Do you think this will be worst than the Great Recession?

[meiroy]

I think the big question is if households/employees will be paid/are paid their salaries directly or indirectly by the Government.

 

If they don't, the outcome will be really bad. Household consumption will decrease. Inequality will increase. I think it's as simple as that.

 

Second, is the government going to start massive infrastructure projects and whichever other projects to employ as many people as possible while increasing productivity and future growth via enhanced infrastructure?

 

 

 

 

 

 

 

 

 

 

 

 

 

[UK]

https://www.wsj.com/articles/new-york-feds-williams-says-recovery-unlikely-to-be-swift-11587130541

 

“I don’t see the economy being back to full strength by the end of the year. It’s going to take longer to get us back to where we want to be,” he said in a CNBC interview. Mr. Williams tied the prospect of a slow recovery in part to caution by the public that is likely to outlast any social-distancing and other government restrictions. “Even as the pandemic passes, even as the restrictions are relaxed gradually over time, people may take quite a while before they are willing to get back on airplanes, on trains, or go to the theater or go to concerts or things like that,” Mr. Williams said. “So there are some risks it takes longer to get that recovery for the economy than just what happens in terms of the formal restrictions that are in place.” “We’re definitely in a severe downturn in economic activity,” he said Thursday. “Even as a pandemic passes through and the economy comes back, I expect demand to be weak and therefore needing strong monetary support, fiscal policy support as well, to get our economy back to full strength over the next couple of years.”

 

Other regional Fed officials also weighed in on Friday, sharing by varying degrees Mr. Williams’s expectation that it will take time for the economy to right itself. Speaking on Yahoo Finance, Philadelphia Fed leader Patrick Harker said he doesn’t expect a snapback quickly once the all-clear signal arrives from health experts. “I’m not a fan of the V-shaped recovery, I don’t think it will be that V. But the goal is to make a U, but a very narrow U,” he said, which means the official, who has an FOMC vote this year, sees a sharp and deep downturn from which it takes some time to emerge.

 

In a video presentation, St. Louis Fed leader James Bullard, an FOMC non-voter, said that second-quarter data— which he expects will show the full brunt of the economic shutdown—will be so bad as to warrant being omitted from the normal process of measuring economic activity. What will happen in the second quarter won’t be comparable “to anything we’ve seen in U.S. macroeconomic history,” Mr. Bullard said. “We should just sort of write off the second quarter. Think of it as a very different episode and quit calculating annual growth rates and quit comparing to other periods in the past because it’s deceptive in thinking about how the economy might be able to behave going forward,” he said.

 

Mr. Bullard also joined with other Fed officials and said the central bank has made “substantial progress” in fixing financial markets, and added that “the Fed is certainly willing to do much more” if it sees a need. In a later conversation with reporters, Mr. Bullard said it’s a “very unlikely outcome” that the U.S. central bank would buy stocks as a means to support the economy. He noted that the equity market hasn’t suffered from liquidity issues, and probably wouldn’t get much lift from central bank purchases.

[valueinvestor]

At this very moment, it's almost certain at this will be worst than the Great Recession, as the GDP loss will be greater than 4-5%. However, I'm not sure if the stock market will decline because of that.

 

It may be a scenario where the market rises, while the economy gets worst. Stock markets were never really a true reflection of the economy anyway. The stock market was at it's highest during the peak of the damage caused by 2008 if I remember correctly. It may be the case here unless we have a second pandemic because we never developed a "herd immunity"

 

We are again going to a restructuring, not due to liquidity but a force reducing consumption.

 

Just thought I would post what I think will be my final thoughts on the matter, unless new information comes to light, as a result, will act accordingly.

[mattee2264]

It is difficult to tell what will happen to consumer spending.

