Service Sector Has Been Walloped By The Virus
Services account for 70% of the US economy, but presently the sector is in meltdown. According to the analysts at Wolf Street: Employment contracted sharply and hours were reduced for those still employed. The employment index plunged from +6.1 to -23.8, also the lowest level on record
Retailers got whacked. The Retail Sales Index of the Texas Retail Outlook Survey collapsed from the already beaten-down level of -2.5 in February to an epic all-time low of -82.6 in March the general business activity index collapsed from the beaten down level of -5.0 to a historic low of -84.2
Comments from retail executives were somber: Most of our business has gone to zero except for essential locations such as hospitals, military bases and prisons We are contemplating at this moment sending most employees home while our owners determine whether they can afford to pay reduced salaries and cover benefits for a short period while we see if things improve or worsen
Does Depression Look The Same In Everyone
Depression can affect people differently, depending on their age.
Children with depression may be anxious, cranky, pretend to be sick, refuse to go to school, cling to a parent, or worry that a parent may die.
Older children and teens with depression may get into trouble at school, sulk, be easily frustrated feel restless, or have low self-esteem. They also may have other disorders, such as anxiety and eating disorders, attention-deficit hyperactivity disorder, or substance use disorder. Older children and teens are more likely to experience excessive sleepiness and increased appetite . In adolescence, females begin to experience depression more often than males, likely due to the biological, life cycle, and hormonal factors unique to women.
Younger adults with depression are more likely to be irritable, complain of weight gain and hypersomnia, and have a negative view of life and the future. They often have other disorders, such as generalized anxiety disorder, social phobia, panic disorder, and substance use disorders.
Middle-aged adults with depression may have more depressive episodes, decreased libido, middle-of-the-night insomnia, or early morning awakening. They also may more frequently report having gastrointestinal symptoms such as diarrhea or constipation.
The Corporate Debt Bubble
Many companies went into this episode highly leveraged. They took advantage of low interest rates to issue debts, often for stock buybacks to engineer earnings per share growth.
Corporate debt levels, especially in the near junk bond BBB space, exploded over the last decade. The volume of worldwide corporate debt hit an all-time high of $13.5 trillion at the end of 2019.
But the overall quality of bonds fell below levels seen before the global financial crisis with 51% of all new investment-grade bonds rated BBB, the lowest investment grade rating available.
This high degree of corporate leverage complicates the revenue losses occurring. Even with a mild downturn, we would expect to see over a trillion dollars of investment-grade debt downgraded to below investment grade or junk, and we will almost certainly see corporate default rates in this downturn that are higher than the 2008 financial crisis.
Lending these companies more money will only compound the long-run problem resulting from over-leverage and make the companies even more vulnerable to failure in the long run.
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Are We Facing A Depression How Multifamily Investors Should Prepare
Rod Khleif Real Estate Investor, Mentor, Coach, Host, Lifetime Cash Flow Through Real Estate Podcast.
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At the time of writing, there is much consternation about the current state of the economy. Notable investor Michael Burry recently said that the stock market crash is not finished. Famed investor Mark Mobius thinks it is going to get worse from here . Inflation is still at historic highs, and GDP has been negative for both Q1 and Q2.
Given this news, I believe the U.S. economy is headed for a depression. Ill explore this more fully below.
How Did We Get Here?
There is no doubt that the economy has been on a roller coaster over the past two and a half years.
Prior to the pandemic, the economy was in the midst of the longest peacetime expansion in history, growing at an annual rate of 2% to 3%. However, once the pandemic and its related closures kicked in, economic activity plunged, falling throughout 2020. An unprecedented government stimulus program turned things around quickly, and GDP bounced back, growing at an astounding annual rate of 5.5% by the end of 2021a wild swing, to be sure.
But the historical amount of stimulus, combined with factory closures and supply chain issues, caused inflation to surge. The inflation rate from June 2021 to June 2022 was 9.1%, a figure not seen in more than 40 years, and the increase from July 2021 to July 2022 was only slightly better, at 8.5%.
How Interest Rates Impact Inflation
Why I Believe We Are Headed for A Depression
Prepare For Central Bank Digital Currencies
Hunt strongly believes a global depression would cause a major reset of the financial system, which would change the way we transact forever.
He says while investment banks and corporate finance may continue to exist, traditional bank branches will be a thing of the past.
The kind of thing that you do with a savings account and a cheque book youre going to be transitioning, he said.
This is actually a destruction event of the traditional finance system.
In its place, Hunt says, will be a system centred around central bank digital currencies.
This is a surveillance finance era. Central Bank digital tokens as a currency will be a powerful force for , he said.
Theyll have all your data centrally. They will have centralized mega-data and they can stop you from making certain purchases.
Money has always been a point of control. Youre going to have a system where they can control, curtail.
And if they decided theres too much inflation, they could just hand a 20 per cent hair cut across everybodys wallets. Guess what youll spend less.
Hunt believes China may already be planning a digital currency pegged to gold, and has concerns about where the technology could be headed.
