The Economy Will Not Soon Return to Normal: Here's Why

Mish

Numerous chain reaction ripple impacts will delay the economic recovery. Let's start with a look at car rental companies.

No Magic Answers

Bankruptcies happen when there is too much debt leverage accompanied by some sort of economic shock. 

For example, Hertz filed for bankruptcy on Friday. Now, the entire rental industry is Scrambling for Answers, but there really aren't any.

Covid-19 caused air traffic to plunge 90%. But blame debt for the Hertz bankruptcy, not Covid.

Layoff Impact

CNN comments on the Hertz Bankruptcy.

Hertz has notified 12,000 employees in North America that that they were losing their jobs, and another 4,000 are on furloughs. Its US workforce stood at 38,000 employees at the start of the year, with about a quarter of them represented by unions.

Auto Manufacturing Impact

Ford (NYSE:F), GM (NYSE: GM) and Fiat Chrysler (NYSE: FCAU) all face a steep drop in rental fleet purchases. 

Last year, Hertz alone bought 1.7 million US automobiles, about 10% of the US auto industry production according to Cox automotive.

CNN commented "Avis Budget said it expects its fleet in the Americas will be reduced by 20% by the end of June, compared to a year earlier."

Used Car Price Impact

If Avis, Hertz, Budget, etc., have too many cars, then a flood of cars will hit the used car market. It's already happening.

Hertz had already announced it would not purchase any new cars for the rest of this year, and that it is starting to sell its vehicles as used cars. As of early March, it had sold 41,000 cars out of its US fleet and another 13,000 out of its European fleet. 

Regional Impact

On Friday, the FAA granted airlines the right to halt service to regional cities. 

As many as 60 cities face flight shutdowns.

For details, please see Airlines to Abandon Dozens of Regional Cities

Corporate Travel Impact

  1. Companies forced to allow more work-at-home have noticed no loss in productivity. 
  2. The same applies to use teleconferencing instead of air travel.

Both cut down on eating out and driving (think local restaurants and gas stations). 

Point number two is an additional hit to car rental companies and hotels. 

This means more layoffs or fewer people recalled from furloughs. 

Attitude Change

It's important to factor in the change in consumer attitudes.

Some retail is going away, never to come back. It will take a while for people feeling comfortable having to sit in a full capacity theater, stadium, or airplane.

  • Some people forced to cut their own hair will continue doing so.
  • Some people who seldom cooked, learned how. They will be slow to return to eating out for many reasons.
  • In general, any persons who suffered a huge income reduction will be very slow to resume eating out, traveling, or buying a car.

To entice people to buy cars, the automakers will have to cut prices, and perhaps dramatically given a new model year is coming up.

Existing Home Sales Plunge 17.8% Much Worse is on the Way

Note that Existing Home Sales Plunge 17.8%. 

April will not mark the bottom in sales. Here's why.

  • Existing sales are recorded at closing whereas new sales are counted at signing.
  • April sales represent transactions that occurred in February and March.

May sales (transactions in March and April) are sure to be worse. Even June sales could be worse.

Real Estate Agent Impact

Price is sure to follow traffic lower, and real estate agents will get hit twice. First on the amount of traffic, and second as prices decline. 

April sales price rose, bit that was heavily skewed by the reduction in sales. 

Grim Economic Data

  1. May 8: Over 20 Million Jobs Lost As Unemployment Rises Most In History
  2. May 15: Retail Sales Plunge Way More Than Expected
  3. May 15: Industrial Production Declines Most in 101 Years
  4. May 15: GDPNow Forecasts the Economy Shrank by a Record 42%. It's 41.9% as of May 19.

Ripple Impacts May Last Years

The economic data has been grim and the ripple impacts may last for years.

Powell Warns Recovery May Stretch to the End of 2021

Fed Chair Jerome Powell Warns Recovery May Stretch to the End of 2021.

Powell is likely to be optimistic. 

Fed in Panic Mode

Seldom does the Fed openly ask Congress to spend more money or to engage in fiscal stimulus. 

But that happened on May 14 when both Powell and Minneapolis Fed president Neel Kashkari.

For details, please see Fed Promotes More Free Money.

This is a sure sign the Fed is in a state of panic.

Global COVID-19 Risk Ranges Up to $82 Trillion

To understand the total global risk, please see Global COVID-19 Risk Ranges Up to $82 Trillion

Anyone who expects a fast recovery out of this mess is delusional.

Mish

Comments (76)
No. 1-29
flubber
flubber

Agree 100%. This shutdown has changed the way we approach work and spending. More tasks will be performed from home online. Some retail is going away, never to come back. It will take a while for people feeling comfortable having to sit in a full capacity theater, stadium, or airplane.

Certainly interesting times we live. I don't think we have ever seen such a jolt worldwide since WWII transformed the world.

njbr
njbr

As for airplane flights...measles on a plane--why would CV be different? And consider that measles has a pretty high rate of vaccination making the possibility of a flight with a sick person matched to a non-measles-vaccinated person relatively rare.

