1. A stronger drift away from free foreign trade and globalization toward protectionism. That will “reduce the efficiencies that result from producing in the most cost-effective locations” and ultimately reduce economic growth and spawn deflation, Shilling says. The lack of a global response to the coronavirus despite its global spread exemplifies the acceleration of this shift.
2. Bigger inventories to avoid temporary shortages, reversing the low inventories and just-in-time deliveries of manufacturing components that dominated business production before the virus.
3. Less face-to-face interaction in business and education, which will hurt airlines, hotels and commercial real estate (for office space) but benefit companies that produce communications hardware and software. “There’s no question that getting together and pressing the flesh is important in establishing rapport and trust…. Still, once relationships are established, it often isn’t necessary to take a day or more of business travel for a one-hour meeting, especially when only a few people are involved and no key decisions are pending.”
4. Accelerating growth in online shopping, including grocery shopping and online gambling. Amazon and other online sellers will benefit; department stories, supermarkets and other brick and mortar retailers will suffer. (Macy’s, JCPenney, Kohl’s and Gap Inc. already furloughed nearly 1 million workers last week, according to The Washington Post.)
5. Massive infrastructure spending. Better roads, airports and other infrastructure projects are badly needed, and concerns about funding them “have evaporated as interest rates have nosedived in the face of the leaping federal deficit.” President Donald Trump, Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi have all suggested the need for a big infrastructure bill, but Shilling notes it could “take several years” for such federal funds to be spent because states will first need to conduct environmental impact studies, hire contractors and complete other preparations.
6. Accelerated consolidation of industries hit hard by the pandemic. They include airlines, cruise lines and hotel companies as well as the brick-and-mortar retailers.
7. Continued weak commodity prices overall due to slower global demand, especially in China, but a recovery in oil prices if Saudi Arabia and Russia “cooperate to try to drive out American frackers.” The two countries were scheduled to meet Monday to agree on production cuts to boost oil prices, but that meeting has been delayed. If the two agree on production cuts, oil prices, according to Shilling, could rebound to between $40 and $60 a barrel. As of Monday morning, West Texas Intermediate crude was trading at $27 a barrel; Brent crude oil, at $33 a barrel — both well above lows reached at the end of March.
8. Consumer caution will linger, reducing spending, repeating behavior that prevailed after the 2008 financial crisis. “The attitude of use it up, wear it out, make do or do without may prevail for years.”
9. Global supply will continue to exceed worldwide demand, unless “all-out protectionism” takes hold. The result is continued low interest rates and low inflation or possibly deflation, which will further reduce spending and restrain the post-recession recovery.
10. A change in presidential and congressional leadership. “The recession may well kill Trump’s reelection hopes and put Democrats in control of the White House and Congress.” If that comes to pass, Schilling expects “some sort of federal-sponsored medical care-for-all” and enhancement of “tax rules to redistribute income from the rich to the poor.”
11. Growing defaults in high-yield bonds, especially those issued by energy companies, which could “spark a rush into Treasuries and high-quality corporate bonds and lead to tighter lending standards.” Many investment-grade bonds issued by energy companies have already been downgraded to junk.
12. Many pension funds will remain “seriously underfunded” as their recent moves into riskier investments to capture high yields proved disappointing and they face the increasing likelihood of corporate defaults. In the fourth quarter of last year, pension fund assets could support 54% of future liabilities, down from 84% in the first quarter of 2000. Total pension fund assets are close to $1.5 trillion, split nearly two-to-one between private and public funds.
13. Scapegoats will be blamed for the coronavirus crisis and the recession and the bear stock market it causes, including federal health care officials and computerized traders. The response will include more government regulation.
The economic fallout from the COVID-19 pandemic will not end when the world begins to recover from its ravages.
There will be many “lasting effects” from the economic impact of the coronavirus pandemic, which has “pushed already weakening worldwide economies into a recession,” says economist and investment advisor Gary Shilling, founder of A. Gary Shilling & Co.
Those effects will mark the differences between the pre-coronavirus world and the one that follows.
The commercial real estate sector, for example, will likely suffer.
BlackRock CEO Larry Fink in a recent teleconference “questioned the viability of commercial real estate anywhere” once the global economy begins to recover because many companies that have learned to successfully conduct business remotely may not see the need to maintain the same level of office space post-crisis.
Consumer behavior could be changed forever by “the online world of contactless commerce,” according to an article from McKinsey & Co., Beyond Coronavirus: The Path to the Next Normal,
In his latest monthly Insight report, Shilling, a long-term bear on stocks and long-term bull on bonds, especially long-term Treasurys, lays out many changes in the economy, financial markets and social relationships that he foresees in the post-coronavirus world. Among them, a probable 20% to 30% decline in stocks before a rebound takes hold but continued underperformance relative to the economy until elevated cyclically adjusted price-to-earnings ratios “return to normal.”
In contrast, Shilling expects Treasurys, “the ultimate safe-haven asset,” will continue to be attractive to investors even if yields remain low or turn negative because of a deflation.
Visit the slide show above to see what Shilling says is in store for us and note that direct quotes are from his report.
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