The COVID-19 Economy
How May Begins

Published on May 3, 2020 by Wojciech Gryc

May 2020 begins with a calm foreboding -- states are opening up, economies are starting to move forward, and we're wondering where all this leaves us. Below is a short review of recent developments.

The likelihood of a "V" recovery is effectively nil.

• Airlines are suggesting they won't return to pre-COVID-19 passenger levels until 2022.
• Surprisingly, even hospitals are suffering. Many hospitals are losing billions of dollars as they avoid more profitable elective procedures.
• The Economist is calling the coming year as the "90% Economy", where our experiences as consumers and citizens won't be "quite what they were" last year.

The US corporate playbook also has a new component.

• Thank the government for the stimulus and loan programs, but then return the money.
• If you don't, you will be shamed.
• This is in addition to reducing or eliminating dividend commitments (which risks having a huge impact on long-term investors like pension plans), restating earnings commitments, and taking on massive debt.

What this means for the long run...

• In a word, "volatility".
• Structurally, Martin Wolfe's commentary provides an important reminder: “Debt causes fragility.” Regardless of what happens, the debt-to-GDP ratio and low interest rates will lead to fewer options and more surprises.
• In the US, the Fed is drastically expanding its portfolio of assets, which now include loans to small enterprises and junk bond purchases, much of it via its Secondary Market Corporate Credit Facility. While buying corporate bonds and other assets is meant to be a short-term policy tool, it does change the relationship between the Fed, the government, and corporations.
• Take everything with a grain of salt. The situation is so dynamic and unique that everyone is struggling with forecasts and trends. Consumer trends have shifted so much that comparing the economy today to one a quarter ago is difficult, if not impossible (e.g., like inflation tracking).

What does this mean for individual consumers?

• The way you interact with your local businesses will likely change. Former "drop-in" shops are now taking appointments to promote social distancing, for example.
• Companies moving to using "remote office" technologies, which has been discussed for weeks.
• Volatility in prices of goods and services. If this changes rapidly, it could be a harbinger of another depression.

... and the long, long term...

• Kim Stanley Robinson, a sci-fi author, writes: "Possibly, in a few months, we’ll return to some version of the old normal. But this spring won’t be forgotten. When later shocks strike global civilization, we’ll remember how we behaved this time, and how it worked."
• If you’re planning to do your own analysis, "backcasting" is one potential approach. Work backwards from a future you envision or assume might take place, and see what developments might take place beforehand to validate your view.
• If you want to think in terms of centuries, then The Evolution of Civilizations is the textbook for you.