Many people right now are wondering why the stock market is at all time highs while the economy is in recession. I too wondered if this were an anomaly created by excessive Fed printing. So I looked to see if something similar has happened before.
As it turns out, during the 1981-1982 recession, the stock market (blue line in chart below) hit an all-time high after recovering from significant losses.
During the 1981-1982 recession, the return to stock market all time highs occurred close to the end of the recession as unemployment (maroon line) peaked.
Of course, the end of the 1981-1982 recession was only known later in hindsight, so people likely asked the same questions they are today. What they could not see was that the market approached all-time highs because the recession was close to ending. While the transition to growth was slow and painful – as I expect it to be today – with unemployment taking years to return to normal, the markets rallied once economic growth resumed.
The return to growth (second chart below) in 1982 is easily identified by unemployment (maroon line) beginning to fall and Industrial Production (blue line) starting to rise (second chart below). This occurs right near the end of the recession, as indicated by the grey shading.
Industrial Production is a great indication of economic recovery. As you can see (if you have good eyesight) in the chart below is that at the end of every recession (grey shading) Industrial Production immediately grew. The second chart below zooms into the current recession. It is clear that Industrial Production has started to grow once again while unemployment has started to trend down. This indicates the current recession likely ended in April or May and growth has resumed, explaining the stock market’s return to all time highs. (Note the entire period is shaded until the recession’s end is officially retroactively declared months later.) Again, this growth doesn’t feel like growth because we’re rebuilding from an uncomfortable bottom, but the market only cares that things are growing.
The 2020 recession was sharp, deep and short. Markets reacted accordingly and crashed faster and deeper than ever before. The recovery will be long and painful, but we are back on the growth path. Markets sniffed this out months ago explaining the rally. Markets hit all-time highs in 1982 – when unemployment was near its peak. The same thing is happening today.
Businesses are closed or operating at reduced capacity. Millions of people are unemployed. Mortgages are deferred. The need for office space is being questioned.
To put it lightly, both retail and commercial real estate is experiencing one of the most transformative moments in history. While malls and brick-and-mortar retail has been under pressure for years, Covid-19 compressed a decade’s worth of change into a couple months.
The charts below highlight the current state the real estate market.
With the huge surge in unemployment and minuscule savings, Americans are suddenly unable to pay their bills. 32% of Americans missed (either fully or partially) their July mortgage payment.
Delinquency rates vary by property type (overall delinquencies approaching decade highs) but are rising rapidly.
New York is the most stressed area at the moment, likely due to its concentration of people/businesses, real estate valuations and the severity of regional lock-downs.
Toronto-area housing has remained strong through the downturn, with prices actually increasing.
Although Toronto has experienced a resilient housing market, it could face increasing pressure over the next several months as rental supply rises (driving down the price of rent). The decline in condos leased combined with the surge in listings has pushed the condo rental inventory from 1.5 Months of Inventory (MOI) at the end of March to nearly 4 months at the end of April.
How is Canadian real estate holding together? Government handouts. Approximately 20% of the Canadian population is receiving CERB – a $2000/mth support payment from the Federal Government.
If and when CERB benefits are taken away, Canadian real estate will likely face growing pressure. Not only is the supply of rentals growing rapidly, immigration is plummeting. This combination could tip Canadian real estate into negative territory. Of course, there’s always the possibility that immigration once again picks up in the future, but it’s debatable whether this will be enough to absorb the rise in housing supply.
Your boss just told you and your colleagues that you’re all getting 30% pay cuts.
What do you do? How do you react?
First of all, look at it from your company’s perspective. This was probably the better of two shitty choices.
If the company needs to slash costs in a recessionary environment it has few options and little time to make those choices. Often, an impending debt payment puts a hard deadline on the need for cash. Missing a debt repayment risks the life of the entire company.
A pay cut doesn’t mean you’re getting screwed.
Often, one of the easiest ways to free up cash is to cut salary expenses. To do this, a company can either cut headcount or reduce pay per worker.
While a 30% pay cut feels like you’re getting the shaft, it is actually a sign your boss is trying to save jobs.
