EDITOR'S NOTE
My husband and I play a lot of Scrabble. It's one of the few games where we're pretty evenly matched. (Although let's not forget I got a higher Wonderlic score than he did--BOOYA!!)
I make us play from a 1985 Merriam-Webster dictionary (which we ordered on eBay for this purpose), because these days Scrabble basically allows anything as a "word." "pwn"? "Za"? "lulz"? Yep, all allowed. Ridiculous. So for us, if it wasn't a word in 1985 (my birth year), we can't play it. (Granted, this has come back to bite me when I've tried to play "udon" and "naan.") This way it's a real test of vocab, instead of oddball memorization.
But my point is, there aren't a lot of words that end in "v." You can usually figure out a few ways to start a word with that pesky letter ("vie," "vocal," "void," etc.) and maybe even ways to slide it in the middle ("move," "dive," "even"), but basically nothing ends with it. And I've been thinking the same about the coronavirus recovery.
The "V"-shaped rebound isn't a pipe dream. It's a real possibility. It may not be perfectly symmetrical--the right-hand side will be flatter, and it may not spring all the way back up--but it's a brighter prospect than anyone would have thought a few weeks ago. The market's rebound off the lows has been telling you as much. Internet stocks are already breaking out to new highs. The broader S&P is only about 12% below its previous highs. Mortgage applications are basically back (down just 1.5%) to last year's levels, as Diana Olick pointed out yesterday.
And there is theoretical justification for this, too, as Michael Darda of MKM Partners has been writing. The Fed's actions have gained a lot more traction in growing the money stock now; M2 is up about 15% so far this year versus only a 4-5% gain in the latter half of 2008. "The Fed appears to be offsetting the velocity collapse more effectively this time around, which could set up for a more vigorous upswing," Darda wrote last week.
That's all well and good, but it's not the end of the story. As much of a relief as it is that we could see a V-like rebound in markets, GDP, and maybe even unemployment back to near pre-Covid levels, the prospect of strong growth after that point looks much dimmer. Hence the stubbornly low bond yields we see right now. Hence the return to the "growers in a low-growth environment" trade in the market that has Microsoft, Chipotle, Amazon, and others resuming their leadership. (Energy has also been on a nice "V-rebound" upswing, but it will ultimately have to face down future slower growth.)
Brian Reynolds of Reynolds Strategy has been making this point well: the massive corporate debt loads resulting from raising cash to get through Covid will give the economy a big hangover after the rebound. (Case in point: American Airlines could end up with $35 billion in debt! It's only worth $4 billion right now! This was a must-watch discussion about the airlines on TEX yesterday.)
So it's going to be an odd couple of years; at times, feeling "back to normal" and like policymakers at the Fed and in Congress are going way overkill on the trillions of economic relief. At other times, feeling like the economy is sliding back into recession and that way more needs to be done. I suspect we'll probably end up with a major fiscal relief package (morphing into stimulus a couple years out) every six to twelve months for several years, until companies have finished repaying their debt and can start investing for growth again.
The government is basically replacing the lost corporate investment and will keep doing so until it can stop the extra spending without shrinking GDP. Remember, as painful as it is to see chronic budget deficits and a growing pile of government debt, it will be even worse to try and pay those bills with a shrinking economy. Keeping GDP from contracting is vital.
(Which is also why government spending should be aimed at helping businesses rebound and pay down debts as quickly as possible, not hampering them. Hence the focus on a passing a "liability shield" so that litigation doesn't become a "second pandemic," as Sen. Leader McConnell has put it, for the economy.)
There isn't so much a letter for what I've just described, but there is a symbol: it's the "square-root" recovery. The "V" followed by more of a flatline. I've heard it come up from time to time. It's a mouthful.
And I hope it's wrong. I hope we get a flying V! I just don't see it in the cards right now, or rather, on the Scrabble board.
See you at 1 p.m...
Kelly
P.S. If you're not getting this newsletter every day, the problem isn't you, it's me not writing it :-)
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Kamis, 21 Mei 2020
Things don't end with "V"
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