He believes the people of the world will blindly agree to the new system, because they will fell like they have no other choice.
When you impoverish someone and put them in stress, theyll sign anything, he said.
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The Housing Bubble 20
The average home sale price has surpassed the average home sale price just before the Great Recession housing crash while real median income has recovered to just about the same levels.
The underlying household economics today arent really much different than they were prior to the Great Recession, but the economic sudden shocks are much worse.
As more people lose their jobs due to business failures and general contraction, the consumer market will inevitably begin to foreclose on residential mortgages. Economists from Moodys Analytics predict as many as 30% of Americans with home loans about 15 million households – could stop paying if the U.S. economy remains closed through the summer or beyond.
As we saw in The Great Recession, a few foreclosures can have a cascading effect driving down prices for whole neighborhoods, putting homeowners underwater and causing more foreclosures.
What Is A Recession
An economic recession is often defined as a decline of real gross domestic product for two consecutive quarters but it’s not that simple. Over the course of a business cycle, you might see GDP contract for a period of time, but that doesn’t necessarily mean that there’s a recession.
The National Bureau of Economic Research , the century-old nonprofit that determines the start and end dates of recessions in the US, takes a broader view. The group defines recessions as “a significant decline in economic activity spread across the economy, lasting more than a few months,” with indicators including:
- Slowed industrial production and retail sales
- Lack of consumer spending
The NBER’s view of recessions takes a more holistic outlook of the economy, meaning recessions are not necessarily defined by one single factor. But many of these factors are intertwined, meaning a significant drop in something like GDP could rattle consumer spending or unemployment.
There have been 50 recessions in history, from The Copper Panic of 1785 to the 2008 Great Recession. Most recently, the US experienced its 51st recession, a two-month recession in the early months of 2020 as a reaction to the onset of the pandemic. Throughout the 19th and early 20th centuries, recessions were quite common.
Although they’re more or less a regular occurrence, and indicative of a cyclical business cycle, the duration, economic impact, and triggers of recessions can vary greatly.
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The Current Financial Landscape
Between 1929 and 1939, President Franklin D. Roosevelt passed numerous pieces of legislation aimed at stabilizing the economy. He established the FDIC to protect consumers’ bank accounts. The SEC was created to regulate the stock market, and the Social Security Act guaranteed pensions to Americans and set up an unemployment insurance program.
The programs and reforms put in place in response to the Great Depression were established in hopes that an economic downturn of parallel magnitude would unlikely be repeated. Yet, the economy took a tumble as a result of the pandemic. In July 2020, the US GDP fell a historic 33% annualized rate in the second quarter of 2020, with no other downturn in history causing a sharp decline in the economy.
So could we be heading into another depression? Well, no. Barring any major unseen circumstances, a recession that impacts the economy so deeply that it’s widely considered a depression is unlikely. However, the turbulence that rising inflation and soaring interest rates have stirred up also carry whispers of an upcoming recession.
That said, unemployment has settled back to pre-Covid levels, hovering at approximately 3.6%, according to the Bureau of Labor Statistics, which is below the unemployment rate right before the Great Recession. Meanwhile, retail sales in April of 2022 were up 0.9%. Experts say that if we see a recession, which we won’t see until 2023, it will be fairly mild.
The Case Against Recession
Despite market fears and warning signs, many economists say the economy is simply too healthy at the moment to consider current conditions a recession.
Peter Essele, head of portfolio management for Commonwealth Financial Network, says the latest U.S. jobs report should reassure investors.
Its difficult to rectify how some are claiming the economy is in recession when job growth remains well above long-term averages and wage growth is the strongest in decades, Essele said.
Quincy Krosby, chief equity strategist for LPL Financial, says the solid U.S. labor market suggests a U.S. recession is not imminent. However, if recession fears trigger a shift in consumer behavior.
Because of the markets intense focus on whether were currently in a recession or heading into one, the oft-told comment by economists that its important to watch what consumers do that counts and not what they say has become increasingly important, Krosby said.
He says U.S. consumers account for nearly 70% of the overall economy, and consumers are getting squeezed by higher gas prices, interest rates, and grocery bills. In June, the University of Michigans Surveys of Consumers consumer sentiment index fell to its lowest level dating back to the mid-1970s and has only slightly recovered subsequently.
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Americas Economic Engine Stalls
The No. 1 driver of the worlds largest economy is shopping. And Americas shoppers are tired.
After more than a year of rising prices on just about everything, with wages not keeping up, consumers have pulled back.
The hardship caused by inflation means that consumers are dipping into their savings, EY Parthenon Chief Economist Gregory Daco said in a note Friday. The personal saving rate in August remained unchanged at only 3.5%, Daco said near its lowest rate since 2008, and well below its pre-Covid level of around 9%.
Once again, the reason behind the pullback has a lot to do with the Fed.
Interest rates haverisen at a historic pace, pushing mortgage rates to their highest level in more than a decade and making it harder for businesses to grow. Eventually, the Feds rate hikes should broadly bring costs down. But in the meantime, consumers are getting a one-two punch of high borrowing rates and high prices, especially when it comes to necessities like food and housing.
