It is going to take several years for the U.S. economy to recover back to 2019 levels. 2019 is a low bar in our view as that economy – much like the present one – was debt-fueled, deficit-ridden and plagued by artificially low interest rates. These factors in the aggregate have stymied sustainable, real economic growth.
The debt-propped U.S. economy was already softening pre-COVID. COVID pushed the economy over the edge.
- High unemployment: Approximately 32 million people claim unemployment insurance across all programs. This compares to approximately 2 million people a year ago. This weakness will be felt across all industries and will include companies of all sizes. Layoffs have not discriminated by industry or company size. Retail, Travel & Hospitality, Healthcare, Tech, Media, you name it – all companies are impacted directly or indirectly. Expect more layoff announcements as companies work to preserve margins and cash in the face of uncertain demand.
- Debt-funded fiscal and monetary “stimulus” is masking the problematic U.S. economy: Where to begin? It is a myth that Treasury and the Federal Reserve initiated their coordinated debt-funded stimulus programs in March/April 2020. The truth is that Treasury and the Fed have worked essentially in lock step to suppress interest rates since the Great Recession of 2009-2010. The Federal Reserve purchases approximately $125 billion of Treasury securities per month ($1.5 trillion/year) to maintain artificially low interest rates. This effort is responsible for the corporate debt bubble, for the proliferation of derivative products in the quest for yield, the equity market bubble and Americans’ inability to earn real interest income on savings. Federal debt to GDP sits at approximately 110% and has been at 100% or greater since 2012. To this toxic brew we must add the $2.5 trillion debt-funded “stimulus” plus the forthcoming trillion dollar-plus debt-funded “stimulus” packages. These debt-funded fiscal and monetary policies are incapable of generating sustainable, real economic growth. In fact, they ensure that real GDP growth for the next decade – to the extent there is any – will be anemic.
- COVID: COVID is hardly under control and will be a negative of varying degrees for the global economy and markets for the foreseeable future.
- The General Election: A Biden victory will bring higher taxes, increased regulation, debt-funded social and international programs ($2 trillion “climate plan”) and continued loose monetary and fiscal policy. A Trump victory will result in higher taxes (not to Biden’s level), continued geopolitical headline risk and continued loose fiscal and monetary policy.
- Mergers and Acquisitions relegated to the sidelines: Illogically high equity valuations combined with limited visibility will limit M&A activity for the foreseeable future. This is unfortunate as M&A is one of the primary healing devices of the natural business cycle. Thank loose fiscal and monetary policy for inflating valuations and limiting this tool.
- Bankruptcies help heal the economy: We have had record bankruptcy levels and more need to occur to cleanse the economy of inflated debt levels, artificially supported bond ratings and weak companies propped up by stimulus programs. The fiscal and monetary band aid needs to be ripped off so that the economy may heal. Post election this may be allowed to happen to a greater degree.
It is difficult to imagine a scenario that will drive real economic growth sustainably higher in the near-term. The Fed and Treasury are putting the economy in a more perilous position, not helping it. We therefore expect markets to grind lower for the remainder of the year.