It might work, it might not. But either way, keeping your job during the Covid-19 recession should be top priority. A steady paycheque keeps you solvent and it buys you time to build up emergency savings. It also buys you time to build skills, network and prepare for the possibility of eventual unemployment.
Longer job tenure means a bigger severance if laid off.
Another big upside to keeping your job is you retain tenure. A longer tenure means more severance if you are eventually laid off.
In good times, a 30% pay cut would send you immediately searching for another job. But in bad times, that would be a risky strategy. This is not the time to let pride drive decisions. Unless you’re independently wealthy, you still need an income to pay your bills and feed your family.
Quitting for a new job is risky because it means your tenure resets to zero. A company can have the best of intentions when hiring, but changing circumstances could force them into cutting staff (or salaries). Who gets cut first? The new guy – because it costs the company nothing in severance. A recession is not the time to walk away from job tenure.
A 30% paycut is usually temporary.
As the economy eventually normalizes, salaries should be returned to their previous level. If this doesn’t happen, then consider your options. But it could take 2 or more years until the labour market is strong enough to give labour a fighting chance. Until then, it’s a buyers’ market.
Job seekers today are competing against millions of other job seekers for jobs that don’t exist. This is not a labour market you voluntarily enter. So accept that 30% paycut, as painful as it is, because the alternative could be a lot worse.
(Free Guide) Survive the Coronavirus Economic Catastrophe:
A recent Bloomberg article provided a view of the deteriorating condition of the Canadian housing market. It’s dire and in my opinion will get worse because the economy is being pushed to the edge by the Covid-19 coronavirus crisis.
Housing crises are slow-motion train wrecks, so don’t expect the pain to be immediately obvious, like in the stock market. While this might seem to make it more manageable, it actually extends the economic pain. If you are unfamiliar with what a housing-led economic implosion looks like, you should brush up on what happened to the US after 2006 and Canada after 1989.
The US housing collapse took years to eventually bottom, resulting in massive economic dislocation, human suffering and a near-collapse of the global financial system. Coming out the other side of the collapse was a long, slow uphill battle for most.
Canada saw the same after its real estate bust in the early 1990s. Years of stagnation and relatively high unemployment.
Of course, in both the US and Canada the real estate bust eventually created massive opportunities for many.
The following key stats from the Bloomberg article illustrate the immediate vulnerability of the Canadian housing market and the overall Canadian economy:
1) Nearly one in three workers have applied for income support.
2) Canadian households are among the world’s most indebted.
3) Real estate has become Canada’s largest sector. Including residential construction, it accounted for 15% of economic output last year; energy accounted for 9%.
4) The City of Vancouver fears it’s heading for insolvency after it surveyed residents and found that 45% of households say they can’t pay their full mortgage next month and a quarter expect to pay less than half of their property tax bills this year.
5) Canadian households owe C$1.76 for every dollar in disposable income. In Vancouver, that spikes to about C$2.40
6) Canadians owe C$2.3 trillion in mortgages, credit card, and other consumer debt, about equal to the country’s GDP, which is an even higher ratio than the U.S. had before its housing bust.
7) If only 2% of the housing stock were to be listed for sale, it would trigger the kind of supply shock behind a 1990 crash, according to Veritas. That’s most likely to come from investors, half of whom weren’t generating enough cash to cover the cost of owning their rental properties, Veritas found in a survey last September.
9) 30% of apartment rent due April 1 went uncollected, according to estimates by CIBC Economics.
10) Nearly a third of Canada’s Airbnb hosts — who jointly had 170,000 active listings in late 2019 — need the income to avoid foreclosure or eviction, Airbnb said in a letter to the Canadian government last month.
11) Nearly 6 million Canadians have applied for income support. Lenders had deferred nearly 600,000 mortgages, about 12% of the mortgages they hold, as of April 9.
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I am posting this information to show you the devastation facing millions of small business owners right now.
The headlines make it seem like the government is providing tons of support. However, for most small business owners the support is failing them. These people are the lifeblood of the economy, yet are on their own fighting for their lives.