Americans opened their wallets during the 2020 lockdowns, which powered the economy out of its brief-but-severe pandemic recession. Since then, government aid has evaporated and inflation has taken root, pushing prices up at their fastest rate in 40 years and sapping consumers spending power.
Energy Crisis To Cause Winter Of Discontent
Already Germany is experiencing a spiralling energy crisis as a result of the Ukraine and Russia conflict and Hunt believes the problems will spread to other parts of the northern hemisphere.
He believes rapidly increasing energy costs will lead to grannies freezing in their flats in the United Kingdom as the new Liz Truss government tries to artificially bring those prices down.
We think the northern hemisphere, particularly northern Europe, is going to have a bitter season, he said.
Well need to go back and ask ourselves what are our physical needs?
Those needs, he says, are the basics like energy, shelter, water and food.
Farming has almost been almost demonetized compared to being an investment banker, to such an extreme that we just think of them as dirty people who rummage around in the dirt, he said.
Now, boy, are they going to come back into fashion.
So the winners are going to be the farmers people who are direct providers of food and energy providers.
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Many Businesses Might Not Survive Long Enough To Get Stimulus
Many businesses shut their doors either for a lack of customers or on orders from state or local governments as emergency declarations began rolling across the country in mid-March,. Yet it could be weeks more before the business loans, bigger unemployment checks and direct payments to individuals from the stimulus plan flow into the economy.
Small businesses account for almost half of U.S. private employment. A complete collapse of even some of those enterprises not only would dash the dreams of entrepreneurs and threaten the livelihoods of many, it risks sapping the power of an eventual economic rebound as the financial distress ripples through to landlords, vendors and lenders.
Already, 50,000 retail stores have shut in just over a week across the country, putting more than 600,000 workers on furlough, according to data compiled by Bloomberg.
The National Federation of Independent Business, had a record 13,000 people register for a webinar it hosted Monday on the stimulus plan and financial resources.After the webinar ended, more than 900 emails flooded in, she said, with business owners asking: Am I going to have anything left? Will I be evicted? Will I have to file for bankruptcy? Will I be able to reopen?
The emails almost make me want to cry, Milito added. What Im hearing from members is fear, uncertainty and almost heartbreak.
Are We Headed For A Recession Or A Depression And What’s The Difference
In recent weeks, some prominent economists have pondered the idea that the current economic shock brought on by shutting down much of the American economy could trigger not just a recession, but a longer, deeper and more damaging event.
Even as the U.S. tiptoes towards recovery, with more states reopening and businesses resuming operations, the prospect of an economic collapse along the lines of the Great Depression cant be entirely ruled out, experts say.
The economy has passed the apex of the shock, said Mark Zandi, chief economist at Moodys Analytics. As the Memorial Day holiday nears and business and consumer activity are reestablished, he said the economy can expect to regain some momentum albeit at a slower rate than pre-COVID.
But Zandi added one significant, worrisome caveat. If there’s a serious second wave as businesses reopen, which is a clear risk, then were going back into recession, and this period will go down as a depression. I think the most likely scenario is that we avoid a depression, but the risks are awfully high.
Really, the key thing is going to be virus spread, as the country inches towards reopening, said Eric Freedman, chief investment officer at U.S. Bank Wealth Management. If we get into an environment where we just see transmission occur more quickly and we dont have a widespread antiviral treatment or vaccine, that would really lengthen the recovery period, he said.
He clearly sees some urgency, North said.
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Are We Headed Toward The Second Great Depression
Your life would change dramatically if the United States were to experience an economic downturn on the scale of the Great Depression. One out of four people would lose their jobs. The stock market would drop by 50%, and it would take decades, not months, to recover.
The COVID-19 pandemic caused a recession, but it’s unlikely to create a depression. Central banks around the world know how to prevent them. They make sure that banks have enough capital. They’ve lowered interest rates to zero.
Unlike the early years of the depression, Congress has used expansionary fiscal policy to cushion recessions. The CARES Act sent a $1,200 stimulus check to eligible adults earning up to $75,000. It also expanded unemployment benefits.
Inflation And Supply Chain Disruptions
Supply chain disruptions in Asia and economic sanctions against Russian oil and gas have exacerbated the U.S. inflation problem that began in 2021. The Federal Reserve also underestimated how aggressively it would need to act to bring inflation under control.
The BEA recently reported the Personal Consumption Expenditures price index rose 6.3% year-over-year in July. Core PCEthe Feds preferred measure of U.S. inflationwas up 4.6% from a year ago.
While core PCE growth is down slightly from peak levels of 5.3% in February, it remains near multidecade highs last seen in the 1980s.
Consumers are feeling the brunt of increased costs for everyday goods and services. The Bureau of Labor Statistics reported on Sept 13 that the consumer price index , a measure of the cost of living, soared by 8.3% from last year, even as gas prices started to decline.
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