Business & Investment

The stock market crash isn’t over yet — don’t believe Happy Talk

Dear reader,

Return to business …

Things get back to normal …

Return to where we were …

Australia is starting to wake up from economic stagnation. The headlines I read seem to focus on how quickly we can get back on track.

The problem is that it may not be possible.

The problem with this idea of ​​returning to normal is that it assumes that nothing has changed.

But many things have changed.

Australia’s unemployment rate soared until April. It may be even worse than I expected.

Our government has taken special steps to fund government funding in specific sectors of the economy. According to one estimate last week, 75% of Australia had some government support.

To launch, our biggest trading partner is threatening a trade war …

Create a chance to bring things back to an increasingly difficult state. But we are not alone.

As Jim points out below, the United States has its own economic problems.

And how the US market reacts to it can determine what Australian stocks do.

Read below for more information.


Shay Russell,
Editor, Daily Reckoning Australia

Stocks are far from the bottom

Nothing like what we are witnessing has ever happened. Even the most savvy analysts cannot yet internalize what has happened.

As explained earlier, even the comparison with the 2008 financial crisis or the 1929 stock market crash that caused the Great Depression cannot capture the magnitude of the economic damage of the virus. May have to go back to the plague in the middle of 14 yearsth A century for a correct comparison.

Unfortunately, the economy will not return to normal for years. Some companies go bankrupt before they are allowed to reopen and will not return to normal.

In the United States, companies such as restaurants, bars, pizza parlors, dry cleaners, and hair salons account for 44% of US GDP and 47% of all jobs.

This is where many of the unemployment, shutdowns, and revenue losses have occurred.

The US government’s response to the economic collapse was unprecedented in size and scope …

Debt burden balance sheet

The US baseline budget deficit for fiscal year 2020 is approximately US $ 1 trillion. Congress added US $ 2.2 trillion to it in its first economic bailout bill. The second bailout bill added another US $ 500 billion. Another bill could add another US $ 2 trillion to the deficit.

Combined with the baseline deficit, enacted legislation, and expected legislation, the 2020 deficit will be US $ 5.7 trillion.

That’s more than 25% of GDP, and given the loss of production (US $ 6 trillion a year), the US debt-to-GDP ratio is pushed up to 130%. The past record debt of the United States was about 120% of GDP at the end of World War II.

This puts the United States in the same category as Greece, Lebanon and Japan when it comes to the world’s most heavily indebted poor countries.

The Federal Reserve is also printing money at an unprecedented rate.

The Federal Reserve Board’s balance sheet is already above US $ 6.7 trillion, up from around US $ 4.5 trillion at the end of the third quarter of 2015. The US Treasury and the Fed are the first US $ 2.2 trillion bailout bill.

As the Fed is a bank, it can leverage US $ 454 billion of SPV shares provided by the Treasury for US $ 4.54 trillion on its balance sheet. The Fed can use its capabilities to buy corporate bonds, junk bonds, mortgages, government bonds, municipal bonds and issue direct corporate bonds.

When the Fed is complete, its balance sheet will reach US $ 10 trillion.

Only that is known.

What is not known is how quickly the economy will recover. The best evidence shows that the economy is not recovering quickly and that an era of low production, high unemployment and deflation has arrived.

There is no accumulated demand

That’s why the economic recovery doesn’t show the “stagnation of demand” and other Happy Talk features you hear on TV …

The first reason for the recession to continue is the loss of personal income. Unemployment compensation and PPP loans only hurt the surface of total loss income from layoffs, wage cuts, time savings, business failures, unemployment as well as total loss income from individuals who are completely out of the workforce.

In addition to wage losses due to furloughs and wage cuts, many other workers are losing wages in the form of tips, bonuses and commissions.

Even full-employed waitresses and salespeople can’t tip or sell commissions without customers. This shows how the economies are tightly linked so that problems in one sector spread rapidly to other sectors.

In addition to the loss of personal income, there is a significant loss of business income. Earnings per share of listed companies have not only declined in the second quarter (probably the third quarter), but many have been negative.