Authorities predict about 50% of small businesses will disappear before the Covid-19 coronavirus economic crisis is over. This is not something the economy can quickly recover from. It will take significant time, effort and risk appetite for entrepreneurs to once again start new businesses and hire staff.
I’m afraid the neighborhood landscape will look very different once this quarantine is over. Local drycleaners, restaurants, yoga studios, pet stores. Half gone.
Here are their stories:
The future is truly uncertain for small business owners.
I own a bar in Downtown Atlanta. It’s not really a residential area and 80% of our business comes from traffic going to nearby stadiums, arenas, hotels, and concert venues.
We are closed right now, and I don’t see how we could survive as a business without international travel opening back up, restrictions being completely lifted, AND people are eager to get close to each other once again without fear. I would say we have *at least* a year before that would happen.
Not to mention, this happened right at the end of the slow season. So we had completely depleted our resources and had acquired a little (~15,000) additional debt to cover us until we got to the busy season again that starts right around the middle of March.
Now bills are stacking up, I have no money, and the PPP loan really won’t help my business until we know when we can open again (so we can use the forgiven portions of the loan to help float payroll cost as we get back on our feet).
This is just a bad, bad situation. I don’t know what to do either. I don’t know if it’s smarter to begin the process of putting the business out of its misery now or “wait and see” while more bills pile up and more debtors coming after me.
I definitely feel abandoned. Like I fell off the ship that is the USA along with many others. Now we’re all stranded in the water flailing, screaming for help while the ship slowly but steadily sails away, leaving us.
The biggest problem for many businesses is the Lease. It no longer makes sense.
Revenues fall? Well, you can always cut some staff to lessen the payroll burden, and figure out other ways to survive until customers return.
But what are you going to do about your crazy lease? You can’t downsize and ask the Landlord, “I’m only getting half the customers vs what I used to… can I change the Lease so that I’m renting only half the store now and pay you half the rent?” The LL will of course say no, especially if you Personally Guaranteed (which is most of the times for small businesses because if they don’t the LL won’t lease the space to you).
Also, if the LLs have a mortgage on their property, even less likely they will adjust your lease since LLs have to pay their bills too. Which is why the commercial real estate market will tank.
If I were you, i’d seriously consider bankruptcy (or closing shop if you have a Good Guy Clause in your lease). Survive the downturn. Meantime, scrounge up whatever you can and launch a new business when the time is right (once the LLs take a beating, new leases/rents will drop significantly and people will be able to find great opportunities).
I qualify for all the loans approved by the government and have applied for the EIDL, PPP past Saturday and Monday respectively, and for the $10K (three day express funding) since March 30th. It has been now nine business days since I applied for $10k express, however, I haven’t heard from anyone. I believe at this point they are not worried about businesses with 10 employees or less. Each day trying to stay afloat makes the debt bigger. SBA classification for small business stand for 100-500 employees which makes me think there is no way they will come to the rescue of a tiny micro business of 10 or less employees. I am losing hope every hour, I am within days of running out of oxygen.
The truth is anywhere from 30 to 50% of the small businesses will not survive this pandemic. A lot of the financial assistance is focused on getting thru the lockdown and the economy shutting down. But little has been focused on what happens afterwards. Do not believe what this administration is selling. The economy is not coming back instantly, nor in a few months or even this year. I have seen articles by economist saying that the US economic will snap back in the 2nd half of the year.
It is the consensus from the medical community that continued social distance is going to be with us for the foreseeable future until a reliable vaccine is available. Which directly contradicts what the government wants.
At this point it is like screaming into the void – somewhat cathartic but ultimately useless.
People in my state are basically 100% against anything opening up before June. There is no help, and no help is coming. No one in the general public gives a fuck about what small business owners are facing right now, or more importantly, the looming economic doom that is on the horizon because of that. Even with agriculture being “essential” we can’t get the required inputs for production because everything is shut down and we can’t get the employees to come in because everyone is paralyzed with fear. No one wants to compromise on measures to ease up on things a bit before May 20th in my state, which in this growing region the window will be missed and the damage will largely be done (although the effects of which won’t be felt until August or September). A friend of mine killed himself the other day because he couldn’t take the burden and the abandonment by everyone, not just the government but mostly the abandonment of support of the public to allow some businesses to reopen with precautions.
