Reality Check and Common Sense
The big news this morning is that the Senate has passed the long-awaited stimulus legislation. In anticipation of this predictable outcome yesterday saw equity markets throughout the world celebrating with classic bear market jubilation. Throughout history, almost all the largest single day gains have taken place during bear markets. We believe that this is yet another example of that phenomenon. It’s amazing the differences a day can make. We had several “investment professionals” claiming that the bottom is behind us! The day before, these same folks were screaming that it was the end of the world and that the bottom was months away. Human psychology is truly stochastic and capricious.
We realize that the details of the legislation have yet to be published but we feel it our duty to insert some common sense to the market’s reaction. We encourage readers to review our commentaries from the past few days as well. Historically, fiscal stimulus packages are extraordinarily ineffective. The bureaucratic inefficiencies overwhelm any potential stimulus. We believe that in the current situation this will be particularly true. The logistics of distributing loans to small businesses will be grossly underutilized since it will require struggling business owners to fulfill a set of criteria that remains to be determined. Most small businesses, like ours, will have to weigh bureaucracy and paperwork against simply tightening the belt a bit and streamlining operations. Most will elect the latter rather than have the government dictate how we run our business. So large swaths of this legislation will have literally no impact on the economy.
Larger companies, with lobbying and political infrastructures, will take what the government will give them with little forethought on what that means in the long run. The government will require companies to meet criteria that will eventually result in sub-optimal corporate capital structure decisions. Some might even call it corporate nationalization. Think US Postal Service and Amtrak. This will have a deleterious economic impact. The government has never been good at running businesses!
How long until this can be implemented? We continue to have much of the developed world in lock down. This will continue for quite a while. The economic impact of this will overwhelm any stimulation that this legislation can bring to bear. This is simply the economic reality being glossed over by the politicians. They continue to spew platitudes of encouragement that contradict the objective empirical evidence of the situation. We get that they can’t preach fear and foment more panic but the approach being deployed is more than a bit disingenuous. We would prefer some true leadership, honesty, and objectivity. To date, all leaders have severely mismanaged expectations with their actions. They are behaving more like an adolescent with severe ADHD (I speak from experience since my 14-year-old falls into this category) than deliberative leaders. They need to properly blend facts to present the problem and clearly define solutions.
Also, what if Latin America begins to participate in the spread of the virus? Those economies will be overwhelmed as they possess little infrastructure from a health or fiscal perspective. Emerging markets may experience an absolute economic tsunami. And how can we believe anything that comes out of China? That seems delusional to us. I don’t buy into any conspiracy theories, but certainly no honest person can suggest they are transparent or forthcoming with the truth. So, when we read reports that depend on the information coming from China, we do so with more than a little skepticism. China’s contribution to global growth will be meaningfully lower going forward as well.
Politicians and their appointees still haven’t structured the problem properly. If they had and offered legislation that clearly focused on the solution, then we’d applaud. However, for the reasons above we really are not optimistic that this legislation will be impactful given the measures being taken to prevent the spread of the virus. Now, President Trump seems to be leaning toward more of a hands-off approach – let the virus run its course rather than deal with the economic realities. Supposedly he wants everything back to normal by Easter. Unfortunately, it is far too late for that given the actions already taken and the sheer number of people that will be unable to work due to the illness (or caring for the ill). This executive waffling is extremely unattractive and authenticates the lack of forethought in the decision process. We continue to be very concerned over the direction of the economy. This legislation really doesn’t change our views.
The Economic Quantification of the Middle Class
The legislation also includes literal handouts to anyone that falls within certain income thresholds. Like Obamacare, this effectively quantifies how the government defines the middle and lower economic groups. Where do they come up with these figures? How can they know what the individual situations are of families? It is simply idiotic as it completely ignores all fiscal realities at the household level. It is a one size fits all approach. And what if someone is already on government handouts? Why would they get a payment of any kind? Their contribution to the economy has not changed in any way so why give them more taxpayer money than before the virus? This is the problem with our government. Stimulus needs to be designed to trigger sustainable growth; gimmicks that are simply political gifts in order to get re-elected and which make no change to economic behavior are almost worthless. A one-off handout to arbitrary categories of our population have no healing power on the economy. They simply buy votes. The money would have been better spent on medical supplies, doctors and hospitals. If the government is unable to get the medical crisis under control, then no amount of stimulus and handouts will make any meaningful difference.