 

On the one hand a lot of people are going to lose their jobs with low-income workers and self-employed most vulnerable and those people tend to have the highest marginal propensity to consumer.  Their might also be more caution going forward with people more inclined to save for a rainy day having been caught short when this hit. You saw that in the USA after the Great Depression. That change in attitudes could persist for quite a long time. There might also be a housing market downturn which will have negative wealth effects that are a lot more meaningful than those emanating from the stock market as most people still have the majority of their wealth tied up in their homes.

 

On the other hand for the vast majority of people who kept their jobs or got transfer payments from the government lockdown massively reduced their living expenses so they have probably built up a fair amount of savings and will have a lot of pent-up demand for entertainment and travel when restrictions lift.

 

Also unlike other recessions there is a lot more pressure on banks and businesses from the government. That means there is unlikely to be a credit crunch and unemployment won't as fall as much as it otherwise would. In addition coronavirus is the perfect justification for unprecedented government spending and money printing which is picking up a lot of the slack. Provided inflation doesn't explode this extra debt will be manageable to service in the same way it was after WW2.

 

I agree that the stock market may well go a different way as there is still the bull market mentality of looking ahead and not putting too much emphasis on a single quarter's or single year's earnings. With interest rates this low the market is trading at a very reasonable multiple of normalised earnings power even if you decide to haircut 2019 earnings on the assumption it will take a while to get back to full speed.

 

The main worry for me is whether inflation makes a comeback. This will have a very negative impact on the economy and also force the Fed to raise rates.

 

It seems unlikely because wage pressures will be muted and technology continues to have a deflationary effect and quantitative easing just seems to inflate asset prices and enrich the wealthiest people who tend to hoard rather than spend.

 

The most likely source might be commodity prices. There is likely to be some supply destruction as production takes a while to come back online so if demand recovers ahead of this then once inventories are used up prices could spike. But even this effect is likely to be relatively short lived and likely to be accommodated by the Fed.

 

 

 

 

 

[Cigarbutt]

It is difficult to tell what will happen to consumer spending.

On the one hand a lot of people are going to lose their jobs with low-income workers and self-employed most vulnerable and those people tend to have the highest marginal propensity to consumer.  Their might also be more caution going forward with people more inclined to save for a rainy day having been caught short when this hit. You saw that in the USA after the Great Depression. That change in attitudes could persist for quite a long time. There might also be a housing market downturn which will have negative wealth effects that are a lot more meaningful than those emanating from the stock market as most people still have the majority of their wealth tied up in their homes.

On the other hand for the vast majority of people who kept their jobs or got transfer payments from the government lockdown massively reduced their living expenses so they have probably built up a fair amount of savings and will have a lot of pent-up demand for entertainment and travel when restrictions lift.

Also unlike other recessions there is a lot more pressure on banks and businesses from the government. That means there is unlikely to be a credit crunch and unemployment won't as fall as much as it otherwise would. In addition coronavirus is the perfect justification for unprecedented government spending and money printing which is picking up a lot of the slack. Provided inflation doesn't explode this extra debt will be manageable to service in the same way it was after WW2.

I agree that the stock market may well go a different way as there is still the bull market mentality of looking ahead and not putting too much emphasis on a single quarter's or single year's earnings. With interest rates this low the market is trading at a very reasonable multiple of normalised earnings power even if you decide to haircut 2019 earnings on the assumption it will take a while to get back to full speed.

The main worry for me is whether inflation makes a comeback. This will have a very negative impact on the economy and also force the Fed to raise rates.

It seems unlikely because wage pressures will be muted and technology continues to have a deflationary effect and quantitative easing just seems to inflate asset prices and enrich the wealthiest people who tend to hoard rather than spend.

The most likely source might be commodity prices. There is likely to be some supply destruction as production takes a while to come back online so if demand recovers ahead of this then once inventories are used up prices could spike. But even this effect is likely to be relatively short lived and likely to be accommodated by the Fed.