At this point I have already given up. I’m doing what I can to provide for myself and my family, and when the bankruptcy comes I’m going to use this as a chance to start over in a state or country that is more hospitable to liberty and more supportive of small business owners.
I’m feeling miserable myself. I’m running a hotel in middle ga and we’re hemorrhaging money. Last year was slower than usual but we got by. This year started slower than normal and turned into the catastrophe we’re in now.
I’ve applied for the EIDL advance (was told it will take a week to get back to us if we’re lucky) and the PPP (I’ve been waiting for BB&T to send us an application for 5 days now). The rules for PPP are such a clusterfuck that I have no doubt that it will take a lot of back and forth before we get approved (i.e. they are using payroll # of employees from January and in my industry we have high turnover so I have to find 3 more employees to hire if I get approved since I’m down 3 housekeepers from Jan and I want to the loan to be forgiven given that we’re barely making any money on hotel rooms right now).
Don’t get me started on getting the mortgage on a hotel paid every month. Thankfully there is enough money in reserves to get by but if this continues then we are totally screwed.
My business is in live events… we have no clarity on when our business will come back. We might have to wait possibly a year or more? Many in the 2.5 trillion dollar live global events business will go under. MSM is promoting this rosy picture of trillions of dollars in assistance, we’ll all get back to work in a month or two… stock market zooming back up. Not true for many of us… I don’t think anyone knows how bad it’s really going to get and the current optimism and stock market is not reflecting what’s really happening on main street.
I own a bakery/cafe in a small town that is almost 100% reliant on tourist money. The main tourist draw is closed until September, at least. The PPP money will be minimal for us- barely covers 2 months rent if that. EIDL seems to be a bust. My partner is optimistic that once things get back to “normal” our local regulars will show up, but I doubt many folks will have disposable income to keep us going until the festival opens. It’s not looking good for us. If it was just me I’d walk away and deal with the consequences of breaking my lease, but it’s not just me.
Woke up with some anxiety this morning. Still no emails from the SBA regarding my EIDL loan. Since it was just my partner and I in our LLC with no employees, we couldn’t apply for the PPL either.
Made myself some coffee and sat outside for a and listened to the birds for a few.
I have a small but beloved massage therapy business here in downtown Jersey City. My business partner voluntarily withdrew from the LLC last week, has taken the couch (good thing I bought everything else) and will not be renewing the lease with me in May.
Technically, I won’t be able to renew the lease either if the EIDL loan doesn’t come through and I’m saddened by all the effort and money I put into our business the past year only for me to have close doors. I wasn’t done yet. We were building the foundation of things still.
I’m still kinda positive about things in my heart but I’ve mostly given up on that EIDL loan. It was kinda nice to come on here and see others share my disheartened feelings as well. Got to be realistic at the end of the day and be able to adapt or cut losses.
Tragic to have read someone took their life last week in the chaos.
Still grateful my family and I have our health and if you’re reading this, I hope you still have that too and will continue to have it until this is over.
I’m in Mexico, which in official terms, has reacted way worse than how the USA has, according to many criticisms.
The President (AMLO, as we call him) textually said “don’t stay inside… I’ll let you know when you really have to stay inside.” I could write several paragraphs describing his reasons and the background, but all you need to know for context is that he divides opinion just like Trump does. And he’s trying to wash his hands from the economic recession. Just days before they acknowledged the pandemic, the US dollar jumped from around 18 Mexican pesos to 24.
The government stance on business is this: There are no governmental aids. You’re expected to pay all taxes as normal, all bills such as electric or water. Businesses are told to close (even though the citizenship is told not to stop going out), but it’s not enforced. However, a worker that contracts coronavirus in whatever circumstances and isn’t being paid in full to stay home, can sue their employers for getting the virus. So they pretend every single business is a massive corporation that can pay full wages indefinitely. To add to this take into account that 90% of Mexicans live day-by-day and can’t afford to go a single day without pay, or else they and their family don’t eat that day.
