This past week, I had many conversations with clients and other financial professionals about where the economy goes from here.
There is no shortage of strong opinions about the current economic environment brought about by the restraints placed on the economy with the stated goal of protecting public health. I’m sure you have your opinion too.
I’ll put all that aside and focus on where we go from here economically speaking. Will we have a V shaped recovery? L-shaped?
I commented on this in my June newsletter soon to be sent to our firm’s clients.
I have long been skeptical as to the health of the US economy and have stated so often over the past several years.
That is not an indictment of any current or prior politician or policy; rather it has been a sharp criticism of Federal Reserve policies which were creating what I perceived to be an artificial economy.
Peter Schiff recently commented on this(emphasis added):
The economy was booming. The stock market was setting records. Then coronavirus came along and governments shut things down to minimize the pandemic. That led to massive layoffs and a nasty recession. But once states open up, things will spring back to life and the economy will go back to being great again.
That’s the mainstream narrative. But it’s not based on reality.
In truth, the economy was a Fed-induced bubble before the pandemic. The central bank has managed to reinflate the stock market bubble despite the economic destruction, but it is nothing but a Fed-induced sugar high.And the economy won’t likely rebound quickly, even after things open up.
There are all kinds of reasons to doubt the quick economic recovery narrative. We’ve reported on the number of over-leveraged zombie companies, skyrocketing household debt, the battered labor market, and a potential cash-flow crisis even after the economy gets moving.
Now we have another sign of long-term economic trouble. A survey conducted by financial services company Azlo found that nearly half of small business owners think they will eventually have to close their businesses for good.
Forty-seven percent of the small business owners surveyed said they anticipate shutting down, and 41% said they are looking for full-time work elsewhere.
This is on top of the small businesses that have already shut down and will never reopen.
The survey also asked questions about the Paycheck Protection Program (PPP) instituted through the CARES Act. The results were less than stellar, as Newsweek reports.
Less than half of participants—38 percent—involved in Azlo’s recent survey applied for PPP loans. Of those who did apply, 37% said the program was slow to distribute funds and 20% described the process as ‘painful,’ the company reported.”
It’s absurd to think the economy is going to come roaring back when nearly half of small business owners expect to shut down. Small businesses employ 58.9 million Americans, making up 47.5% of the country’s total employee workforce.
That’s not good news, quite the opposite – it’s dismal news.
The Fed’s response as Mr. Schiff notes is more of the same.
I am reminded of what Albert Einstein said about the definition of insanity – doing the same thing over and over again while somehow expecting to get a different result.
Today’s monetary policies fit Mr. Einstein’s definition of insanity perfectly.
Each time a bubble bursts, and the current bubble is now unraveling, the monetary policies pursued to create the illusion of prosperity become more extreme and less effective. In other words, it takes more stimulus to get fewer results.
I have my doubts about an instant recovery.
Small business destruction eliminates vital employment infrastructure that won’t quickly be replaced.
Entrepreneurs will be hesitant to invest in a new business given the lockdown response of many states to the COVID 19 situation. Regardless as to how you feel about the policies that have been pursued in response to COVID 19, the fact is that there will be far fewer entrepreneurs investing in the economy moving ahead since there is a real possibility that a fledgling enterprise could be shut down and destroyed by a future executive order.
Instead, it’s my view that most would-be entrepreneurs or investors in the economy will simply opt to “keep their powder dry”, preserving investment capital until the dust settles at some future point.
And, many will never invest. They won’t trust the politicians to allow them to pursue their small business dreams.
That, in my view, will be the biggest obstacle to a viable economic recovery.
As far as the stimulus packages that have been passed (and more proposed), these economic aid packages referred to as stimuli should actually be called sustenance packages. Stimulus encourages investment; these programs largely provide money to allow the recipients to subsist for a while.
On another note, Federal Reserve Board nominee, Judy Shelton, whose appointment seems to be stalled at the moment made some interesting comments last week.
In an interview, she stated that she favors a gold-backed digital currency. Not surprisingly many of the Washington politicians are opposed to Ms. Shelton’s appointment. A gold-backed currency automatically imposes fiscal restraint on politicians making wild, out of thin air, money creation impossible.
Since my clients and friends are savers and investors, I side with them. Such a monetary system would help to preserve the purchasing power of the money they’ve saved in IRA’s and 401(k) plans.
Ms. Shelton recently offered her views10 on how a system based on gold might work in a recent interview (emphasis added).
“I don’t see it so much as returning [to the gold standard], more like ‘back to the future.’ I think that what a gold standard stands for is monetary discipline for its own sake. Money is supposed to be a unit of account, a reliable measure and a dependable store of value. It really shouldn’t be subject to who’s the chairman of the Federal Reserve.”
This from the article reporting on Ms. Shelton’s thoughts (emphasis added):
According to Shelton, a “futuristic” vision of the gold standard may involve a digital currency component. She said that central banks are “not serving the private sector in providing that reliable unit of account […] under the gold standard, you did have that stability, and I think that’s what’s missing […] it could be used in a very ‘cryptocurrency way.’”
Engaging with the emerging sector of digital currencies is not wholly new for Shelton, who has previously advocated for a digital dollar’s potential in helping to “preserve the primacy” of the U.S. currency worldwide.
For Shelton, the U.S. needs a “reset” away from the “distortions” of the Fed over the past half-century. She has previously argued that the Federal Reserve’s current mandate flies in the face of a market-led society.
Central bank activism, for Shelton, hinders the ability of the market to function free from centrally planned overreach. Here she overlaps with proponents of Bitcoin (BTC) who argue that blockchain technology can ensure that the currency will remain immune to any single entity’s attempts to “manipulate” its value.
Shelton might well be sympathetic to advocates of digital scarcity who claim that Bitcoin can induce a deflationary monetary policy by serving as a reserve currency with a finite supply.
Yet she has also said that she is open to an approach where the Fed would target a dollar price for gold “by linking the supply of money and credit to gold”.
Moving ahead, as I have stated, I believe we will see deflation followed by inflation assuming money creation continues.
Should money printing continue, it’s inevitable that at some future point a monetary system like the one that Ms. Shelton is discussing will be adopted somewhere in the world. And, when it is put into use, it will in all likelihood become very popular very quickly.
I believe the two-bucket approach remains the best tactic to utilize in your portfolio from my perspective since the timing of the transition from deflation to inflation is very difficult to determine.