I wish the above bold part would not matter for the S&P 500 but it does. This may sound like a TED talk given by a retired Microsoft executive a while back about pandemics. Who really cared then? Animal spirits and market psychology will carry the day eventually but, for the bold statement, i submit the opinion that this time may be different, perhaps wildly so.

 

The US is taken as a poster child.

 

Unemployment was at 14.6% before US involvement in WWII. Taking the publicly held debt above 100% of GDP required an unusual amount of government control and patriotism. During the war, government's share of GDP went from about 15% to about 40% of GDP.

 

The defining features coming out of WWII were residual central control allowing financial repression and a context of sowing the seeds of painful inflation. It was a good time to invest then (see early partnership letters) because it was a time of amazing and robust growth in GDP (and productivity) {with low interest rates and low valuations} and the US started the period after 1945 with a very low level of private debt. Entitlement spending (funded and unfunded) was also a tiny fraction of what it is now and the age profile was much more favorable.

 

Here's an interesting data point from 2012:

https://www2.deloitte.com/us/en/insights/industry/public-sector/the-untold-story-of-americas-debt.html

The knee-jerk reflex is to dismiss the conclusion because their forecasts have been wrong even if the underlying analysis is right. Animal spirits somehow accommodated to lower interest rates with lower rates of growth being more than mitigated by much lower interest rates. They were 'predicting' that the % of interest payments over budget would reach 20%. Since 2012 to now, numbers show that it moved from 6.2% to about 10% for 2020 ('forecast' before CV).

 

In terms of productivity growth, will Facebook and Netflix get us through?

Market psychology makes this impossible to predict but what about fundamentals?

 

And then there is a thread about Mr. Buffett's inactivity with many expecting that things will get back to normalized earning power in no time..

[Spekulatius]

Debt service after WW2 was serviceable because the US went into a period of heavy growth after WW2, which reduced the debt/GDP metric. This is likely* to repeat after the current epidemic.

 

At some point, all this extra spending will lead to higher taxes imo.

 

Wanted to write *unlikely

[TwoCitiesCapital]

Debt service after WW2 was serviceable because the US went into a period of heavy growth after WW2, which reduced the debt/GDP metric. This is likely to repeat after the current epidemic.

 

At some point, all this extra spending will lead to higher taxes imo.

 

The difference being we were already running massive debts/deficits prior to the pandemic and economic growth @ the peak wasn't enough for us to lower the debt/GDP (or even the deficit to GDP for that matter).

 

I don't think the growth of the economy returning to normal after a few months will come anywhere close to that of a repressed economy for years with a ton of people returning to the consumer pool. That being said, if pandemic lasts 2 more years in various rolling outbreaks, your comparison may be more apt, but the debt-to-GDP will get MUCH worse beforehand.

 

Higher taxes and eventual inflation are all but assured, but methinks it gets worse before it gets better.

[Cigarbutt]

^Some numbers.

-CAGR of GDP (real)

1950-1969 (the year when Fed independence was redefined): 4.6%

2000-2019 (the year when Fed independence was redefined): 2.2%

 

Since 1950, GDP growth has been gradually and structurally going down.

 

During the "peak" years (2016-9) ---) CAGR of real GDP: 2.3%

-Deficit per GDP (not taking into account massive off-balance sheet items)

2016: 3.1%

2017: 3.4%

2018: 3.8%

2019: 4.6%

2020: ????

 

The government (that has the ability to issue debt in the domestic currency) has the ability to issue 'cheap' DIP financing but isn't this a classic case of restructuring?

[Packer16]

IMO doing all these calculations of debt levels/interest without looking at alternatives does not make sense.  Savers have to invest somewhere so as long as the US on a relative basis is better than any other place on earth it does not matter.  If there was a large country with a better place for savings/investing I would be concerned but there is not.  Since we are all pretty much in the same boat with Coronavirus spending & capital will continue to grow, how has the relative position of the US versus changed?  Not much IMO.

 

Also those countries that have an aged population & large capital base accumulated over the years have a large internal demand for bonds in the local currency.  That is why places like Japan have not seen much depreciation/inflation.

