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On Reopening: We’ve Just Seen The Iceberg’s Tip

New Data Should Accelerate Re-Opening

When the pandemic started, the only data available was the number of new cases, existing cases, and deaths. The original models, perhaps based on prior pandemics like the Spanish Flu of 1918, forecast significant deaths, up to as many as 2 million in the U.S., and, of course, mass infections. Based on that, governments all over the world shut-down their economies.

New mortality data is now available from many and a diverse set of economies (France, UK, Italy, Japan, Germany, Scandinavia, So. Korea, the U.S. (CA, NY, OH…)). The more recent data show the following:

  • Almost no one under 40 years of age dies (except those with pre-existing issues);
  • Death rates for ages 40-49 who contract the virus are less than 0.5%;
  • For those 50-59, the death rate is less than 2% (again, mainly with pre-existing conditions);
  • In the 60-69 age range, about 5%, with 70-79 at 13% and 80+ at 23%;
  • The death rate by demographic appears eerily similar to the regular seasonal flu;
  • Random samples show that 80% of the people who have had this virus showed no or very mild symptoms, and 50% who showed up with virus antibodies didn’t even know they had it.

Early on, as Europe was shutting down, Sweden decided to follow a different route. They cautioned that mortality rates were higher in the elderly demographic groups, and they emphasized social distancing. But they left it to individual businesses regarding closure. Most stayed open. According to Worldometer, the death rate per million population there is 264. In the U.S., it is currently 199, but much higher in places with high density populations. For example, in NY State, it is 1,242/million; 849 in NJ, 544 in MA, but lower in low density areas like WY (12), HI (11), UT (15), AZ (48), NV (87). In the Netherlands, one of Sweden’s neighbors who closed their economy, the death rate is 291/million, actually higher than Sweden. It is 203 in Switzerland, but much higher in more densely populated Europe (IT 467; SP 537).

Given that Sweden’s death rate doesn’t appear to be significantly higher than those neighbors who closed down their economies, perhaps governments ought to consider immediately reopening economies, a la Sweden, in low density states or counties. Some states like GA (deaths/million of 114, SC (52), and TN (31)) have already moved in that direction. Others need to follow asap, to mitigate the economic issues that are surely in our future (see below).

The data for March, and what we have so far for April, have been more than horrible (see Appendix), and the data that are coming will make these pale in comparison. Q1 GDP, which included a period in which the economy was only shut down for 1/6th of the quarter, came in at a -4.8% annual rate, with Consumption, the main economic driver, falling -7.3% (would have been -9.9% except for the huge surge in grocery store sales). Those last two weeks of March wiped out a full three years of consumption growth!

Assuming that the economy had been growing at a 1% rate, the implication is that the rate of real GDP decline in March’s second half was an annual -10% rate. Worse, the last two weeks in March saw about 11 million go on the unemployment roles. With the latest 3.8 million increase the week ending April 24th taking the total to 30+ million since mid-March, the implication is that April’s GDP contracted at a rate about 3X as fast as March, or at a -30% annual rate. But wait! There is still another uncounted April unemployment week (the week ended May 1), and, given the understaffed and antiquated state unemployment systems where people can’t get through and just give up, the -40% plunge in Q2 real GDP predicted by some Wall Street investment banks appears credible.

The Worst is Ahead

In the past week or so, we have just begun to recognize that significant credit destruction has occurred and is ongoing. Diamond Offshore declared bankruptcy, and we are likely to see Chesapeake Energy (the original developer of fracking), J. Crew, Neiman Marcus, and JC Penney this week. This will get worse, much worse, much, much worse! The bear market rally, which brought the S&P 500 (2,831 on May1) more than halfway back from its 1,149 point plunge from its February 19th peak to its March 23rd trough, hasn’t yet grappled with the coming wave of credit destruction, a wave that has barely begun. Instead, the rise from the trough appears to have occurred because of the Fed’s intervention in mid-March and continuing, with a bevy of new programs, which markets apparently believed would put a floor under the economy, as those interventions appear to have resolved the liquidity issues. Those Fed programs include the purchase of corporate paper (and even some high yield), and a supposed line of credit to businesses (the Main Street Credit Line). (Note: The commentary on this credit line is as follows: Because the Mnuchin Treasury does not want the Fed to lend to those who many not be able to repay, it doesn’t appear that this credit line is going to be effective, as those who qualify have the ability to borrow in the private markets, while those who need it to survive don’t have any other alternatives!)


