The US government had an unprecedented response to the economic fallout of the COVID-19 pandemic spending more than $2 trillion bailing out US corporations, “small businesses,” mortgage holders, and student loan holders—i.e. already accumulated capital (only $218 billion of this bailout went to stimulus checks, and many Americans still haven’t gotten theirs). It used all of its weapons to combat recession right out of the gate, but the goal seems to be to keep people invested in the stock market.
There is no correlation between stock prices and the economy.
This has never been clearer than right now. 40 million people are unemployed. The US economy is in shatters. A huge amount of wealth has been erased. Debt has surpassed equity. But April and May were “record breaking” months for the stock market.
Before the bailout, the stock market crashed primarily because investors were fleeing historically less stable (higher risk) growth assets (stocks) for cash. Normally investors would flee to more stable (lower risk) assets like bonds, but the government lowered interest rates to unprecedented levels (sometimes negative) in order to lower the cost of money in the economy or increase access to capital. This caused both bonds and stocks to crash. Institutional investors as well as personal investors decided to cut their losses and sell sell sell into cash. This caused the price of many stocks to drop below the value of the companies they represent ownership in.
At this point the government decided to provide bailout relief to US companies primarily through something called the Paycheck Protection Program (PPP loans). Access to these loans was privileged (you had to go through your bank). Information on how to apply was privileged (it wasn’t made clear how to apply or who could qualify even after all the money had been given out). Many banks flat out refused to process applications because they didn’t want to be at risk for repayment even though these were supposed to be 100% forgivable loans. This classification is problematic in itself since the criteria to qualify for 100% forgiveness wasn’t made clear until months later. Even though applications are now available, the process is murky at best. This is a HUGE problem because who decides eligibility for forgiveness? Who is going to investigate and enforce misappropriation of this money? The US Government. They will be able to pick and choose who has to repay and who doesn’t. There already have been reports of companies getting access to this money who weren’t supposed to in the first place.
What counts as eligibility for forgiveness?
Payroll (including executive and personal pay)
Mortgage interest expenses
How does this all affect the stock market?
Remember how investors fled stocks in favor of cash and that caused the market to crash? Well this massive influx of cash specifically in the hands of businesses and investors (those who already have capital—stock owners—and the suspension of mortgage and student loan payments) allowed investors to buy back stocks while they were cheap since they had lower costs and extra free cash. This caused the stock market to “bounce back” very quickly. Investors had access to an unprecedented amount of free money (0 risk money) and were allowed to buy stocks with it. Meanwhile 20.5 million jobs were lost in a single month. People who were not in a place to benefit from the stimulus suffered (many still haven’t received their check). They lost their jobs, they were evicted, they couldn’t even afford basic health care during a pandemic (and this is still happening). This has been a great transfer of wealth from the poor to the rich.
All of this is problematic on its own. But what happens if there is a second wave of the coronavirus? What happens if our economy has to shut down again? Well, we have zero tools left, so Adam Smith’s invisible hand will be allowed to run its course. If we lost 40 million jobs during this time of unprecedented economic stimulus imagine what will happen when we have no stimulus to give. Investors have poured their cash back into the markets (we know this because the value of assets in the market is about equal to what it was before the crash). What if it crashes again? Investors will be forced to sell at a loss resulting in the loss of wealth. The capital owning class will be decimated. It could be argued they had it coming. This will have a devastating effect on the economy as a whole because companies will have less money. Corporations will close their doors. Jobs will be lost and will take a LONG time to recover. Banks will foreclose on mortgages because they will need the cash to pay for their own debt. Bankruptcies will spike to unprecedented levels.
We are living in a time of deleveraging.
Corporations have accumulated massive amounts of debt over the last decade of historically low interest rates. Then equity shrank due to the economic shutdown, similar to when your home value drops below your mortgage owed. The federal reserve is trying to inject cash into the economy through stimulus (to pay down this debt) but for some reason they decided to give it to corporations instead of people who can’t pay their bills because they lost their job due to the pandemic, ignoring a huge part of the problem, and we are going to see it all come crumbling down.
How the Economic Machine Works.
American billionaire hedge fund manager and philanthropist, Ray Dalio has an excellent video on how economies work that is helpful in understanding economic cycles. He believes we are heading into a global depression rather than a recession. This is in stark contrast to the rest of the investor world who seem to believe we are going to get back to normal by next year, which is absolutely ridiculous since the coronavirus is still here and getting worse every day.
We are at an inflection point.
There is hope in all of this. Things are going to change—they have to. Inequality will be addressed. We are moving into an incredible time of opportunity for those who are willing to embody change. When everything crashes everything is equalized—reset. Bad companies, bad practices, and bad policies will crumble. It will be up to the innovators and the dreamers to rebuild the world better than it was before. Do not stand idle. Get activated. Get involved. Your time is now.
“Everything is dependent on the behavior of those who have their hands on the levers of power”
-Ray Dalio from “What coronavirus means for the global economy”