 

Packer

[Viking]

Most people appear to be more concerned about inflation than deflation.

 

In the next year or two is deflation not much more likely? The globe has been shifting for the last 2 decades from high inflation to very low inflation. The virus is going to accelerate deflationary trends:

- oil prices have cratered and will be low for a long time; many companies will go bankrupt

- unemployment will be at levels last seen in the great depression

- industries involved with travel and tourism will be severely impaired for the next year perhaps two: airlines, hotels, car rental, vacation shops, conventions

- public sporting and entertainment events will be severely impacted for the next year: all professional and amateur

- eat-in restaurant industry will be impaired (drive through take out will thrive)

- brick and mortar retail will be impaired; the trend of the past few years (shift to online) will accelerate

- wild card: do we get a shift to in-country production. Essential medical goods will be immediate. Travel restrictions will make international business more difficult moving forward.

- look at the trends in the global economy the past 30 years: Japan has been a hot mess for 30 years; the Eurozone never dealt with the 2008 crisis (its banks are not in great shape) and are ill prepared for the economic carnage currently happening; emerging markets are not well equipped to deal with the virus as they do not have the ability to stimulate the same way more developed economies can; China’s economy is at risk if de-globalization takes hold

- we already have negative interest rates in Japan and Europe. Makes sense US is next as the recession takes hold in the coming quarters.

- higher taxes are coming in the next year. All this government spending will need to be paid for.

- US election in November: as we get closer it will be a blood bath between Trump, Republicans and Democrats - all at a time when the US will likely be dealing with a second wave of the virus and needing cooperation among politicians - which just increases the odds of a poor outcome

- wild card is future path of virus is unknown and is skewed to the downside at least until a vaccine is available in another year or two

- more broadly, technology has been causing massive shifts in the economy. Perhaps this change will accelerate in the coming years.

 

I am sure i am missing a bunch of things. Bottom line, it looks to me like deflation is likely moving forward. Falling prices. Demand is falling. We have too much supply.

 

I am pretty sure markets today are rising because of all the central bank spending. I am not convinced that it will be enough this time. It looks to me like the economic damage is going to be large.

[Cigarbutt]

^Shorting the JGBs in the last few years would have been a very frustrating exercise indeed but does that mean all is hunky dory?

BTW, as a CDN, USD-labelled 'investments' are north of 80% at this point.

 

I would challenge the assertion about domestic demand for JGBs. Many financial institutions in Japan have regulatory mandates (forced) to hold JGBs and the main buyer of JGBs is...the Bank of Japan(?). In the last few years, the BOJ has been buying the vast majority of bonds and its share of total JGBs is now above 50%(!) leaving the price discovery just about dead. Also, lately, the rate of BOJ activity in the JGB market has accelerated.. Last checked, the Federal Reserve's share of total US public debt was around 15% so, in a way, there is further room to grow..

 

In the early 30s, Finance Minister Takahashi got the BOJ involved in government bonds and that was one of the factors behind the relative good outcome out of the Depression but Mr. Takahashi lost control of the situation (and his life) when a group of leaders thought it was time for national morale building.

[Viking]

IMO doing all these calculations of debt levels/interest without looking at alternatives does not make sense.  Savers have to invest somewhere so as long as the US on a relative basis is better than any other place on earth it does not matter.  If there was a large country with a better place for savings/investing I would be concerned but there is not.  Since we are all pretty much in the same boat with Coronavirus spending & capital will continue to grow, how has the relative position of the US versus changed?  Not much IMO.

 

Also those countries that have an aged population & large capital base accumulated over the years have a large internal demand for bonds in the local currency.  That is why places like Japan have not seen much depreciation/inflation.

 

Packer

 

Packer, i agree theoretically with what you are saying.