What markets haven’t yet come to grips with is the recognition that the Fed, while it can impact liquidity issues, cannot resolve solvency issues and debt defaults are coming even if all economies fully open tomorrow! It appears that the Mnuchin Treasury is hesitant to absorb any loan losses (thus the Fed’s floundering Main Street Credit Line) despite Congress’ aggressive policies that throw cash everywhere (i.e., helicopter money). Perhaps the two down days for the S&P 500 on April 30th and May 1st (-3.7%) will mark the beginning of the recognition that the upcoming solvency issues and their aftermath are going to be the real economic disaster.

Business and Consumer Impacts

With the solvency issues come employment, income and economic growth woes. Companies in bankruptcy won’t be calling back most of their employees. In addition, when companies do reopen, operating costs will be higher and productivity lower due to cleansing processes and social distancing requirements. The first priority for businesses will be to rebuild cash and likely to set much higher target cash/liquidity levels.

Same for consumers. Even under the most optimistic scenario, re-hiring is likely to proceed slowly. According to Pew Research, half of American households were caught with cash reserves of less than three months. Thus, for households, replenishing or simply building cash reserves will be a top priority, just in case the pandemic, or something similar, re-emerges in the future. In fact, that is exactly what consumers told the University of Michigan, as reported in their latest consumer sentiment survey.


The only feasible conclusion, given such facts, is that there isn’t going to be a “V”-shaped recovery. Markets seem to have been betting on that, perhaps because of the initial reactions of the Fed and Congress. Nevertheless, irreparable damage has been done, and, we have yet to confront, or perhaps even imagine, the economic devastation that lies ahead.

The Price/Earnings (PE) ratio of the S&P 500 currently stands at 19.8 (2,831 closing level on May 1st divided by $143 of analyst estimated 2020 earnings). This is a sky-high PE ratio. Markets apparently are “looking beyond” 2020. But returning to 2019 economic levels in 2021 also appears overly optimistic.  Even a PE ratio of 15, near the historic average, would put the index at 2,145, 24% lower than its May 1st close. And that assumes that $143 of S&P 500 earnings will hold; highly unlikely given what clearly lies ahead.

State and Local Government Issues

State and local governments employ 20 million people, more than manufacturing and construction combined. They add $2 trillion to GDP, second in importance only to the consumer. They cannot run deficits (must have balanced budgets), and the revenue hit to their budgets from the business shut-downs is now estimated at a whopping $650 billion. The hesitancy to provide aid to these entities on the part of some GOP lawmakers simply makes no sense. Without such aid, more massive layoffs will occur, and the economy will be further damaged by spending cuts on social services which originate at the state and local level. As has been recently reported, universities expect a 15% enrollment decline next fall, and many of the weaker ones simply won’t survive. Non-support for state and local governments is just not smart!


The worst lies ahead. Real GDP in Q2 may be in the -40% range. The unemployment level approaching 30%. Interest rates will go even lower and while some predict a return of inflation due to the helicopter money, that can’t occur until the economy is well into the healing process. Likely not until 2022 at the earliest. In the face of this, it is hard to see stock indexes at higher levels. Of course, there will be some companies that do well in the current environment, but you have to be an active investor (manager) to find those gems.

Robert Barone, Ph.D. is a Georgetown educated economist. He is a financial advisor at Four Star Wealth Advisors. www.fourstarwealth.com. He is nationally known for his writings and Robert’s storied career includes his having served as a Professor of Finance, a community bank CEO, and a Director and Chairman of the Federal Home Loan Bank of San Francisco. Robert is currently a Director of CSAA Insurance Company (the AAA brand) where he chairs the Finance and Investment Committee. Robert is the co-portfolio manager of the UVA Unconstrained Medium-Term Fixed Income ETF (FFIU).



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