I had a lot of time away from screens this weekend which is probably a good thing. Always good to get to step away and get a different perspective away from the constant bombardment of news, opinions, and, dare I say, conspiracy theories.
People never lose their collective shit more than during times of crisis and uncertainty.
But I’m not here to talk about conspiracy theories, rather I just wanted to offer some perspectives. And feel free to disagree with them. We’re all working with an evolving set of data points (health, macro, interventions, etc.) and lots of global emotions ranging from ignorance to hysteria during a time of great uncertainty.
But here’s a few thoughts to consider as we collectively navigate through this mess.
First off, this is not a drill, and everybody’s lives are affected in one or the other, many severely, many are losing their lives and it’s a horrid tragedy.
Yesterday I actually ventured on the roads here in England in earnest for the first time in a couple of weeks. It was not by choice, but as I had mentioned on twitter we had an unexpected house-guest. Not somebody we ever met before, but it was someone’s elderly mom who got stranded in Heathrow as the South African government shut down all flights. With hotels on lockdown she literally had nowhere to go and after a frantic phone call from her daughter in the US we agreed to take her in.
Her job and life is in South Africa, now she was in a foreign country with no place to go. Her job likely gone at this point. There are many horror stories like this. So we took her in and she stayed with us for 10 days with still no visibility as to when she can return home. A family friend agreed to take here in, but they live in Northern England and there was no practical way to get her there other than by car and I’m not going to drop a grandma off at the train with all the health concerns that come with it.
So we drove. And a trip it was.
I posted some impressions yesterday, just amazing to see the motorways so desolated for long stretches:
Drove hundreds of miles today to drop our stranded guest off at her new temporary home in Northern England.
Some impressions from the lonely journey on largely deserted freeways and roads in a country on lockdown. pic.twitter.com/CV3yEI0udd
— Sven Henrich (@NorthmanTrader) April 4, 2020
So while I hear and see news reports that people are not taking lockdowns seriously, my experience on the road was quite a different one. That bridge in the video is Dartfort Crossing, it’s usually packed all the time. Hardly a car on it. So it was eerie.
Which brings me to a larger point: Most people we know here are seeing their livelihood in jeopardy. I see business owners seeing their operations blow up. Workers get furloughed and believe me: They are all saying government assistance is not enough.
You all know that to be true all over the place. For years we’ve been posting news items about how a larger portion of the population either live paycheck to paycheck or don’t even have enough savings to cover an emergency.
I even highlighted this again last year:
The consumer is in good shape as long as the consumer has a job.
78% are living paycheck to paycheck. 50% have no saving, no retirement & keep adding to revolving credit card debt to fund expenses.
The judge consumer health as good when things are at their best is a fool's errand t.co/kwVbxMIrl2
— Sven Henrich (@NorthmanTrader) September 21, 2019
And now we are finding out the hard way that the consumer is indeed in terrible shape despite a long running bull market driven by cheap money. Why? For many reasons, one of which of course was that wages did not keep up, poor paying jobs in many cases, yet housing prices skyrocketing by the very cheap money that again made housing unaffordable for many and of course the same sins as in every cycle, but perhaps worsened by this last cycle: The illusion that things will always be good and that with cheap money and low rates all kinds of debt can be sustained.
Take your pick or desired combination: Many people were incredibly vulnerable and are now paying the price.
Which brings me to the difficult decision part. How long can shutdowns be kept up, hence my tweet a few days ago:
I hate to say this: But there may come a moment where ugly choices will have to be made.
You can't keep the global economy on permanent shutdown.
This is not sustainable no matter how much the Fed prints.
— Sven Henrich (@NorthmanTrader) April 2, 2020
Twitter being twitter my tweet prompted me being accused of calling for “racial cleansing”:
You can’t make this up. I despair sometimes at the utter stupidity thrown around sometime.
But that’s neither here nor there.
What is here are parents out of jobs or furloughed, dependent on government assistance with their kids out of school for months to come. This creates all of sort of stresses that go beyond just the financial component, but also to the mental health of children. Sure you can keep this up for a few weeks but not months on end. Zoom only goes so far as a social replacement. I suppose we are lucky to have these tools today, but it’s not a substitute in the long term.