From 2012....However, recent work has shown that cabin air flow may not be as reliable a barrier to the spread of measles virus as previously believed. Along with these new studies, several reports have described measles developing after travel in passengers seated some distance from the index case. To understand better the potential for measles virus to spread on an airplane, reports of apparent secondary cases occurring in co-travelers of passengers with infectious cases of measles were reviewed....Papers were included in this review if they reported secondary cases of measles occurring in persons traveling on an airplane on which a person or persons with measles also flew, and which included the seating location of both the index case(s) and the secondary case(s) on the plane. Nine reports, including 13 index cases and 23 apparent secondary cases on 10 flights, were identified in which transmission on board the aircraft appeared likely and which included seating information for both the index (primary) and secondary cases. Separation between index and secondary cases ranged from adjacent seats to 17 rows, with a median of 6 rows....Although the pattern of cabin air flow typical of modern commercial aircraft has been considered highly effective in limiting the airborne spread of microorganisms, concerns have been raised about relying on the operation of these systems to determine exposure risk, as turbulence in the cabin air stream is generated when passengers and crew are aboard, allowing the transmission of infectious agents over many rows.

Lance Manly
Lance Manly

People who seldom cooked, had to (or they ate more frozen dinners). Some of them will be slow to return to previous spending ways.

Yeah, because it is fairly straightforward to make awesome food out of simple unprocessed ingredients, why would you go back?

Russell J
Russell J

I cut my own hair recently and I'll probably never pay someone else to again. It wasn't great but I have paid $16 for as bad a haircut as I gave myself several times in the last 2 years. I'll save about $160 a year including the tip not to mention my fuel and time.

caradoc-again
caradoc-again

Not to mention the international impact. A potential hammer blow to mercantilism and the major exporters who will need to stimulate their own consumer sectors to bolster demand.

TimeToTest
TimeToTest

That sound you hear is our economy imploding.

The knock on effects are huge on all of this stuff.

Zardoz
Zardoz

If they can't paper over the hole again, demand for warm bodies and war materials will be our economic salvation.

TumblingDice
TumblingDice

Hertz isn't the only one to take on debt / leverage. What about cities using Tax increment financing (TIF)? TIF was meant for areas that needed environmental cleanup, but cities like to use it to increase tax base even if cleanup is minimal.

Sometimes this is to detriment of existing businesses, since people will go to shiny new toy.

Maximus_Minimus
Maximus_Minimus

Surprised you didn't single out higher taxes due to all the free spending by governments. Or debt is so out of control that it doesn't matter in a new parallel universe. We're on a collision course with a death star.

BaronAsh
BaronAsh

Well reasoned.

This has been a very strange event. Not part of any business cycle, more like a natural disaster. Hard to say how things will be going forward, though it feels like we are entering the aftermath phase.

There might be some surprising positives as well as negatives, though. As we emerge from this it might prove a sort of collective baptism, in that the body goes down into an alternate world (of water) for a little while, and then returns renewed, a new body in a new world, a fresh world. Maybe some of the world supply chains are going to change greatly after this which might in turn have some very positive effects in many areas - for example the manufacturing and generally 'making things' areas. Maybe the health industry will change significantly and the dominance of Big Pharma in legislation be cut back. Maybe the world banking system via centralised credit cartels will be abandoned and a more multi-polar system established. Maybe a new-found appreciation for how vital small business is effects electoral politics and regional governance. Maybe a new-found appreciation for republics and what they are for and against. For sure there is going to be quite a lot of detritus to sort through, and much damage to absorb, some which can be worked through quickly, and much that will take time, or maybe prove unsurmountable.

It's going to be a challenging, but also interesting, time.
For some reason, I feel that as ghastly as most of it has been thus far, something positive is going to come out of it. Maybe because it feels to me like we have avoided a huge fall, that we came to the brink but did not founder. That did not happen by accident. Forces in play came out in a positive configuration. That's something.

Jdog1
Jdog1

Hertz was running and 80% debt to asset ratio. And that was at grossly inflated asset values. The "moral hazard" has finally bitten, and now it is Hertz's lenders who are in big trouble.. to the tune of 19 billion dollars.

Bam_Man
Bam_Man

I see lots of people riding bikes in the future. I have a nice road bike - an old Raleigh Technium 12-speed. All Reynolds aluminum frame. This bike was "the bees knees" almost 30- years ago - before they started with the ridiculously expensive carbon fiber frames and forks. Just had it tuned up and it rides great. See you out there on the road!

gregggg
gregggg

Well, here's the 18 year old Fed Blueprint for response to deflation. Enjoy:
https://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm

thedirtymac
thedirtymac

I've always voted Republican but I'm going with the Democrats this year. I've surmised that they are more likely to support assisted suicide. The only way out for much of the US population.

pormarketeer
pormarketeer

Market participants view it another way. The fed is going to save us all.

We will need to watch local, county and state government budgets as they have 4 choices and all bad:
a) cut services and they always cut the most needed services first to inflict the most pain = higher unemployment
b) raise taxes = higher unemployment
c) combination of a and b = higher unemployment
d) bankruptcy which isn't an option (yet) because of the legal hurdles

But hey, a cure is coming and the fed can bail us all out so party on. BTW, it's great to hear that stimulus checks were spent on investing in stocks, tvs, and apple products instead of paying down debt.

