by memories_of_butter
Underestimating Covid
I believe that the total death toll from Covid-19 even in the short term is going to significantly exceed the numbers the government has been estimating. Consider: current estimates are for 60-66k dead by the end of the summer, but these numbers seem increasingly, wildly on the low side even without any of the current rush to try to get back to normal. As of right now (4/25/20) we’ve had over 52,000 deaths already with close to 2,500 new deaths per day for the past week or so. Even just one more week at that rate puts us at almost 70,000 dead. Supposing that after that the rate of deaths drops by 15% per week, we’re still looking at around 145,000 dead by the end of the first week of June. If we rush reopening high-contact social events, businesses, etc. I don’t think it’s all unrealistic that we could see 200k dead or more by the end of the year…and how that would impact the economy can’t be good.
The Oil Crisis
The whole meltdown in oil prices might seem kind of abstract given that we haven’t seen the price at the pumps move very much as crude oil prices and production seems like some kind of governmental-level problem to be solved by the U.S., Russia, the Saudis, etc…but then keep in mind that the U.S. oil and natural gas industries support around 9.5 millions jobs (the actual jobs in the industry plus all of the jobs that exist because of the money produced and spent by those who work in the industry)…and what kind of ancillary jobs does the industry support? Exactly what you’d expect: restaurants, personal services, car dealerships, electronics, retail stores – all of which are already beaten up by the Corona virus shutdowns…
Congressional Aid to Individuals and Small Businesses
The $1,200 per person is already spent and gone – at best it paid some – not all – of already accrued bills and bought a few groceries. Without a monthly stipend, this level of “worker” / “paycheck” protection is just a band-aid on a severe injury. Ditto the small business loans – there’s not nearly enough there to cover the worst hit companies – the ones that employ 48% of American workers. Without significant and ongoing support for consumers and workers on the low end of the economic chain, there will be devastating effects on our core service economy, as well as a torpedoing of any kind of personal savings/economic security for the middle class and below, all of which will only serve to make this a depression-risking feedback loop. Polarization in Washington does not bode well for this more short term requirement for a return to normalcy, especially when such solutions are very much an emergency delve into socialism.
Time Needed for Economic Recovery
As of this week the unemployment rate in the U.S. just topped 20%, with 26.5 million jobs lost over the past month. You might say “yes, but when the lock down ends everybody will just go back to work” – except it’s not nearly that straightforward: many smaller businesses (and even quite a few large ones) run on extremely thin margins – a month, three months lost revenue while still having to pay rent, unemployment insurance premiums, healthcare premiums, etc. coupled with likely financial insecurity for those who own/run these businesses in many case could impact re-hiring, future hiring, future need for borrowing/indebtedness (at likely higher rates due to their now damaged finances/collateral for loans), investment in new inventory, equipment, locations, etc….there is going to be significant and hard to predict economic ripples from this that will extend out 12, 24, 36 months or more.
The Emotional Hangover
The Vietnam war killed 58,220 Americans…we’re going to surpass that with this virus by this time next week. Two of the deciding factors in turning the tide of public opinion against the war were seeing body counts and body bag on the evening news every night and the simple fact that once you lose enough people the likelihood that a lot of people will know someone who was lost, severly impacted in health or livelihood or both, or at least will know of someone who lost somebody will be huge, and will bring home the very real cost of the mismanagement of this crisis both scientifically and politically. Ironically, though I personally think that this will cost Trump re-election, having him re-elected (and thus preserving the popular, if wrong-headed (IMO) Republican approach of repeatedly bailing out mis-managed big businesses and perpetually cutting their taxes) would very likely buoy Wall St. In any event, the crisis and all the uncertainty about its personal effects and future economic effects will be devastating to consumer confidence, which in turn will only exacerbate a slow, uneven, and anxious recovery.
Tl;dr everyone is holding their breath hoping that the Covid crisis is temporary and that we’ve already seen/felt the worst of it. I doubt this, and I see it having a medium- to long-term effect that is significantly more than is priced into the markets. Once it becomes obvious that the Fed’s efforts can’t/won’t do nearly enough to help the middle class, a spiraling down of consumer confidence will pull the markets down with it. Positions IWM 9/18 125p, EXPE 10/16 65p
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.