 

I think one of the drivers of the increase in stock prices the past few weeks is money starting to shift from bonds to equities. Institutions holding bonds are saying why would i hold a bond paying less than 1% interest? Blackrock talked about this shift happening on its quarterly conference call.

 

The problem with this strategy is stocks are not bond substitutes (even utility type stocks). If we get a severe recession/deflation lots of pension funds/insurance companies could be in deep shit. Yes, this is low probability. I wonder if asset managers will be communicating this risk to their members?

[HalfMeasure]

IMO doing all these calculations of debt levels/interest without looking at alternatives does not make sense.  Savers have to invest somewhere so as long as the US on a relative basis is better than any other place on earth it does not matter.  If there was a large country with a better place for savings/investing I would be concerned but there is not.  Since we are all pretty much in the same boat with Coronavirus spending & capital will continue to grow, how has the relative position of the US versus changed?  Not much IMO.

 

Also those countries that have an aged population & large capital base accumulated over the years have a large internal demand for bonds in the local currency.  That is why places like Japan have not seen much depreciation/inflation.

 

Packer

 

Stocks are great replacement for low-yield bonds, as long as they don't go down  :-X

 

Packer, i agree theoretically with what you are saying.

 

I think one of the drivers of the increase in stock prices the past few weeks is money starting to shift from bonds to equities. Institutions holding bonds are saying why would i hold a bond paying less than 1% interest? Blackrock talked about this shift happening on its quarterly conference call.

 

The problem with this strategy is stocks are not bond substitutes (even utility type stocks). If we get a severe recession/deflation lots of pension funds/insurance companies could be in deep shit. Yes, this is low probability. I wonder if asset managers will be communicating this risk to their members?

[Viking]

IMO doing all these calculations of debt levels/interest without looking at alternatives does not make sense.  Savers have to invest somewhere so as long as the US on a relative basis is better than any other place on earth it does not matter.  If there was a large country with a better place for savings/investing I would be concerned but there is not.  Since we are all pretty much in the same boat with Coronavirus spending & capital will continue to grow, how has the relative position of the US versus changed?  Not much IMO.

 

Also those countries that have an aged population & large capital base accumulated over the years have a large internal demand for bonds in the local currency.  That is why places like Japan have not seen much depreciation/inflation.

 

Packer

 

Stocks are great replacement for low-yield bonds, as long as they don't go down  :-X

 

Packer, i agree theoretically with what you are saying.

 

I think one of the drivers of the increase in stock prices the past few weeks is money starting to shift from bonds to equities. Institutions holding bonds are saying why would i hold a bond paying less than 1% interest? Blackrock talked about this shift happening on its quarterly conference call.

 

The problem with this strategy is stocks are not bond substitutes (even utility type stocks). If we get a severe recession/deflation lots of pension funds/insurance companies could be in deep shit. Yes, this is low probability. I wonder if asset managers will be communicating this risk to their members?

 

Negative bond yields really does corrupt the investment decision making process.

[Spekulatius]

IMO doing all these calculations of debt levels/interest without looking at alternatives does not make sense.  Savers have to invest somewhere so as long as the US on a relative basis is better than any other place on earth it does not matter.  If there was a large country with a better place for savings/investing I would be concerned but there is not.  Since we are all pretty much in the same boat with Coronavirus spending & capital will continue to grow, how has the relative position of the US versus changed?  Not much IMO.

 

Also those countries that have an aged population & large capital base accumulated over the years have a large internal demand for bonds in the local currency.  That is why places like Japan have not seen much depreciation/inflation.

 

Packer

 

I think this is correct. Even a downgrade of the US credit rating wouldn’t do much, because it is still the best. House in a crummy neighborhood with the exception of Switzerland (too small to matter) and gold.

 

The emerging markets may have a huge problem though.s  like Mexico were just about junk and got  hit by lower crude prices. They can’t borrow for nothing. The Mexican peso has already lost 20% compared to the USD. I think we will see many defaults.