BigSKYoung
BigSKYoung

Hertz took approximately $800 million in new debt a few months ago, so likely they are planning to conserve their cash hoard, renegotiate their liabilities and re-organize as leaner and meaner?

Mojo Ryzan
Mojo Ryzan

Mish, excellent summation of just some of the reasons a V recovery is only something in a make believe world...the stock market. It is much worse than the avg person knows or maybe doesn’t want to know.
The grim reality on the street will be exposed and imho the huge disconnect with valuations in the mkt will get corrected.
I want to be optimistic, I only find reason in the exposure of the insanity the Fed policies helped get us to here.
Like bad dry wall, I don’t think you can paper over this.

Please keep writing the truth!
Mojo

Realist
Realist

The economic downturn is just in its infancy.

The virus is just getting going in heavily populated areas like Latin America, Africa, India, Pakistan and Bangladesh. Now that China, Europe and the US are re-opening a second wave of cases will be showing up in those countries shortly. Followed by 3rd, 4th, and 5th waves.

It doesn’t matter whether any government orders another shutdown: it will happen on its own. Very few people will want to travel, attend sporting events, theme parks, restaurants etc etc when the risk of infection is high. It’s tough enough to get people to go to work when the risk of infection awaits (such as in meat processing plants), let alone sit in a crowded theatre.

This is going to throw a wrench into the gears of world trade until effective vaccines are developed (hopefully) in 2021.

It will then take 2-3 years to vaccinate populations around the world (a Herculean task).

I maintain my prediction for zero overall average growth for 2020-2030.

And to all those who continue to think this pandemic is some kind of hoax or conspiracy, I suggest you be the first to do all the things that others are afraid to. The rest of us will sit back and watch what happens.

ToInfinityandBeyond
ToInfinityandBeyond

My wife and I usually plan a either a winter vacation in the Caribbean or a summer vacation in Europe to visit family, sightsee and play some golf. We have canceled our plans to travel anywhere this year and will probably not book anything for 2021 unless the outlook improves significantly.

AWC
AWC

And the Fed is only into this for $6 or $8 trillion so far. Can’t help but wonder what all this will look like when their balance sheet hits $120 trillion, and they will have taken the entire economy private?

And to think that financial pundits accused those who suggested the Fed would buy Junk, of wearing tinfoil hats only a few years ago?

As Howard Marks recently remarked, why not give every American a million dollars? Everyone would be rich, and it would only cost $320 trillion. Would there be consequences? Judging by what has happened so far, maybe or maybe not. No one knows.

Brave new world, this! And the scary thing is, some might even need to stop and ponder whether or not my above comments are facetious. I’m even reluctant to leave a sarc tag here. ;-)

Jojo
Jojo

Shhhh! Wall Street better not read this article.

elvis07
elvis07

Reading these comments, I believe a contrarian would be fully invested in stocks.

Fredsgirl1
Fredsgirl1

This recession was on the horizon for 20 years. If you didn't see it coming then you need glasses. Like CV19 was obvious in December 2019, the recession was obvious long before that. The cost of W Bush's war, CV19 and Trump's mismanagement will just make it worst. We will survive, America will survive if we can hang on to our Democracy and keep it alive, but everything will change weather we like it or not. And that might not be a bad thing in the end.

CCR
CCR

The sooner this economy doesn’t return to “normal” the better. And do not make the mistake that the stock market is somehow correlated to the economy. That idea works about as well as cash on the sideline theory.

yipman yipman
yipman yipman

This guy is pretty good. His writing is easy to follow and seems to be describing me. I'm not sure if i'm in the majority though. For me

  • i'm cutting my own hair for rest of year. surprisingly, i look decent doing it myself and it's saving me about $75/month.
  • i never ever cook in my life but now i do. surprisingly, i have more energy & healthier. not saving any money here bc had to buy sauce, cooking equipment, learning curve, etc. regardless, i'm not eating out, not even fast food. it's all kids out there making fast food. i now only trust my hand touching my own food. this will last a few years until i see what happens to those who go out first to brave restaurants
  • i'm doing this not because of income but more about life & habits. i got sick from panera during coronaVirus scare when i did a take out salad (again mostly kids working + disgruntle employees during pandemic makes for unsanitary situation).
Montana33
Montana33

You are right of course. We all either need to rebuild savings or help our families who need to repair theirs. Confidence isn’t coming back and we all have to adjust to an impaired life with this virus which is about to get worse. The only US State that beat it is Hawaii but how long can they remain a fortress without going broke?

Crypto Enthusiast
Crypto Enthusiast

Car companies should be selling direct to consumer. And new makes and models only available every few years. Anything else is just bubbly waste.

New year models are a marketing gimmick, nothing actually changes in those vehicles. Another industry falsely propped up by low interest rates.

I've heard dealers talk to new buyers about auto equity... I mean how sleezy has this industry become? Does anybody actually own anything anymore? Or the banks literally own everyone and everything at this point.


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