The coronavirus outbreak has devastated financial markets and sent shockwaves across the economy as the nation prepares for negative growth and massive job loss in the coming months. We’ll dig into the causes and how Washington is responding.
On the likelihood of a global recession
Rana Foroohar: “We're headed to a global recession. I think that there's very little doubt really at this stage that that's going to happen. Steve Mnuchin, the treasury secretary, came out the other day and said, ‘Look, we're probably going to see 20% unemployment.’ And immediately people are like, ‘Oh my gosh, that's impossible. That's unprecedented.’ Well, just today, jobless claims spiked to an all-time high. I think we could be headed there. This is about as serious a shock, certainly, as we've seen since 2008. But ... in some ways what's happening is actually closer to a 1929 type of situation, for a lot of reasons. If you overlay a graph of where the markets have been in the last few years, they've been climbing up, up, up, up, up. And, you know, I've discussed that with you in the past and they're now starting to go down, down, down, down, down. And if you overlay a graph of the last, say, 10 years with the period from 1918, which is right around the time of the Spanish flu, until 1932, you'd be surprised how similar those two graphs are.”
This is about as serious a shock, certainly, as we've seen since 2008. But ... in some ways what's happening is actually closer to a 1929 type of situation.Rana Foroohar
Why was the U.S. economy so vulnerable?
Rana Foroohar: “I don't know which metaphor to use, the chicken and the egg or the tail wagging the dog. I mean, what's so interesting is, if I can go back and talk a little bit of history here, if you think about where the economy was before these changes really started, so I’d pin that around the 1970s. At that point, the financial system, the markets, were just a facilitator for the real economy. Banks lent money mainly to homeowners and businesses. The businesses grew, they employed people. Individuals got mortgages, they bought a home, they made most of their money from income.
“But over the course of 40 years, the system changed. And now the majority of what banks do is actually not lending, it's mostly trading, which helps to prop up share prices. You had a variety of changes, small changes throughout different areas of policy to have the tax code, corporate governance, the way in which companies can buy back their own shares, for example. And this is an important thing right now, because buybacks are kind of a wonky concept, but they're quite important because, you remember the Trump tax cuts of 2017? Well, most of that money — which, you know, of course, the president falsely told us, oh, that's all going to go back on the main street, it’s going to be great, companies are going to employ lots of people — the vast majority of that money went into corporations buying back their own shares. That artificially pushes up share prices because it sort of takes supply off the market. But the majority of shares, 80% of all stocks, are owned by 12% of the population. So that's enriching a very, very small part of the population. Meanwhile, average real weekly wages are pretty much where they have been since the 1970s. So those of us who make most of our money from paychecks, we haven't seen a real wage gain in some time. The people that own assets have gotten very, very rich.
“The economy is now so dependent on that bubble. And to be fair, all those of us who have 401ks — and that's, you know, a little over half of the population — we're kind of all in this in a bit of a Faustian bargain … This is why there's so much free-floating anxiety right now. People are looking at their retirement and they're seeing it just go.”
Are these problems unique to the U.S?
Rana Foroohar: “I think a number of other countries that have stronger underlying economies — Yes, they're all being hit by coronavirus right now, but I think that a number of other countries are going to recover faster and better, whereas I think that these kind of fundamental problems in the American economy that we're talking about here are going to actually prevent a quick recovery. And one thing I would point to: It's interesting that in recent days, many, many nations have announced major fiscal stimulus programs. There's going to be bailouts, there's going to be individual cash payments to people; in Europe in particular we're seeing a bolstering of the social safety net, which was already stronger than it was in America. Lots of spending, and we can parse that. But here's the interesting thing: Stock markets in Asia and Europe are actually starting to pick up faster than in the U.S.. And to me, that says investors are worried about the U.S. economy fundamentally in a way that they are not worried about the rest of the world.
“... It's about choices as a nation. I think that we've been making the wrong choices and we've been bolstering the wrong things for some time. And now the chickens are coming home to roost.”
As a nation I think that we've been making the wrong choices and we've been bolstering the wrong things for some time. And now the chickens are coming home to roost.Rana Foroohar
Will the economy make a full recovery?
Rana Foroohar: “Economists often talk about different shapes of recovery, a market recovery and also a real economic recovery. They talk about a V recovery where maybe the markets go down very quickly but then they come up quickly. There is a U recovery where it kind of goes down really sharply and then it takes a while for them to come back up. There's a W, which is up and down, up and down. And then there's an L, which is really what you don't want. They go down and then they kind of flatline. I'm worried about that. I definitely don't think we're in a V. I personally don't think we're in a U. I think we're in a W, potentially headed to an L when it comes to at least U.S. stock prices. And this is going to happen over time, I mean, this may take years to play out.
“But when I look out in the global economy right now and I think about all the things that have boosted the price of big U.S. companies in the last 40 years: Globalization, well, that's changing. You know, the U.S. and China are decoupling. I think coronavirus and all the fragilities that it has exposed in supply chains are actually going to make the world much more regional and local for reasons that are both good and bad. So, that's point number one. Demographically, the U.S. is aging. Most of the developed world is aging. Growth is basically people plus productivity, so where's the growth in population? Well, it's in emerging markets, typically. Technological change is going to take more jobs. I personally think a lot of the jobs that are being lost right now in the coronavirus may not come back. I think companies are going to try and replace people with software. That's going to become a political problem. So all of these factors, and all the debt and kind of financial engineering that I mentioned have buoyed stock prices. I don't think we're going to reset to that period again.”