I have a couple small businesses where I sell flooring and window covers, plus a few other related products like awnings. Traditionally we sell in person, but I had worked a long time on trying to build an eCommerce sales channel, to some success (boomer mentality runs rampant in Mexico, where even Zoomers doubt the legitimacy of eCommerce). However, we install our products and most people aren’t interested in DIY and would rather have the technician perform the installation.
It’s a family business, my dad owns and runs the factory that supplies about 75% of the products I sell. The factory is still operating at a limited capacity, as it has a relatively small team with large space. But mainly, the workers asked my dad to continue working because they can’t survive without steady salary. About 90% of what we call small sales vanished overnight when Mexico announced the first case, which was about three weeks before the government even talked about the pandemic. These small sales provide most of the cash flow and account for about 60% of revenue on an average month.
My own sales dried up by about 85%. Only wealthy clients are buying, since they can survive their entire lifetime without working again (or thereabouts) and are now getting bored of looking at the same decor in their homes.
I’m trying to complement my earnings with Appen (have waited two weeks for project validation, still waiting) and I recently opened another business thanks to my cousin. We are selling construction materials remotely (again, normally done in person) as construction hasn’t halted yet.
AMLO is trying to pit business-owners (whom he has referred to as the cancer that’s killing Mexico even long before he was elected; he makes no distinction between tiny stores and cafés than multimillionaire CEOs) against the workforce and vice versa.
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“When the facts change, I change my mind. What do you do?…”
— John Maynard Keynes
As time plods on, my thoughts on the economy grow increasingly dire. The reason is not the drip of horrible data releases – that was to be expected – but the mere fact that time itself makes our predicament more inextricable. It is becoming increasingly clear that the Covid-19 coronavirus exogenous shock is not a one-quarter phenomenon.
Governments are increasingly ‘socializing’ the idea that quarantines could last not weeks, but months. We’ve heard rumblings of this from officials in the UK, Canada and the US. Even as China appears past the peak on paper, it too continues to suffer from moderate forms of quarantine (e.g. movie theaters are still shut) and prolonged weakness as both domestic and export markets collapse. China’s experience shows that a v-shaped recovery is highly unlikely.
Except for the occasional grocery-store mission, I have not left the house in weeks. Other than food and utilities, I have not spent a penny. My ‘win’ however, is someone else’s loss and is a microcosm of the type of world we are approaching.
The epic collapse
March payrolls declined by over 700,000. This is just getting started:
Source: BLS, CNBC
Weekly initial claims are up 6.6 million. An unprecedented number. (I’ve highlighted the increase because it just looks like part of the chart’s vertical frame otherwise.)
Source: St Louis Fed
The world economy has come to a standstill.
On April 4, 2020 the IMF Managing Director, Kristalina Georgieva, said this is worse than the global financial crisis:
“Never in the history of the IMF have we witnessed the world economy come to a standstill. This is in my lifetime humanity’s darkest hour, a big threat to the whole world and it requires for us to stand us, be united. It is way worse than the global financial crisis. This is a crisis like no other.”
This is clearly not priced into the market. Currently, the S&P 500 is 27% off it’s all time high. During the 2008-2009 financial crisis, the market fell 57% from it’s highs. It would seem to me that there is considerable room for downside, if this is worse than the global financial crisis.
Notably, during the global financial crisis S&P 500 earnings per share bottomed roughly the same time as the market. Given the current Covid-19 lockdowns could continue for at least several more weeks, it is entirely plausible that S&P 500 earnings – and the S&P 500 Index – won’t bottom at least until early summer 2020.
There is clearly more room for downside. Perhaps 30% more downside, if the global financial crisis is our yardstick.
