Economic Impact of COVID-19 and Oil War Black Swan Events
The near-term economic impacts of the COVID-19 pandemic and the Oil War cannot be understated. The day-to-day activities of majority of the industrialized population has come to a standstill. Businesses are limiting the hours they are in business while some are closing entirely. People are losing their jobs and the consumer, from all outward appearances, is spending their money on the basic essentials; toilet paper, diapers, and canned goods. If you turn on the TV, the coverage has been non-stop; state-by-state how many infected, how many dead, what’s being done and what should be done to stop the pandemic.
However, history tells us this will be a short-lived event that will have painful but short-term economic implications. From a long-term perspective, it will be a blip on the timeline of economic history. As we have reported over the past several quarters, the economic trends that we track are rising and we believe they will continue to rise. The difference is that we fully anticipate seeing a “V” shape within economic indicator trend lines. Over the next couple of months, it is obvious economic activity will soften. As a result of the measures put in place to combat the spread of the COVID-19 virus the majority of the metrics we track will slow. Retail Sales, a metric that tracks consumer spending, will slow. Businesses will stop spending on Capital Goods and Services, Manufacturing will slow and Wholesale trade will pause.
Several key points that support this thesis include the actions that have already been taken to mitigate the spread of the virus. The first is containment through social distancing. Social Distancing is not new. The effectiveness of social distancing can be seen in the graphic below depicting the Spanish Flu of 1918.
Consider China, the epicenter of the COVID-19 virus and the “Philadelphia” in the graphic above. Chinese health officials initially thought they were dealing with SARS. It wasn’t until after the virus had expanded exponentially throughout the region that they realized they were dealing with something new. By the time they implemented very serious containment measures, it was too late. The majority of the population was infected, the virus had spread to neighboring countries and Industry had shut down. The economic impact was extensive. However, just as depicted in the graphic above, all information coming out of China now, indicates the spread of the virus has slowed and may well be diminishing. Industry is coming back online, people are going back to work and goods and services are starting to be produced. The damage appears to have been done and they are now getting back to normal.
The U.S., seeing what happened in China, has learned from their experience and has implemented significant social distancing directives. In the graphic, the U.S. is St. Louis. As in the 1918 Spanish flu epidemic, the impact of the virus will be diminished (i.e. fewer infected and fewer deaths) but will be a more drawn out process but not necessarily as long as depicted in the graphic. The reason we believe it won’t be as long, is because the 1918 Spanish flu started in the fall and went through the winter – prime time for flu bugs to multiply. It is now mid-March and we will be entering the summer season soon – a time when flu bugs tend to die out.
The second and third reasons to believe this will be short-lived, is that both consumers and businesses are in strong financial shape. The savings rate for consumers has been strong and companies have been pocketing more of their profits over the past several years.
US Savings Rate
US Personal Savings as a Percentage of Disposable Income. This indicator has been above 6% since 2010 and has hit as high as 12%. The consumer is in strong shape. Critics will say debt levels are at all time highs – BUT DEBT LEVELS HAVE ALWAYS BEEN AT RECORD HIGHS. The unemployment rate is at historical lows and wages are rising. As the COVID-19 virus recedes, businesses will reopen and people will go back to work.
Corporate Cash
Not only is the consumer in a better place to weather the storm, but corporations are also find themselves in fiscally positive situations. Total liquid assets (cash on hand shown below) are in a cyclical ascent. Since 2010, Corporate Liquid Assets have only dipped below 0 twice (2012 and Dec 2019/Jan 2019). The Fed’s $1.5T stimulus program and dropping the interest rate to 0% will likely support this trend.
Also, it is very important to remember the stock market is not the economy. The extreme volatility in the stock market today is more an emotional reaction to what is perceived to be the “unknown”. We’ve been through pandemic’s before as well as market melt down’s (e.g. 2008/2009) which leads us to the final reason we believe this is a short-term event.
The Federal Reserve has injected a significant amount of money into the economy, lowered interest rates to 0% to 0.25% and will purchase $700 billion in bonds? As Yogi Berra said, “It’s déjà vu all over again”. During the 2008/2009 Great Recession, the markets were wildly volatile just as they are today. The Fed interceded and the stock market recovered to reach all-time highs a decade later.