[Nomad]

Yes, this will be worse than the Great Recession. The number to remember is 70% - that's the approximate portion of US GDP comprised of consumer spending. Consumption similarly drives many other developed economy GDPs.

 

Let's start with the optimistic case. Let's assume that the economies of the developed world are allowed to legally re-open in the next 3-4 weeks. Let's further assume that there is substantial "pent up" demand in those economies and that the citizenry decides to return to normal activities without apprehension. People go back to restaurants, they go back to retail, they order clothing and makeup and home furnishings again, they get their hair cut, etc. Finally, let's assume that the household balance sheets of these returners are largely intact - that these people have savings in reserve or access to unsecured credit on reasonable terms to drive their consumption. Overall, let's assume about 80% of 2019 capacity and 20% unemployment for FY2020 and 90% of capacity and 10% unemployment for FY2021.

 

Sounds good? No - even with an optimistic scenario of a quick return to 80% capacity, this will be an economic calamity. About a fifth of the job seekers in the US are presently unemployed and in survival mode. That means they're not consuming; they're trying to literally and figuratively stay in their houses and avoid the bread lines. Their balance sheets were already precarious before the crisis, and - surprise, surprise - their creditors are not legally prohibited from collecting on debts incurred, and the creditors' staff are allowed to work remotely. So how do the laid-off and furloughed workers repair their household balance sheets? The lucky ones get their jobs back and successfully renegotiate terms with their creditors. The unlucky ones declare bankruptcy and get partially or wholly wiped out. By the way, if the debtors are younger and have student loans, those aren't dischargeable in bankruptcy, so many people will come out of BK with ruined credit and still have the burden of debt repayment.

 

Do their jobs return? Maybe - unemployment is a lagging time series, so many jobs will be slow to come back - if they come back at all. Restaurants can't pack people in if there's no vaccine or therapeutics; they won't have a need for as much staff. Same story for employees at movie theaters, bars, stadiums, wedding venues, etc. Factories will try to automate to the extent that they can, because machines don't get sick and have family emergencies like human beings do. The oil patch is getting wiped out at $20/barrel WTI and many of those jobs are probably gone. Even the white collar work from home set is not immune, and white collar workers are liable to face layoffs if austerity hits corporations.

 

Homes, cars, and durable goods purchases? Forget about it - household formation will be down as the Millennials once again run headlong into the twin buzzsaws of economic disaster and high house prices (thanks, Fed). The young will choose to further delay marriage and children and consume less in the process. The elderly are in the high risk infection group and will be sheltering in place for longer than their younger counterparts, reducing their consumption too. Older people with less solid balance sheets will be forced to liquidate assets, creating a negative feedback loop.

 

Additional negative wealth effects could come from an equity market collapse, which could happen as soon as the "unsinkable" tech titans start to take on water. Facebook and Google rely heavily on advertising, which is a cyclical business that always declines in crises. Apple produces luxury products that cash-strapped consumers will hesitate to upgrade. Even mighty Amazon will be hit hard by a decline in discretionary purchases, cancellation of digital subscriptions, and reduction in revenues from their cloud services. After all, with the reduced corporate IT budgets and shuttered small businesses, who will need more cloud capacity? Once the FANG and QQQ bubble finally pops, the wealth destruction will be immense as upper middle class equity holders see their holdings evaporate.

 

In sum, the virus has caused global demand destruction on a scale not seen in generations. To steal blatantly from Churchill, we are not at the beginning of the end, and we may not even be at the end of the beginning.

[Cigarbutt]

The emerging markets may have a huge problem though.s  like Mexico were just about junk and got  hit by lower crude prices. They can’t borrow for nothing. The Mexican peso has already lost 20% compared to the USD. I think we will see many defaults.

