Sputtering to a Stop

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We are living in a singularly bizarre time. And it just seems to me the stage is set for things to go from bizarre to outright surreal.

It feels like the world is slowly shutting down, day by day. Schools are closing. Events, both big and small, are being cancelled. Travel is collapsing. People are scared.

The only ones who should be grateful are the 18,000 (!) employees drawing salaries from the Federal Reserve. Even though the financial cataclysm at hand is entirely and utterly their fault, they will get a pass thanks to an invisible virus that strolled onto the scene. Jerome Powell will be seen as impotent, but he probably won’t get the wrath he so richly deserves.

Of course, absolutely no one knows where this Covid-19 problem is going to take us all. That’s the key difference between what we’re going through now and a ‘normal” disaster.

If a huge earthquake strikes, it only takes a few hours to get a good assessment of the damage, casualties, and what needs to be done to build things back again. If a hurricane rages through multiple states, once it’s done, it’s done, and the damage is known and the repairs can begin.

In this case, however, no one really knows anything. If a visitor from the year 2021 popped in front of you right now and said that the entire globe was gripped in panic, and tens of millions of people had died, and more tens of millions would surely follow, there would be no reason to disbelieve him.

Similarly, if the same visitor-from-the-future appeared and you asked about Covid-19, and his response was, “What? Oh. Oh, yeah. No one has even though about that since last March. It totally died out.” You could believe that too. There are an infinite number of possibilities.

Remember how worked up people got in 2010 and 2011 about the Euro crisis and Greece’s bankruptcy? Turned out to be a total non-event, didn’t it? Indeed, paradoxically, anyone who ran around and gobbled up as many European bonds as they could afford has made an absolute fortune, even though they would have appeared to have been absolutely insane to do so at the time.

But let’s consider the two possible extremes mentioned above.

Let’s take the first one: that we’re already past the peak of problems with Covid-19. Let’s say that this week a genius announces a cure (no, not Jim Bakker) and that by the end of this month, no one even cares to talk about Covid-19 anymore. It passes. It’s done. It’s off the news cycle forever. Then what?

Well, at that point you need only distinguish between what sectors are still stigmatized and which are not. In most cases, people will breath a sigh of relief and bid assets up again. Take airlines, for example. These public companies have been blown to hell, losing half their market value. The core need for air transportation hasn’t really changed, so I suspect a very big recovery would be enjoyed there in short order.

A few places, however, wouldn’t shake off the problem so quickly. Cruise liners, for example, are going to have a stain on themselves for years to come. Those of us who have lived through this crisis over the past month or two are going to associate cruise ships and disease for years – – decades, actually. So while the cruise industry will recover, I don’t think they’re going to see their numbers get back to where they were for a very long time.

How about the other extreme, then? What if the pessimists, doomsters, and chicken littles are all correct, and this virus is going to sweep the earth and turn the global economy upside down? What if the death count moves from its current level of several thousand to several tens of thousands, or even more? What then?

Well, a couple of outcomes seem quite likely. First, the already-battered equity markets will just keep getting more battered. Jerome Powell will keep cooking up ideas to bail out his rich buddies, but it’ll all be just about as effective and long-lived as his embarrassing emergency rate cut last week.

At some point, too, I suspect they’ll ban short selling altogether. Because blaming the short sellers during sell-offs is the most politically risk-free thing anyone can do. Nobody likes a bear.

Adjunct to the collapse in the economy and market would, of course, be the change-of-address postcards from our current President. History has proved that when the economy goes to the crapper, whoever is in the White House gets the blame. Just look at George HW Bush in 1991/1992. He went from being insanely popular (92% approval rating from the whole country) to being thrown out on his ear at the election. And that was due to a very mild downtick in the economy.

Of course, extremes don’t tend to happen. It’ll be something different, or maybe even a hybrid. Precisely 102 years ago, in March of 1918, the Spanish Flu began killing people. Then, a couple of months later, it just kind of………..disappeared. Problem solved! The same thing could happen with us.

Oh, but there’s the next part of that story. That same autumn, a far deadlier strain popped up again, and it began killing people by the millions. Some say as many as 50 million people on the planet died.

Do you know how many trillions of dollars we poured down the sink due to the less-than-three-thousand people who died on 9/11? Consider the psychological and economic impact of a number SIXTEEN THOUSAND TIMES bigger than that? And that wasn’t a science fiction novel. It was real.

Whatever happens, there’s one thing I can pretty much offer with certainty: there ain’t gonna be no “Phase 2” deal with China.