Tuesday , 27 October 2020


Stimulus Won’t Prevent Next Leg Down In U.S. Stocks Here’s Why

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…After the current counter-trend rally fizzles out and the primary bear market trend resumes, in the course of the next leg down, U.S. equity prices will collapse significantly below recent lows and establish a bottom somewhere between the range of approximately 1900 and 1500 on the S&P 500 index. [In this article I explain why that is the case.]

…The combined measures by the U.S. Treasury and Fed will not be enough to prevent massive and long-lasting losses of national income, production and wealth…[which] will be the most severe since the Great Depression. [In addition,] they will not ultimately prevent the occurrence of another massive leg down in U.S. equities.

…Economists at Goldman Sachs, Bank of America, Morgan Stanley and JPMorgan now all agree that:

  • the contraction in US GDP in the second quarter of 2020 will be in the order of 30%-40% – by far the largest quarterly contraction in U.S. economic history, including the Great Depression…
  • unemployment is expected to peak at 20%-30% and
  • business bankruptcies are expected to skyrocket to unprecedented levels.

Economists, however, currently disagree on the timing of the economic recovery and regarding how quickly the U..S economy will be able to re-achieve prior levels output and employment. My own estimates is that:

  • the U.S. will not reach prior peak levels of output until the fourth quarter of 2021, at the earliest…[and that] full employment may not be reached until 2030, or beyond.

On Thursday, the U.S. Fed announced an emergency package worth up to $2.3 trillion….[but this] fiscal and monetary stimulus will not be enough to prevent a deep and prolonged economic crisis – severe and prolonged losses of income (individual and business, acute and long-lasting losses of production and massive long-term losses of wealth – and an associated “second leg down” in the ongoing bear market in U.S. equities…[A major swath of detailed information supporting the above assertions can be found in the original article.]

…Some people evidently think that the U.S. government can just throw money at the problems caused by this economic crisis and repair the vast damage done such that the net impact on the value of U.S. equities is relatively minor. These people are mistaken. The money thrown at these problems will come with a high price tag in the form of higher levels of debt and higher long-term inflation and/or long-term inflation risks which will significantly impact both future growth and the discount rate at which the future cash flows of equities will be discounted.

Conclusion

Many people seem to assume that massive U.S. Treasury and U.S. Fed stimulus programs will essentially “make up” for all of the economic damage that has been done by the COVID-19 crisis…This is simply not the case.

Although Treasury and Fed programs will certainly mitigate many problems it will not come close to compensating for all of the losses of income, production and wealth that will occur. These uncompensated and essentially “unfixable” gaps represent an enormous proportion of the U.S. economy that employs an enormous number of people.

The implication of this is that the forthcoming economic crisis will not only be extremely deep but very prolonged in time. Long after the economy is “opened up” and “lock-down” measures are eased, many industries that employ huge numbers of workers will remain devastated.

Editor’s Note:  The original article by James A. Kostohryz has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy. The author’s views and conclusions are unaltered with no editorial comments included to maintain the integrity of the original article and are not to be construed as an endorsement of such by the editor. Any re-posting of this article requires a hyperlink to this post to avoid copyright infringement.

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