JP Morgan does not see a fast recovery, regards recent uptick in stocks as a head-fake

Despite being optimistic early on, I am personally on the fence now as to whether the US economy will recover quickly from coronavirus shutdowns. When they were proposed as very short-term experiments, I thought they were profoundly bad policy but the damage could be mitigated with one-shot, extreme fiscal policy. Then Trump and others started (uncharacteristically) pumping up dire projections and pushing to extend the coronavirus shutdowns, resulting in month-long shutdowns in the only large state economies that were hold-outs (read: the only people who were still supporting the US GDP). Now I suspect serious, lasting damage has been done to the US economy.

One of the problems with situations like this is the financial markets rally on optimism on factors such as a decline in new cases (which, as I have said a million times, were never going to achieve the doomsday scenarios academics have been cranking out because their models were based on objectively bad math – a fact that should have been obvious to any numerate individual who bothered to read them). Then shockingly bad economic data comes out (like it will on Thursday at 8:30 am) and the panic starts up again.

The other issue is that 70% of the US economy is driven by consumer spending, and consumers are utterly smashed right now. You can’t have 20 million people out of work (as we very soon may have), many millions more scared of losing their jobs, and have a recovery in consumer spending. That’s mathematically impossible. There seems to be an optimistic consensus that people (those who have been furloughed as opposed to outright laid off anyway) can just be re-hired at their own jobs. And that certainly will happen in some cases, but far, far from all cases. In fact, the number of merely furloughed workers who can be saved declines as the shutdowns drag on.

It’s a simple fact that, with unnecessarily long shutdowns meant to contain doomsday scenarios that will never obtain, businesses have watched their capital get absolutely nuked.

You cannot run a company without capital. You cannot hire people unless you have a robust firm. People without jobs cannot spend. People who aren’t spending create a collapse in demand that continues to destroy firms. And a vicious cycle begins.

The only thing stopping me from saying this is absolutely 100% what is happening here is that I have been lecturing people on the value of intellectual humility for weeks. I remind myself that pessimism is rarely rewarded, but then I can’t ignore details like the fact that even Warren Buffett is dumping stocks in anticipated bailout targets.

Had Trump stuck with the positions that he had a week-and-a-half ago, I would have said unequivocally that he threaded the needle and avoided a dire economic situation. I am no longer totally confident that is the case and I am quite disappointed with Trump not being Trump when it actually mattered.

I also think this episode has revealed how beyond irrational state and local governments are, so I don’t discount the possibility that they may do this to their residents again. I also cannot discount the political usefulness of destroying the economy during an election cycle. I am sufficiently cynical as to believe that has been a major contributor to this panic.

I am not alone in these fears:

There is a widespread view on Wall Street that the stock market hit its lowest level of the bear market last month, and that a combination of an ebbing of the coronavirus in late spring and unprecedented fiscal and monetary stimulus will set the stage for a sharp rebound in corporate profits later this year.

On Monday, the Dow Jones Industrial Average DJIA, +7.73%, the S&P 500 index SPX, +7.03% and the Nasdaq Composite Index COMP, +7.32% were each rallying more than 4% on these hopes.

However, Mislav Matejka, head of global equity strategy at J.P. Morgan warned investors in a Monday research note that there is a significant chance the global economy experiences “a vicious spiral, which is typical of recessions, between weak final demand, weaker labor markets, falling profits, weak credits markets and low oil prices.”

What’s particularly troubling to Matejka is that the current recession has been triggered by a shock to the consumer — which makes up 70% of GDP in Western economies — as workers around the globe are prevented from earning a living by the closures of nonessential business. This dynamic has led J.P. Morgan economists to predict “only a gradual bottoming out in activity, such as seen after the Great Financial Crisis, and not a V-shaped one that we see, for example, after natural disasters.” A so-called V-shaped economic recession is typically defined as one characterized by a sharp, but brief, slowdown in business activity that is followed by a powerful rebound.

The bank’s house view is that the unemployment rate will remain elevated at 8.5% during the second of the year, while the peak-to-trough decline in real U.S. GDP will be 10%, versus the 4% decline during the financial crisis. “And this is all assuming that the virus is history by June, which might prove significantly optimistic,” Matejka wrote.

Therefore, he advised clients to ignore technical signals indicating stocks are oversold, or to be reassured by the massive fiscal and monetary support provided by global governments. To do so would be “missing the elephant in the room, that is the first consumer and labor market downcycle in 11 years.”

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