August 18, 2020

Like many children, I grew up idolizing many people who were proposed as exceptional, one of those was Albert Einstein. While many recognize his theory of relativity and the famous equation E=mc2 it may not be clear that his methodology was just as critical. Gedankenerfahrung is the German for ‘thought experiment’.

Alongside the idolization of Einstein, I was poor, so the thought experiment became a practice, albeit for far more mundane experiments than the foundations of the universe, but that practice continues to serve me well. When it comes to the living through COVID-19, the question “What would I do now” leads me to contemplate outcomes in a very uncertain environment.

Economic data pours in daily driving equities higher and higher while individuals continue to experience far less success in their daily lives. The disparities are remarkable. Consider the following two ‘most popular’ stories from MarketWatch this morning:

The question of ‘what would you do now’ is important because the disconnect between financial markets and the reality on the ground is profound. I have produced a chart of US continuing claims for unemployment for many months now, but today I am switching it up to a chart from CNBC that shows not just continuing claims but adds in those receiving pandemic unemployment assistance (PUA). There are about 205 million working age Americans, and typical ‘participation rates’ are around 60-65% or about 130 million people. Currently at least 25 million or 19% of the US population is unemployed.

There has been no update to my ‘Bankruptcy Watch’ page for some time because the tracking seems somewhat futile. The company list is getting much longer but the impact appears to be smaller. Mendochino (Canada), Stein Mart, Briggs & Stratton, 300 Pizza Hut franchises fell with one owner (NPC) declaring bankruptcy, Chapparal Energy, Noble Corp, California Pizza Kitchen . . . the list goes on forever with more companies you have never heard of.

At the same time the normal economic metrics suggest that things aren’t so bad. In Canada, we found out yesterday that more Canadian homes sold in July than any other month in 40 years. In the US sales are booming as well (20.7% increase in sales in June), and new home starts are at 1.5 million (1.25 million were expected). All of this while the moratorium on evictions is delaying what many are expecting to be an eviction crisis. Of course people want out of the cities and cash may not have much value if there is a significant spike in inflation, but that is a staggering response to fiscal, medical and political uncertainty.

Spending was certainly impacted, but spending rose with the stimulus cheques. Things one would want in a pandemic are of course on the list, but so are items that appear to suggest people are ignoring the realities of the bills yet to be paid. Spending on home improvement, RVs, watercraft and plenty of other non-essentials was robust through the summer. This morning Walmart announced that spending is slowing as stimulus cheques ran out.

To think of this another way, the government has been providing much of the ammunition that keeps the economy going. They provided the debt to support large companies that were on the brink of bankruptcy. They provided funding for individuals to buy groceries and pay rent. They prevented those without funds from being evicted.

And now the money is running out. This is where gedankenerfahrung kicks in.

What is likely to happen when the stimulus runs out? When the government money stops flowing to support indebted businesses, to pay rent, to buy food, to cover healthcare and pensions? This blog has been highlighting that things will get a lot worse before they get better, but that has not really happened. The S&P 500 hit a new all-time high this morning.

In my gedankenerfahrung, It is difficult to see where the next $4 trillion comes from to support the US economy. The EU also needs another 2 trillion euros (above and beyond the 1.7 trillion they just agreed to), and it isn’t yet clear when the pandemic will end. What will the response be when people can’t get food or shelter, not just in North America, but places like Lebanon (300,000 displaced by last week’s blast) or Europe where people have faced tremendous pressure over the past decade (Greece’s economic collapse; 20% unemployment in Italy; Separatism in Spain; Brexit … etc.)

Prior posts highlighted that layoffs would pick up steam later in this year when the PPP program (US) and similar programs around the world came to an end. These programs provided money to companies to avoid layoffs of staff. Travel industry layoffs are happening rapidly now. Manufacturers, services and plenty of others are quickly reducing costs. (Boeing offered another big ‘buyout’ program this morning; WE charity in Canada last week, Airlines, Retailers, just a quick search on Google or Bing).

Perhaps it would be appropriate for the reader to do a thought experiment to consider what would happen in your life if things went back to what they were like in March or April. Without control of the pandemic, there is a chance that these effects will play out over many quarters and the impact, as muted as it seems currently, will get worse.

If the chart below continues to be the pattern, then capitalism may be pushed aside by social unrest, and that won’t be good for humanity.

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