, they worry about eating.   This will lead to civil unrest, violence, and yes, even wars and revolutions. More people will die as a result, worldwide, than as a result from this virus.  I suspect that might even be true here in the United States, even.  Perhaps not on an annual basis, but over time, the number of people falling into despair and suicide, or reverting to crime or violence - or victims thereof - will exceed the number of virus deaths.  But I guess we'll have to wait and see.

Some economists and commentators claimed we would see a "V" recovery, with stock prices and profits recovering fairly quickly (as they did in 2008 initially, and then did a slow, steady slog for the next eight years).   I don't think we'll see that this time around.  Unemployment will be much higher this time around, and money will be a lot tighter.  And with all the deficit spending, inflation might also be an issue.

We may be seeing "the light at the end of the tunnel" with regard to virus infections and death rates. But in terms of the economy, we haven't even entered the tunnel yet.  The shit is going to hit the fan in the coming weeks, and it ain't gonna be pretty.

If you lived through the 2008 recession, all I can say is, that was a freaking appetizer.