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Musings Report 2020-13 3-21-20 There's No Going Back, We Can Only Go Forward
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There's No Going Back, We Can Only Go Forward
Last week I had a memorable dream that summed up my own perception of the post-pandemic world.
To reach a jobsite for potential work, I drove to the end of a road by a stream, crossed the shallow watercourse and walked over rough, hilly terrain to the site. On my way back to my car, I reached the summit of a hill and looking down, was shocked to see the stream was now a raging river that could no longer be crossed. Adding to my sense of disorientation, I'd left my mobile phone in my car and could not even notify anyone that I was unable to get back to my car and home.
In the dream, I reckoned a heavy rain had fallen far upstream, engorging the river. Since the weather was calm in my locale, this raging river was completely unexpected.
When I awoke, this dream seemed like a remarkable metaphor: while we were heading off to future work, a storm that we couldn't see flooded the river, and now we can't go back, we can only go forward.
In my dream, I examined the stretch of river in front of me, looking for any line of rocks I might be able to use to cross the raging water. But there were no places to ford that weren't extremely hazardous.
Globally, everyone is eyeing the torrential river, either seeking a safe crossing or expecting the water to recede. In either case, the expectation is a return to the pre-pandemic world is just a matter of time.
I think the situation is akin to being injured. Since I worked for decades in construction, I've had numerous potentially serious injuries, including slipping off roofs, being on ladders that fell, etc. Immediately after impact, your first instinct is to assess how badly you're injured. Of course we all hope we're not seriously hurt, but initial relief can be misleading: we might have suffered internal injuries that we can't feel.
That's the global situation: we want to assure ourselves the injury is minor and we'll be back on our feet in no time, but I think the financial-economic injuries are severe and to some branches of global capital and labor, fatal.
Those in power around the world crave one thing above all else: control. If you can't control the situation and key assets, then what good is your supposed power? If you can't control the situation and key assets, your power is illusory.
Those in power cannot completely control the forces unleashed by the pandemic. The tide has turned, and everyone trying to return their corner of the world to its pre-pandemic conditions is swimming against the tide--or shoveling sand against the tide, if you prefer that analogy. In either case, they will exhaust themselves and the tide will continue on. regardless of their titanic efforts to print money and maintain control of their populaces.
In my recent book, I focused on intangible capital, which includes all the forms of capital that cannot be commoditized and purchased for cash like goods and services. Intangible capital includes social capital, social stability, a diverse, resilient local economy and control of one's own capital.
What I see is a global collapse of intangible capital that is invisible to most people. This includes confidence, trust in institutions and a complacent sense that the tide is carrying us all to greater prosperity.
The tide has reversed, and the key dynamics are income, net worth and costs. As I explain in today's blog post, incomes are falling and will continue to fall. Since income is the foundation of asset valuations, asset values will also fall. This will reverse the "wealth effect" that supported the enormous increases in spending and borrowing globally.
When our net worth is rising, we feel wealthier and are more likely to borrow and spend more, confident that our rising wealth will support the debt and higher expenditures. When our assets are declining in value, we feel poorer and are less likely to borrow and spend.
Income is fragile and prone to instant decay, while costs are extremely resistant to declines.
Consider stock valuations: the core driver is profit, which is revenues minus costs. As revenues drop and costs rise, profits vanish literally overnight. That sudden erosion of profits is global, and it will affect companies previously perceived as bulletproof. Facebook and Google depend on advertising, and with the global economy in free-fall, what's the point in wasting scarce cash on marketing? Essentially no one needs a $1,000 iPhone or a $40,000 Tesla. Aspirational spending is as fragile as income.
Consider real estate: commercial real estate is based on the income generated by enterprises renting space. If businesses fold or stop paying rent, the value of the property falls accordingly.
Even residential real estate is intimately connected to income: as household incomes plummet, the number of potential buyers plummets, too. Institutional buyers of houses base the value on rental income, just like commercial property. As household income plummets, fewer people can afford sky-high rents, and so supply exceeds demand and rents will fall accordingly.
Consider bonds: the value of any bond, government or corporate, is based on the yield paid to the owner. While the general expectation is that yields will fall to zero because central banks are buying bonds, this may be less of a guarantee than generally assumed. The volume of bonds being issued may well exceed central bank buying, and yields (and interest rates) will rise despite central bank intervention.
The world depends on expanding debt to pay for government services and private-sector spending. Debt is also dependent on income; lenders who issue loans to households and enterprises with faltering income are very likely to lose money as these marginal borrowers default.
As income falls, lending dries up, as lenders cannot afford to risk making loans to people and businesses that are practically guaranteed to default. This is especially true for borrowers who are already burdened by existing debts.
As incomes decline, asset values decline and borrowing dries up. Once borrowing dries up, spending dries up, and enterprises and governments must cut payrolls by any means available: don't replace retiring employees, cut wages and benefits, and eliminate overtime and bonuses.
As stock values fall, so do the value of employee stock options--another example of the reverse wealth effect.
Meanwhile, costs will continue rising as cash-strapped governments eventually seek more tax revenues and supply-chain shocks lead to higher prices.
We cannot go back to the pre-pandemic side of the river, and it's dangerous to focus on returning to a time that has already been lost.
Highlights of the Blog
The New (Forced) Frugality 3/28/20
The Pandemic Is Accelerating the Breakdown That Began a Decade Ago 3/25/20
Helicopter Money: Short-Term Relief Won't Cure our Financial Disease 3/23/20
Best Thing That Happened To Me This Week
Since we're home anyway, tackled a long-shunned repair of broken sash cords in double-hung windows. Not an easy job (due to repairing termite damage) but satisfying once completed.
From Left Field
Perspectives on the Pandemic with Dr. John Ioannidis (1:02 hours) (via John F. M.D.)
Scientific Approach to Avoid Coronavirus COVID-19 Part 1 (20 minutes) (via Simon H.)
Masks, Gloves and Making Disinfectants Part 2 (24 minutes) (via Simon H.)
Reusing Masks, Ozone and UV Decontamination Part 3 (20 minutes) (via Simon H.)
The Virus Can Be Stopped, but Only With Harsh Steps, Experts Say
Uncharted Territory: Nate Hagens on coronavirus and the economy (41 minutes)
The People in Charge See an Opportunity: Around the world, rulers are using the pandemic as an excuse to grab more power. And the public is going along with it.
How corona broke the system: The corona crisis sends shockwaves through political, economic and social systems. The status quo simply cannot continue
Coronavirus is the greatest challenge capitalism has ever faced: will a new system result? A world constrained by pandemics is one in which the balance of power could shift dramatically back in favour of workers.
The coronavirus did not escape from a lab. Here's how we know.
A Greater Depression?
An Often Overlooked Region of India Is a Beacon to the World for Taking on the Coronavirus -- Kerala....
Under coronavirus, pro-market ideologies are overturned around the world. But it's too little, too late
"From the end spring new beginnings." Pliny the Elder
Thanks for reading--
charles |
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