What's your financial advice to Americans right now?
Michelle Singletary: “Instead of hoarding toilet paper, hoard cash. You just have to pay the essentials right now. Concentrate on the things you absolutely need. And even food, for example, people are so panicked. Only by what you need for maybe a weekly or bi-weekly basis because you don't know what's going to happen ... if you’ve been aggressively paying off your credit card debt, pull back on that, just make the minimum payments. The thing right now that is of value is cash, so that you can pay for the things that you need."
This virus is exposing how unhealthy our financial lives have been.Michelle Singletary
Is now the time to sell off assets?
Michelle Singletary: “Everybody's asking me, 'What should I do now?' And none of us know what's going to happen in the next six months to a year. I do know that once you sell, you lock in your losses. And for some people, they're like, ‘I don't care. I can't take this anymore.’ And if that's you, that may be what you have to do. I'm not doing that, I'm not panicking right now … when we talk about financial resources, we mostly focus on retirement investing. But if you don't have debt right now, if you have paid off your mortgage, you can weather this a little bit better. And to this point about this sort of financial engineering, there was a whole discussion about, ‘Oh, don't pay off your mortgage, put the money in the market.’ And I was beating that drum for years, how you cannot listen to the money changers when they tell you that because that's to their advantage. And now I don't look so crazy right now when I told people, don't take a mortgage into retirement, pay it off as quickly as you can. Because the less debt you have to service, you can weather this a little bit better.”
Rana Foroohar: “I wouldn't sell right now. Just … look for that W, wait for an uptick, we'll get another one. But then I think we will get a correction. At that point, talk to your adviser, think about re-allocation.”
Can Americans rely on the government stimulus package for relief?
Michelle Singletary: “It’s too little, too late is what my feelings are saying right now. And even as they're discussing those payments to send people, when you look at the details they’re still zeroing out some of the most vulnerable people in the population. So the people who are going to get the checks really aren't the people who absolutely need them … Every dollar is precious to me, so I would never say, ‘Oh, $600 or a $1,000 is not a lot of money.’ But how far will that last when people are paying 40 or 50% of their income for housing, when they still have co-payments for health insurance or no health insurance?
“... I'm so angry at how, you know, now they want to do this huge bailout when all along people have been saying, ‘We need to take care of everyone. We need to have a system where people aren't gonna go broke when they need health care. We need a system where people have a living wage.’ We look at that, you know, wages have been depressed forever. And so now this virus is exposing how unhealthy our financial lives have been. And it just pains me because those of us who are called to give people financial advice, what can we say? There is no money.”
From The Reading List
Financial Times: "This is the big one" — "What a week in the Swamp, and the country. As coronavirus spreads, the financial markets go into meltdown and the economy braces for what now looks like a good chance of recession for 2020, there is only one silver lining — we have negative real interest rates on 30-year Treasury bills.
"Let me be clear: that’s not good news for America’s growth prospects. The flight from risk, the fall in the dollar and the fact that the bond markets are telling us that we are not only in the post-American world, but the post-growth world, is all very disturbing news.
"... Financial markets are behaving very much like 2008 — risky bets being called in, and pretty much all assets (except gold!) have fallen. On that note, I have to remind Swampians that I called both the rise in gold and the synchronised fall of the dollar and stocks many months ago.
We all know the central bankers are out of ammunition — interest rates are already so low, they can’t have much more impact, not that this will stop the cuts from coming. What we need now in practical terms is a major public health-related fiscal stimulus, followed by a major bipartisan infrastructure programme. That’s the only thing that I can think of that would calm things."
The Washington Post: "How do you not panic about what’s happening to your retirement account? Just don’t look." — "I haven’t looked at my 401(k) retirement account since the stock market began its nose-dive in response to the spread of the coronavirus in the United States.
"With the constant four-digit drops in the Dow Jones industrial average, I’ve been tempted to see how much I’ve lost — at least on paper. But I’m not planning to make any changes, so there’s no reason to check how it’s doing.
"'I’ve lost $70,000 in the past 20 days,' a friend wrote after she couldn’t resist looking. She’s several years away from retirement and has a solid financial plan — and savings. She promised to stop checking out her 401(k).
"'My feet are planted in faith,' she said after we talked."
Financial Times: "Bernanke and Yellen: the Federal Reserve must reduce long-term damage from coronavirus" — "Around the world, policymakers are grappling with the effects of the devastating coronavirus.
"Experts on public health are taking the leading role, as they should. For their part, fiscal policymakers are helping to fund the public health response while providing critical aid to people whose lives and livelihoods have been shattered by the virus and its effects. Fiscal policy will certainly have to do more as the size of the hit to economic activity becomes apparent.
"Central banks, like the US Federal Reserve, also have a useful role to play. Some of the actions recently announced by the Fed, including cutting the short-term policy rate nearly to zero and preparing to buy at least $700bn in Treasury debt and mortgage-backed securities, are superficially similar to those taken by monetary policymakers during the 2008 financial crisis.
"However, the underlying challenges today are quite different. Back then, the near-collapse of the financial system froze credit and spending; the goal of monetary policy was to restart both. Now, the problem is not originating from financial markets: they are only reflecting underlying concerns about the potential damage caused by the coronavirus pandemic, which of course monetary policy cannot influence."
This program aired on March 20, 2020.