WHY 2021 LIKELY WON'T BRING AS MUCH RELIEF AS MANY EXPECT
The major point I need to emphasize right out of the gate is that it can't possibly be lost on anyone that what we had was a health crisis that morphed into an economic crisis and then somehow managed to morph into a financial crisis that was 10 times worse than anything we saw in the Great Financial Crisis, one that forced the U.S. Federal Reserve and Bank of Canada to probe the outer limits of monetary intervention.
We simply refuse to stop these cycles of redressing debt crises by adding more debt, which merely compounds the adverse effects from the recession that is inevitable, and yet at the peak of the cycle, nobody ever seems to be prepared for one.
The vaccination process is no reason to believe we are not in some form of economic depression that has only been disguised by unprecedented policy stimulus. Just because your kid has training wheels doesn't mean they know how to ride the bike. We have an economy on our hands that could not survive without large-scale deficit finance and central banks suddenly acting like hedge-fund managers. This is why it's going to be a depression, because what comes next is a secular change in attitudes toward credit and towards savings.
I mean, seriously, more than half of American households didn't have enough cash on hand to even get through three months of a job loss — quite remarkable when you consider we went into this mess with a 50-year low unemployment rate of 3.5 per cent. Not to mention the corpo
rate sector where, for some reason, the word “liquidity” became a dirty nine-letter word this past cycle. Now every business has working capital it has to cover with a fraction of last year's cash flow.
This got me thinking about how the future will be one of treating savings as sacrosanct. Beyond the quarter or two of pent-up demand release in 2021, frugality is going to emerge as the primary theme. It's not the end of the world, either, unless you're an advocate for a sustainable and vigorous economic expansion.
In a narrow view, the markets are telling us that the “new normal” will be a “reversion to the mean” where life goes back to normal. To that, I say: not so fast. People will surely go back to restaurants, hotels and airplane travel in due course, but don't think for a second that there will not be residual impacts. The narrative emerging from the recent trading action in the equity market tells us that we are going back to our old lifestyles, and that is what I would bet heavily against.
I have seen, and continue to see, secular shifts in behaviour
that will transcend a couple of quarters of pent-up demand release: we will be living with a permanently higher equilibrium personal savings rate and a permanently lower labour force participation rate. And if we do somehow revert to the old normal, remember that the prior 10-year period was one of low growth, low inflation and low interest rates. I don't see that changing because the secular forces of aging demographics, massive debt burdens and extreme income and wealth inequalities, if anything, have become accentuated by the pandemic.
What the world looks like when the crisis ends is truly anyone's guess, but I will say with 100-percent clarity that it is going to look a lot different than it did before. I sense that some of the structural changes in our economy could be long-lasting.
Global supply chains could shrink and, in some cases, we might see the full repatriation of manufacturing in certain industries, for instance, pharmaceuticals, food and high-tech such as semiconductors — areas deemed to be in the realm of national security.
Before the pandemic, the emphasis was on just-in-time production, with parts being delivered just when they were needed in the manufacturing process. In the post-pandemic period, the emphasis could shift, to some extent, to just-in-case supply chains, emphasizing proximity and certainty of delivery.
Beyond the questions of government policy, we have to consider at the individual level how months of isolation and distancing and, in the future, a fear the pandemic mutates are going to fundamentally alter our lifestyles. It will have a profound influence, not just on the way we live, but on how we conduct ourselves in our personal and business lives.
Then we have to consider, when we get to the other side, the massive government debts we will have built up and how that, along with even more bloated central-bank balance sheets, will get dealt with. Will the debts get monetized, or not? Or, God forbid, will taxes have to go up on the middle-class?
Just some things to contemplate in 2021 as we get our booster shots and then race to the local brasserie. The stock market is not the economy, so don't believe for a second that record equity prices mean the road ahead isn't going to be a bumpy one.