Which brings me to the virus. We are now finally beginning to get some encouraging news of slowing of death rates and infections out of hard hit areas such as Italy and Spain.
A few comments on this: First generally my impression is that countries that have invested more in their medical infrastructure and are more quick to test appear to be able to manage this virus much better. Germany and South Korea come to mind. I’m not saying they are handling it perfectly, but it suggests that the virus can be managed better then it currently is or has been in other places.
The world is waiting for a vaccine which by all accounts (including Bill Gates) may still be 18 months away, a dreadful long time in a current period of need, but also super fast considering the historicity of developing vaccines to new viral agents. But there are no guarantees either.
But while we may be now getting good news on slowing infections and death rates in some cases how much of this is really the virus dying down versus just our social isolation efforts contributing to the slowing in growth? If it is really just the latter then we may be faced with a much more difficult task.
While there is still hope about seasonality such as the flu, the fact that this virus is global in many different climate zones raises the question whether it really is seasonal. We simply don’t know.
What I do know is that the pain and burdens on families are real. And on companies. The longer these shutdowns go on the more severe the long term damage and the long term consequences:
Fwiw: Any notion that we get back to where we were before this virus hit is a fantasy.
Companies will be under significant margin pressure to cope with the hit they just got. Many jobs will not come back any time soon.
There will be belt tightening.
Better yes. But not the same.
— Sven Henrich (@NorthmanTrader) April 3, 2020
Workers currently furloughed may find out that for some, or many of them, the jobs will no longer be there when the lockdowns end.
The hope for a full and quick recovery may well be displaced. I can’t say of course, but we are facing this crisis with a financially vulnerable population, a globe already massively indebted and now adding more debt at a faster clip than ever before.
None of this is sustainable in the long term. The debate about the consequences will come once the immediate crisis is managed, but the solutions employed today may set the stage for the next crisis already.
But the really tough decisions for this crisis will come much sooner than that. When and how to get back to normal without a vaccine. Is it possible without seeing the virus flare up again and risking more lives?
Frankly one concern I have: I see more and more reports of younger people succumbing to the virus. Even people without underlying health conditions. And there are no clear explanations that I have seen. Why does the virus hardly affect some people but is so devastating in others? Science hasn’t been able to provide a definite answer which suggests many aspects of Covid-19 remain unknown.
This raises the concern that a return to normal anytime soon may be prohibitive from a medical perspective, but not to return to normal is economically and emotionally not viable either. Yes, we can all talk about adapting, but that’s easier said than done for millions without jobs or income other than government assistance which doesn’t make them whole.
Entire businesses can’t sustain themselves with crushed revenues and ongoing fixed costs. It’s impossible.
So tough decisions will have to be made and all of them will come with a heavy price tag. On a human, financial, economic, emotional and psychological level.
The longer this drags on the higher the probability that many jobs will not come back making this eventual recovery, while sharp at the beginning, also destined for a lower trajectory recovery as then the full consequences of the damage will come apparent.
Underneath it all there are again lessons crystalizing that were once again ignored: Those that saved during this cycle are able to withstand the shock, those that didn’t or couldn’t can’t. While this business cycle was the longest it didn’t magically extend. It was paid for with cheap money and constant central bank intervention. These very central bankers that once again are intervening at a new record pace created the illusion that they are all powerful. In 2019 there was even fantasy talk by people who should know better that recessions could no longer occur, that the boom and bust cycle had been eliminated. It hasn’t. The bust is here in a big and unexpected way. And it’s here to say.
So yes, hope for the best, take comfort in a slowing of a infections and deaths, take an optimistic view of human ingenuity finding ways to combat the virus, find relief once market rally again, but don’t lose sight of the long term damage inflicted and the short term damage that will be felt in consumer and business pocketbooks for years to come.
Spending plans once made will be reduced, hiring plans once made will be scaled back, budgets once in order are no longer. This shock will reverberate for years to come.
And also don’t lose sight of the fact that none of the tough decisions that will have to be made are clear, easy or consequence free. All have negative side effects.
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