This week I bought gas for $1.259 per gallon. It has been a long time since I saw gas prices that low. That low price is an incentive to drive around but …almost everything is closed. Personally, I would trade to paying more for gas if I could get rid of my face mask. I cannot print here what I mutter about President Xi and his family lineage each time I put on or take off my mask simultaneously untangling it from my glasses and hearing aids.
I have found Larry Kudlow, my favorite economist, to be brilliant in his economic forecasts over the last 40 years. My prayer is that he is correct again this time as he believes that on the other side of this abrupt shut down of the USA economy is an equally sharp recovery. Call me a Doubting Thomas.
At breakfast in late March I turned to the Love of My Life and said “After surviving The Great Recession of 2008-2010 and being 70 years old, I really thought I would never experience another severe economic event in my career. Bummer, here is another one.” That does not say much for my forecasting ability. I did not say “Bummer”.
The media talking heads are throwing around “recession” and “depression” to simply entice viewers/listeners to tune into their show. The young ladies are all pretty and the young men easily more handsome than me, but I find that I trust my almost 48 years of business experience more than their economic perspective. Perhaps that means I am a curmudgeon. Maybe it simply reflects that I am not reading a teleprompter.
Since it does not match the definition of either type of economic event, we are actually experiencing a mixture of a recession and a depression. I have tried to be creative with a new name and came up with “Dep-Recession”. Not very catchy. Maybe “Xi Recession” in honor of President of China for Life Xi. I am going to use the latter. As you know, Xi is pronounced Z”.
“Xi Recession” will be shorter than the three years normally a part of the definition of an economic depression but is already much deeper than a recession (maximum of 10% decline). Global demand for energy is a reasonable proxy for global economic growth and has fallen approximately 50% since January. That is almost the glide pattern of a rock.
Not smart enough to predict precisely what will happen economically, I do feel comfortable in bracketing the outcome:
My Best-Case scenario – Larry Kudlow is correct again and by the end of 2020 the USA economy is back in high gear. Hallelujah! Amen! My list of Positives below applies.
My Worst-Case scenario – We have a front row seat on the biggest global economic collapse in the history of the world. My list of Positives below applies, but there will be some pain.
Positives from the Wuhan Virus – to date
- The American economy in January and February was roaring because of the huge amount of fiscal stimulus that was and is still in place which will provide incentives for rapid economic growth in our recovery:
- 2017 Tax Act – Brilliantly built a financial base under the stock market plus more
- The Fed reduced interest rates in 2019 (they recognized the errors made in 2018)
- The new USMCA replacing NAFTA (much more important than the China deal)
- Phase 1 of the new China Trade Deal.
- Lower mortgage rates were influencing new home construction which was booming (new home sales are a leading indicator of the American economy).
- Unemployment was setting a 50-year record for being low (around 3%).
- Every month more Americans were returning to the job market.
- The third attempted Coup against Trump since 2016 failed when the Senate dismissed the meaningless charges brought by the House of Representatives which acted in a manner including the pomp and ceremony worthy of a Latin-American tin dictatorship.
- President Trump’s quick decision in January to restrict travel from China and later Europe saved countless American lives which was accompanied by a predictable chorus of slurs from Congressional Democrats and the media.
- President Trump’s Wuhan Virus Task Force has used innovative approaches to–
- Create a BRILLIANT plan to maintain small business payrolls (Payroll Protection Program or PPP) via banks which is putting $350 Billion into the hands of small businesses with amazing speed (over 1 Million loans in one week).
- Congress approved giving The Fed unparalleled powers including the ability to make loans to major companies.
- As they fled DC, Congress paused long enough to pass three stimulus packages of over $2 Trillion with many positives for the USA economy including direct payments to taxpayers in weeks not months in the last Administration.
- The Fed has announced massive Quantitative Easing, dropped interest rates to basically zero, and has announced over $6 Trillion in monetary stimulus.
- Get Americans to understand the need for “social distancing” so as not to overwhelm our hospitals.
- Focused American industries on producing the medial supplies, therapeutics, and vaccines needed to address the Wuhan Virus.
- The USA went from the CDC testing 10,000 folks a week to private enterprise testing 150,000 per week with the production of 20 Million tests per month starting in May.
- It has been exciting to see American industries begin manufacturing medical supplies, pharmaceuticals, test for vaccines, etc.
- It will be reassuring and fascinating to watch America’s mighty, capitalistic economy overwhelm the Wuhan Virus with medical supplies, new therapeutics, new vaccines, and innovations galore. By itself this show will almost be worth the agony of this event.
- We will go from a shortage to a surplus and thus be able to give medical supplies to other countries and ours will actually work!
- The first layer of icing on this Ukrops pound cake – American manufacturers will relocate their manufacturing operations out of China and many will re-shore to the USA. Allowing them to write off their entire cost of re-shoring to the USA would be a wise and magnificent investment that would pay dividends to the USA for decades in jobs, wealth creation, and American/world security.
- The second layer of icing on this Ukrops pound cake – The enormous number of new companies that will be created that provide goods and services because of this event which will provide economic benefits to Americans for decades in the future.
I love thick icing on Ukrops pound cake. My endocrinologist will be upset, but what joy!
Negatives from the Wuhan Virus – to date
- All of us will probably wear facial masks until the vaccine is developed and we are inoculated against the Wuhan Virus.
- Those of us over 70 may be restricted perhaps until vaccinated (come on Spring of 2021).
- The “normal” we return to will be different than what was normal in January of this year.
- My Worst Case analysis is that the GDP of the USA will be reduced an average of 25% over 2020 and 2021, a total loss of over $11 Trillion Dollars.
- The World GDP in 2019 was $86 Trillion. Projecting the same percentage loss globally as my analysis of the impact in the USA equals the Global GDP being reduced by a total of $43 Trillion over 2020 and 2021. This global pain will slow our economic recovery.
- We have learned from this experience that over 80% of our medical supplies and pharmaceuticals are made in China. Until reshoring occurs, we have medical dependency on China.
Next week, we will discuss some of the Risks and Rewards that are headed our way. Then we will apply this event to the land market. Since this is constantly evolving, we will update.
In the meantime, since last Sunday was Easter, I would like to share with you this passage from The Bible:
“A week later his disciples were again in the house, and Thomas was with them. Although the doors were shut, Jesus came and stood among them and said, “Peace be with you.” Then he said to Thomas, “Put your finger here and see my hands. Reach out your hand and put it in my side. Do not doubt but believe.” Thomas answered him, “My Lord and my God!” Jesus said to him, “Have you believed because you have seen me? Blessed are those who have not seen and yet have come to believe.” Now Jesus did many other signs in the presence of his disciples, which are not written in this book. But these are written so that you may come to believe that Jesus is the Messiah, the Son of God, and thus through believing you may have life in his name.” (John 20:26-31 New Revised Standard Version, Oxford University Press)
This scene in the Bible may sound unbelievable to you. Based on some of my life experiences, it is totally believable to me. I serve an awesome God, who is in control and will bring positives out of even this mess created by humans in China.