When 96% Doesn’t Cut It
Yesterday I delivered a warning about this market rally: “Be Careful.”
Today I want to clarify what I meant by this.
While stocks continue to rally hard, the reality is that the economy is in very serious trouble.
I know this, you know this, heck, everyone knows this.
But not everyone understands precisely how damaging the economic shutdown was.
I am routinely seeing pundits saying, “The economy will return to 90% of what it was before,” as if this is a good thing. It’s not. If the economy only comes back to 90% of its former capacity, the US is in GREAT Depression 2.0.
Let me explain.
When most people hear the percentage “90%,” they think, “that’s a high percentage out of 100%,” or “that’s like an A-minus grade.”
As Jim Bianco recently noted, from peak to trough the economy only fell 4% during the Great Financial Crisis of 2008. Put another way, the economy dropped to 96% of its former size during the worst recession in 80+ years.
So imagine what the economy would look like if it fell to 90% of what it was as a result of the economic shutdown. We’re talking about a situation that is almost TWICE as horrible as the 2008 recession!
THIS is why I’m extremely cautious about the markets and the economy in the intermediate to long term.
Yes, both the markets and the economy might improve dramatically from where they are in the coming months. But if this time next year, the economy is only operating at 96% of what it was in February 2020 before the shutdown, then we are in a severe prolonged economic collapse on par with, if not worse, than that of the Great Financial Crisis.
If you think I’m being dramatic here, consider what the head of the U.S. Federal Reserve recently told Congress.
During the last three weeks, Fed Chair Jerome Powell has publicly stated:
- The US is facing its biggest economic shock in living memory (this would include the Great Financial Crisis), an economic downturn which Powell says is “without precedent.”
- The depression/recession could stretch through the end of 2021.
- Asset prices (stocks) remain vulnerable to significant price declines (crashes).
When do you ever remember hearing a Fed chair say anything like this?
Typically, the head of the Fed issues statements that understate the severity of a risk. Remember Bernanke saying the subprime crisis was “contained”?
And yet, here is Jerome Powell saying that the economy is in its WORST collapse ever… that it could last through the end of 2021… and that the stock market could crash.
And this is AFTER the Fed has spent over $2.7 TRILLION propping up the markets in the last two months. Just how horrific is the economy that Powell is saying this stuff after the Fed began buying assets in:
- The Treasury markets (US sovereign debt)
- The municipal bond markets (debt issued by states and cities)
- The corporate bond markets (debt issued by corporations)
- The commercial paper markets (short-term corporate debt market)
- And the asset-backed security markets (everything from student loans to certificates of deposit and more)?
You get my point.
This is why we need to be extra careful with our investments here. Sure, let the market continue to rally and make you some money… but always keep an eye on the exits. Because at some point, the market is going to adjust to economic realities. And when it does, we could see a horrific crash.
Tomorrow I’ll outline one of the metrics I use to identify when a crash is about to hit.
Editor, Money & Crisis