Great Depression 2.0
Even more troubling, however, is that this isn’t a normal cyclical downturn that can simply reverse after inventories are liquidated, companies create new efficiencies and new investment opportunities arise. Like during the Great Depression, the entire world economy is unraveling due to a sudden and widespread shock. This will only worsen with time.
Think of it like a cat playing with a ball of string. If some of the string comes unraveled from the ball one can easily re-wrap it around the remaining ball. However, the more the string comes unraveled, the harder it is to re-wrap. Eventually, the ball ceases to exist and you’re just left with a pile of string.
The longer the Covid-19 shutdowns continue, the more difficult it will be to put the economy back together. The economy will experience a permanent destruction of aggregate demand.
If I could snap my fingers today and return everything to normal, enough animal spirit still exists to spring the economy back to life. Restaurants could quickly re-hire staff with confidence customers would return. There are plenty of fully employed people to fire up aggregate demand once again.
However, as time goes on more restaurateurs will throw in the towel. More businesses will disappear. More people will become unemployed – many permanently so. The knock-on effects on commercial mortgages, loan losses, homelessness and wealth erosion will increasingly get out of control.
After a prolonged drought, people become very conservative about water usage. The same will happen with money. Those who do have discretionary income will stuff it in their mattress in fear that their time will come. Businesses won’t invest or hire. Even if banks are willing to lend, who’s going to borrow and invest?
This is our WWII moment. Even after the virus is defeated, if the battle is long and difficult the fear will remain. Everyone will be waiting for the other to make the first move to spend, invest or hire. In doing so, nobody will make the first move.
The world will enter a liquidity trap not seen since the 1930s.
Luckily, today’s world might by-pass some of the policy mistakes made during the 1930s. We have faster access to information and broader understanding of monetary and fiscal policy. There might not be bread lines, but the scale of economic devastation could certainly surpass that seen after the 2008/2009 crisis, looking more like a Great Depression 2.0.
Even after we won WWII, many feared a return to the depression economy. At that moment, however, the United States became the most powerful nation on the planet. It retained massive production capacity and became the cornerstone of a new global monetary system. Moreover, huge global fiscal spending to rebuild Europe and Japan began, which helped prevent the world economy from slipping back into depression.
Today, if the world economy remains shut for much longer our only salvation will be massive government fiscal stimulus not seen since the WWII era.
How to Survive the Coronavirus Economic Catastrophe:
Jeff Gundlach, CEO of DoubleLine Capital predicted the election of Donald Trump and the 2007 housing crash. He is now providing insights into the next economic collapse.
In 2011, he was featured as “The King of Bonds” in Barron’s, and named one of “5 Mutual Fund All-Stars” by Fortune Magazine. In 2012, he was named one of the “50 Most Influential” by Bloomberg Markets magazine. In 2013, he was named “Money Manager of the Year” by Institutional Investor.
When Jeff Gundlach speaks, people listen. Unlike most investment managers, he doesn’t hold back and is willing to tell it like he sees it. Listening to Gundlach is like getting a bucket of cold harsh reality poured on your head.
He was recently interviewed by a Swiss newspaper on what the next recession might look like. Gundlach warns investors to prepare because it will lead to big changes in the market. He argues investors need to reduce risk and own their house free and clear. (in fact, he says anyone with a mortgage should not own stocks.) While there might still be market gains over the near term, when the downturn does come people will be “overwhelmed by problems” with their investments. In particular, he sees big problems with the US corporate bond market.
“This time the liquidity is going to be very challenging in the corporate bond market. The corporate bond market in the United States is rated higher than it deserves to be. Kind of like securitized mortgages were rated way too high before the global financial crisis. Corporate credit is the thing that should be watched for big trouble in the next recession. Morgan Stanley Research put out an analysis about a year ago. By only looking at leverage ratios, over 30% of the investment grade corporate bond market should be rated below investment grade. So with the corporate bond market being vastly bigger than it’s ever been, we’ll see a lot of that overrating exposed, and prices will probably decline a lot once the economy rolls over. Furthermore, central bank policies have forced investors into asset classes that they usually would be a little bit more hesitant to allocate to.”