Lost business revenue is another source of lower stock valuations and dividend cuts.

Decreased dividends are also a source of income loss for individual shareholders who rely on dividends to pay retirement and medical costs.

Programs such as PPP and other direct government lending to businesses will be far from making up for the above losses. Loans (which can turn into grants) can help for a month or two, but they are not a permanent solution to lost customers.

For others, loans are completely useless because they are short on working capital, simply closing doors for profit and filing for bankruptcy. This means that the jobs of those companies will be lost forever.

These simple events (loss of personal income, loss of business income, reduction of dividends, bankruptcy) have many spillover effects.

When government aid is distributed, many recipients do not use it (as expected), but save it. Such savings are called “preventive”. You may be worried that your job may be at risk even if you are not temporarily dismissed. The income you receive will be used to pay or save invoices “just in case”.

In either case, the money will not be used for new spending. When the economy needs consumption, we can’t get it.

The economy falls into a “liquidity trap” and savings lead to deflation, which increases the value of cash, which in turn leads to more savings. This pattern was last seen in the Great Depression (1929–40) and will soon reappear.

Even if individuals tend to spend money, spending is reduced anyway because less money is spent. Shows and sporting events will be cancelled. Restaurants and cinemas are closed.

Travel is almost non-existent and no one wants to jump on a cruise ship or visit a resort until the risk of COVID-19 is guaranteed to be significantly reduced.

This guarantees continuous slow recovery and persistent deflation, exacerbating slow recovery.

In addition to these on-demand constraints, there are serious supply constraints. The global supply chain is seriously disrupted by shutdown and transportation bottlenecks. Social distance slows production, even in facilities that are open and have the input they need.

One case of COVID-19 in a factory could shut down the entire factory during a two-week quarantine period. Companies that manufacture their own products depending on the production volume of the factory will also be closed.

Not how, but can we move forward from here?

In addition to these direct effects of loss of income and loss of production, there are significant indirect effects on the willingness of investing entrepreneurs and individuals to spend.

The first of these is the “wealth effect.”

A 20-30% drop in stock prices, as in recent years, makes investors feel sick, even if they have significant net worth after the fall. The psychological effect is to get people to reduce their spending, even if they can’t afford it.

This means that spending cuts come not only from the middle class and the unemployed, but also from wealthy individuals who continue to earn but feel threatened by the loss of wealth.

Finally, the value of real estate collapses as tenants refuse to pay rent, landlords default on mortgages, and real estate is seized.

None of these negative economic consequences of neo-depression are affected by a simple amendment by Congress or the Fed.

Deficit spending does not “stimulate” the economy because the payee pays the bill or saves money. The Fed can provide liquidity and maintain the lighting of the financial system, but it cannot eliminate or prevent bankruptcy.

This process takes advantage of itself, represented as deflation, to encourage even more savings and curb consumption.

Based on this analysis, investors should expect slow and weak recovery from neo-depression.

The Fed runs out of bullets. Deficit spending will slow growth rather than stimulate it, as unprecedented levels of debt cause Americans to expect high taxes, inflation, or both.

The US economy will not recover 2019 GDP levels until 2022. The unemployment rate will not even return to 5% until after 2026.

This means that the stock is far from the bottom.

The S & P 500 index can easily reach 1,870 (2,943 at the time of this writing), and the Dow Jones index can drop to 15,000 (24,360 at the time of this writing).

These are the levels that investors may want to consider investing in stocks.

In the meantime, every effort to “buy a dip” will only lead to further losses when the full impact of the above content begins to sink.

all the best,

Jim Rickers,
Strategist, Daily Reckoning Australia

PS: Australia’s Massive COVID Depression — Learn which investments to accumulate and which to avoid to give you the best chance of maintaining wealth during a recession. Click here for more information.

The stock market crash isn’t over yet — don’t believe Happy Talk The stock market crash isn’t over yet — don’t believe Happy Talk

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