Since this thread has morphed to emerging economies, currencies and commodities, it's interesting to note that the Mexican government has had a policy to hedge its export production at 49 WTI this year, apparently 100% hedged and called the Hacienda hedge (versus 55 last year). In Canada, the last quote on WCS is 4.23 (maybe lower tomorrow) which is about 50$ lower than exactly a year ago. Canadian operators have various hedges in place and it may not be as efficient as the Hacienda hedge and I will let you guess who the counter-parties are (hint: they are fully back-stopped by the Fed).

---) Back the low interest rates are great topic

[Viking]

The emerging markets may have a huge problem though.s  like Mexico were just about junk and got  hit by lower crude prices. They can’t borrow for nothing. The Mexican peso has already lost 20% compared to the USD. I think we will see many defaults.

Since this thread has morphed to emerging economies, currencies and commodities, it's interesting to note that the Mexican government has had a policy to hedge its export production at 49 WTI this year, apparently 100% hedged and called the Hacienda hedge (versus 55 last year). In Canada, the last quote on WCS is 4.23 (maybe lower tomorrow) which is about 50$ lower than exactly a year ago. Canadian operators have various hedges in place and it may not be as efficient as the Hacienda hedge and I will let you guess who the counter-parties are (hint: they are fully back-stopped by the Fed).

---) Back the low interest rates are great topic

 

So help me out here... the investment banks (like Goldman) do the hedging for Mexico but who do they offload the risk to?

 

Mexico has made as much as $6 billion in the past with this hedge; likely more this time round.

 

https://www.bloomberg.com/news/features/2017-04-04/uncovering-the-secret-history-of-wall-street-s-largest-oil-trade

[Cigarbutt]

The emerging markets may have a huge problem though.s  like Mexico were just about junk and got  hit by lower crude prices. They can’t borrow for nothing. The Mexican peso has already lost 20% compared to the USD. I think we will see many defaults.

Since this thread has morphed to emerging economies, currencies and commodities, it's interesting to note that the Mexican government has had a policy to hedge its export production at 49 WTI this year, apparently 100% hedged and called the Hacienda hedge (versus 55 last year). In Canada, the last quote on WCS is 4.23 (maybe lower tomorrow) which is about 50$ lower than exactly a year ago. Canadian operators have various hedges in place and it may not be as efficient as the Hacienda hedge and I will let you guess who the counter-parties are (hint: they are fully back-stopped by the Fed).

---) Back the low interest rates are great topic

So help me out here... the investment banks (like Goldman) do the hedging for Mexico but who do they offload the risk to?

Mexico has made as much as $6 billion in the past with this hedge; likely more this time round.

https://www.bloomberg.com/news/features/2017-04-04/uncovering-the-secret-history-of-wall-street-s-largest-oil-trade

Short answer: i don't know.

Institutions likely use offsetting transactions to a large degree and remaining net positions are likely hedged rapidly and somewhat efficiently. Banks occasionally get stuck with losses, it seems, especially with rogue traders who don't follow the playbook. Various commodity traders also occasionally show negative surprises. As to where the risk goes, who really knows? And Goldman Sachs always seems to be on the right side of the trade. The size and speed of this year's decline is impressive, again, and i doubt airlines will be net large buyers of upside price offsetting protection going forward, at least for a while.

[matts]

Yes, this will be worse than the Great Recession. The number to remember is 70% - that's the approximate portion of US GDP comprised of consumer spending. Consumption similarly drives many other developed economy GDPs.

 

Let's start with the optimistic case. Let's assume that the economies of the developed world are allowed to legally re-open in the next 3-4 weeks. Let's further assume that there is substantial "pent up" demand in those economies and that the citizenry decides to return to normal activities without apprehension. People go back to restaurants, they go back to retail, they order clothing and makeup and home furnishings again, they get their hair cut, etc. Finally, let's assume that the household balance sheets of these returners are largely intact - that these people have savings in reserve or access to unsecured credit on reasonable terms to drive their consumption. Overall, let's assume about 80% of 2019 capacity and 20% unemployment for FY2020 and 90% of capacity and 10% unemployment for FY2021.

