The 1920s didn’t “roar” until viewed from the perspective of the depressionary 1930s.
Similarly, in the aftermath of the serious global recession I believe the coronavirus has sparked, the 2010s will look like a Golden Age of slow but steady economic growth with rising employment and declining inflation and interest rates.
Here’s what to expect when things return to “normal.”
- The drift from free foreign trade and globalization toward protectionism that started when China entered the World Trade Organization in 2001 will accelerate (see my March 16 column, “Globalists May Soon Become Extinct”). The decline in manufacturing activity and related jobs in the West resulting from globalization and the vulnerability of worldwide supply chains will promote self-sufficiency but also the accompanying inefficiencies. The hopes of politicians that protectionism promotes domestic jobs and incomes will be dashed as, like in the 1930s, trade barriers reduce economic growth and spawn deflation.
- The business and education shutdowns due to the virus reveal the waste of much of business travel and classroom time. Face-to-face interactions won’t disappear, but instead will be reduced, to the benefit of communications hardware and software and to the detriment of airlines and hotels. Working at home will become even more acceptable.
- Consumer caution will linger longer after the coronavirus crisis subsides, much as it did after the 2008 financial crisis. The attitude of use it up, wear it out, make do or do without may prevail for years, weighing on consumer spending and retail sales.
- Fiscal stimulus will be magnified as monetary policy proves impotent. Beyond recession-induced unemployment relief and income supplements, major infrastructure spending is likely. Both Republicans and Democrats agree it’s needed, and the collapse in U.S. Treasury yields in the face of soaring federal deficits have extinguished Washington’s fear of huge borrowing to fund deficit spending.
- Barring all-out protectionism, global supply will continue to exceed worldwide demand. The resulting saving glut will depress inflation and interest rates. The low rates of inflation, and possibly even deflation, will damp the zeal for spending, further restraining any economic recovery.
- The recession may well kill President Donald Trump’s re-election hopes and put Democrats in control of the White House and Congress. Then some sort of federal-sponsored medical care-for-all is likely. Also, tax rules to redistribute income from the rich to the poor would be enhanced.
- The plunge in crude oil prices may force the Saudis and the Russians to cooperate to try to drive out U.S. frackers. Oil prices would then recover to the $40 to $60 per barrel range, but the resilient frackers will keep nipping at their heels.
- The recession will push many junk bonds into default, especially those in the energy area. The expanding universe of “fallen angels,” or those issuer who have been stripped of their investment-grade credit ratings, may lead to a collapse in junk-rated debt prices and spark a rush into U.S. Treasuries. Lending standards will tighten, much as they did for residential mortgages after the subprime collapse.
- Treasuries, which are the ultimate haven assets, will continue to be attractive even with flat, or possibly negative, real yields in a deflationary climate. Unlike the European Central Bank and Bank of Japan, however, the Federal Reserve will probably refrain from a negative short-term policy rate.
- Pension funds will be troubled as their move into riskier investments in recent years in their search for higher yields proves disappointing. Their options to meet ambitious return goals—cutting retiree benefits, increasing employee contributions and increased funding from sponsors—are equally unattractive.
- When investors finally get a sense the depth and length of the recession, stocks will rebound but probably from levels 20% to 30% below current ones. As after the 2007-2009 bear market, individual investors will be slow to return. In the longer run, stocks may well underperform the economy as the elevated price-to-earnings ratios of the last three decades return to more normal levels, if not undershoot.
- As usual, scapegoats will be needed to shoulder the blame for the coronavirus crisis and the recession it’s initiating along with the collapse in stock prices. Candidates include the federal government, especially health care officials, and computerized trading on Wall Street. As usual, expect more government regulation in response.
A. Gary Shilling is president of A. Gary Shilling & Co., a New Jersey consultancy, a Registered Investment Advisor and author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” Some portfolios he manages invest in currencies and commodities.
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