Gundlach also sees major problems with the US stock market, arguing it will be the worst performing equity market in the world. Why? Partly because it is currently the strongest.
“The late 1980s saw Japan as invincible with the Nikkei tremendously outperforming every other market to the point where there was incredible overvaluation of Japanese real estate when the recession came in the early 1990s. The Japanese Market was the worst performer. It never made it back to that level. In the advent of the Euro, there was a lot of enthusiasm about the economic prospect of the Euro area, and the stock market in Europe was incredibly strong in 1999, outperforming every other market. When the recession began, it was the worst performing market and never made it back again, broadly speaking. This time US stocks are crushing every other area. It’s due to some fundamentals like the better economy, but also due to tax cuts and share buybacks. In the next recession, corporate bonds will collapse, and buybacks will stop. The dollar has already topped. It may begin falling in earnest during the next downturn and US equities will lose the most. They will probably not make it back to the peak for quite a while. When the US market drops, it will drop a lot.”
The next recession will see deficit spending balloon. The US is already running $trillion+ deficits and this is supposed to be the best economy ever. The next recession could put upward pressure on interest rates, as demand for funding rises. Of course, the Fed will do everything in its power to combat this, but possibly not until after a crisis emerges. The firefighters don’t show up until the house is ablaze.
“Powell said he’s going to use large scale asset purchases to fight the next recession. That’s what he said at his last press conference. He could introduce negative interest rates, but I think Powell understands that the US cannot introduce negative interest rates without the entire global financial system collapsing. Because where’s all that capital going to go? Which markets are big enough? Negative rates are the worst thing that could happen in the US. You can see what negative rates have done to the banking system of Japan and Europe. All you’ve got to do is look at the relative performance of bank stocks. The underperformance of European banks is correlated to the yield of the 10-year German Bund. I don’t know if the politicians understand that negative rates are fatal. It’s fatal to Deutsche Bank and insurance companies in Switzerland.”
So what happens post recession when US public debt levels skyrocket due to massive deficit spending? Suddenly, the problem everyone has ignored could smack the US right in the face, and the US government will look for solutions.
“You could create inflation through universal basic income. That would debase everything. Or you could default on Social Security benefits and welfare benefits. These are the options. We’ll do some combination, maybe raise the eligibility age from 65 to 75. I don’t know what’s going to happen, but what we have now is unsustainable. The debt is unsustainable. Interest rates are unsustainable. The wealth inequality gets worse every minute. It’s already beyond the point of sustainability, and when the next downturn comes, there will be a lot of anger and unrest. …the misery is going to be apparent for a considerable fraction of the population. It’s going to be pretty intense, and the response will be money printing. When Ben Bernanke said, we’ll never have deflation because we have the printing press and when he used the word helicopter money, people thought it was some euphemism, some joke. People thought that that could never happen. Now we have candidates running on it. Kamala Harris has a version of it, Cory Booker has a version of it. And for Andrew Yang it’s the centerpiece of his campaign.”
Gundlach is not talking about a garden variety recession. This situation – massive debts, slowing growth, rising wealth inequality – has been building for decades and the world is approaching a point at which seismic shifts will occur.
“This situation has taken since 1945 to develop. And it really got going with US-President Ronald Reagan. So I started in this business when the scheme was starting. And we used to think that 8% interest rates were set to last forever, and it was unthinkable that the Fed would buy bonds, inconceivable! And now it’s normal. And free money used to be unthinkable. What people got themselves fooled by was feeling somehow that there’s real stability to societal institutions because they’ve experienced it most of their life. Some still think they’re experiencing it. But they’re not.”
So what does normal look like?
“In 1970, there were no credit cards. In 1970, there were no car loans. People saved money and bought things. That was normal. The debt-to-GDP ratio was stable. Economic growth was real. It really happened. In 2018, the dollar growth of nominal GDP was less than the dollar growth of the national debt. That means that there is no growth. We’re having an illusion of growth. It means that we’re issuing IOUs and spending it, and it shows up in the calculations as growth. But spending is not growth.“