 

Sounds good? No - even with an optimistic scenario of a quick return to 80% capacity, this will be an economic calamity. About a fifth of the job seekers in the US are presently unemployed and in survival mode. That means they're not consuming; they're trying to literally and figuratively stay in their houses and avoid the bread lines. Their balance sheets were already precarious before the crisis, and - surprise, surprise - their creditors are not legally prohibited from collecting on debts incurred, and the creditors' staff are allowed to work remotely. So how do the laid-off and furloughed workers repair their household balance sheets? The lucky ones get their jobs back and successfully renegotiate terms with their creditors. The unlucky ones declare bankruptcy and get partially or wholly wiped out. By the way, if the debtors are younger and have student loans, those aren't dischargeable in bankruptcy, so many people will come out of BK with ruined credit and still have the burden of debt repayment.

 

Do their jobs return? Maybe - unemployment is a lagging time series, so many jobs will be slow to come back - if they come back at all. Restaurants can't pack people in if there's no vaccine or therapeutics; they won't have a need for as much staff. Same story for employees at movie theaters, bars, stadiums, wedding venues, etc. Factories will try to automate to the extent that they can, because machines don't get sick and have family emergencies like human beings do. The oil patch is getting wiped out at $20/barrel WTI and many of those jobs are probably gone. Even the white collar work from home set is not immune, and white collar workers are liable to face layoffs if austerity hits corporations.

 

Homes, cars, and durable goods purchases? Forget about it - household formation will be down as the Millennials once again run headlong into the twin buzzsaws of economic disaster and high house prices (thanks, Fed). The young will choose to further delay marriage and children and consume less in the process. The elderly are in the high risk infection group and will be sheltering in place for longer than their younger counterparts, reducing their consumption too. Older people with less solid balance sheets will be forced to liquidate assets, creating a negative feedback loop.

 

Additional negative wealth effects could come from an equity market collapse, which could happen as soon as the "unsinkable" tech titans start to take on water. Facebook and Google rely heavily on advertising, which is a cyclical business that always declines in crises. Apple produces luxury products that cash-strapped consumers will hesitate to upgrade. Even mighty Amazon will be hit hard by a decline in discretionary purchases, cancellation of digital subscriptions, and reduction in revenues from their cloud services. After all, with the reduced corporate IT budgets and shuttered small businesses, who will need more cloud capacity? Once the FANG and QQQ bubble finally pops, the wealth destruction will be immense as upper middle class equity holders see their holdings evaporate.

 

In sum, the virus has caused global demand destruction on a scale not seen in generations. To steal blatantly from Churchill, we are not at the beginning of the end, and we may not even be at the end of the beginning.

 

Not sure who you bank with but all I'm hearing is the opposite. Banks are not collecting on debts at all. forbearance for mortgage payments for anyone with a Fannie Freddie mortgage. Most foreclosure processes offline. Moratorium on evictions for landlords with a Fannie/Freddie mortgages. Same policies in Canada. My Canadian banks are sending me an email every couple of days offering me even more help (no interest on my credit cards, forbearance on my mortgage, suspension of many monthly account fees). Banks are not collecting on personal debts, they are too busy shoveling government money out the door.

 

If you are a lower-paid worker in the restaurant industry for example. Very likely...you get the old unemployment payments, plus the extra 600 per month, the check directly from trump. On the liabilities side...you don't have to pay your rent/mortgage, you are very likely going to get some sort of break on your credit card debts. The above liabilities are not forgiven, but they will be in suspension until most people get to work. And really i suspect until the election because politicians will be politicians. So, how does the average low-income person get into trouble? They are earning more than before and don't have to lay out cash for their biggest liabilities.

[DooDiligence]

https://reason.com/2020/04/15/trump-insists-his-name-must-appear-on-covid-19-relief-checks/

 

I'm surprised he didn't get his picture printed on the checks.

 

What a douche.