What will be the longer-term fallout of the coronavirus be on the economy, the markets and society? We’re starting to catch glimpses of it already. And the world looks a lot different than the one we knew.
As my friend Dave Rosenberg, the chief economist and strategist of Rosenberg Research, wrote in a recent client letter …
“We are going to be in for a prolonged period of social distancing and our personal and commercial lives will remain restricted. The focus will be on savings, cash conservation, ensuring adequate essentials on a personal basis, and inventory/working capital on a corporate basis. The government dis-saving via massive deficits will be offset by rising precautionary savings rates in the private sector.”
Economic change begins with individual changes in behavior. People respond to new incentives, and eventually their responses add up.
I have written about the Paradox of Thrift, where individual savings are good but everybody saving actually reduces GDP. After this current crisis/recession, I think Americans’ propensity to save will be much higher. Our spending incentives will be different.
So what are those new spending incentives, and how will they change us?
Most obviously, we see that personal safety isn’t easy or guaranteed. It is no longer enough to drive carefully, take your vitamins, and avoid rough neighborhoods.
The coronavirus threat is invisible and anyone, even the people you love, could be carrying it right now. This will have a deep and long-lasting effect on personal relations and spending patterns.
We are also going to think very differently about the value of some previously well-established things. Right now, crowded concerts or sporting events are simply off-limits. Soon we may allow them with modifications: Wear a mask, stay six feet apart, and so on. But being in a crowd, shoulder-to-shoulder with your fellow fans, is part of the experience. It won’t be the same.
And because the product has changed, the price will likely change, too.
That’s a problem not only for artists and athletes, but also the many people whose jobs revolve around such events. Ditto for restaurants, hotels, many other businesses.
Those will all be repriced, and probably downward.
But right now, the Federal Reserve is spending trillions to make sure companies don’t default. In some cases, that makes sense. But it also calls into question who is bearing the credit risk. Why should bondholders get paid for risk someone else is bearing?
Then again, if we allow the high-yield and leveraged loan market to collapse, we guarantee a deeper recession.
The same is true for stocks.
This month, the U.S. government spent billions bailing out airlines. What should have happened—and did happen in the past—is the airlines go bankrupt and the courts sort out their obligations. Not this time, and maybe not ever again.
If so, there is no reason stock valuations should reflect the risks shareholders aren’t taking.
We don’t know how this will develop, or how quickly. But I think it is far more likely to bring asset price deflation than inflation.
We are going to reprice the world. Probably including your part of it.