1. The U.S. and world experience a sharp, but reasonably short recession with noticeable recovery before year end.
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Although we have started to see some reasons for optimism about a potential economic rebound coming soon in the U.S., there are just too many question marks to not continue to be cautious when it comes to making investments and projecting what will happen with the economy, according to Jeffrey Kleintop, chief global investment strategist at Charles Schwab.

“We still are in an economic freefall” in the U.S., he said Thursday during the online Hedgeye Investing Summit.

However, we are seeing signs of late that “maybe there’s an end in sight” and “we’re going to see some reopenings” of states, he said. Also promising is that it seems that we are now past “at least the first peak” in COVID-19 cases, he noted, adding “the market’s come a long way in pricing” and seems to be “near the end of the freefall.”

Therefore, it seems that we will “get some form of economic rebound” as a result of that progress, “whatever shape it takes,” he noted.

He was quick to add: “That’s the easy part, however; the hard part … still lies ahead.” For one thing, it is not yet clear what shape the recovery will take, he pointed out.

And “it’s not up to just a politician” — whether President Donald Trump or any of the governors — and it is not going to happen on one particular day, he said, adding: “It’s a decision made by millions of individual people, thousands of individual businesses — in terms of when they feel safe operating again, and that’s very hard to say.”

Kleintop is looking at how the European countries fare as they start to reopen their economies and as people gradually stop sheltering in place, he said. How their daily COVID-19 caseloads fare as a result of that increased human interaction is “going to be critical because if we have a second peak in cases, you can expect a really ugly economic scenario — a W-shaped kind of Great Depression-type scenario that we really want to avoid,” he explained.

That is why staged, gradual openings of the U.S. economy in a small number of places as opposed to just opening the entire country at once to business as usual is so important, he said.

Scenario one for what will happen when we reopen the U.S. economy is we see that “the virus really hasn’t been contained” at all and, if that happens, “we’re going to see a much, much longer economic downturn of frozen economic activity,” he said.

Or it could be scenario two: a “V-shaped rebound with all the stimulus in place and pent-up demand — and I think the truth is we don’t know” what will happen, he said, adding what happens may “lie somewhere in the middle.”

Despite claims that the economy was still strong and growing right before the coronavirus crisis started, the global economy was actually “slowing throughout the year last year,” and Schwab had projected there could be a shock on some front this year that would derail the bull market, he said.

That is why Schwab was cautious last year and why it was recommending rebalancing of investment portfolios, he said, adding: “We still think caution makes a lot of sense here.”

There is also “still way too much confidence in the central bank” that it can solve “any kind of problem that faces this economy,” he told viewers, adding: “I think they have the wrong tools to address” the current crisis.

Kleintop went on to criticize Modern Monetary Theory, which claims that any country that prints its own currency can’t go broke, so a country like the U.S. has a lot more room to deficit spend than normally thought, especially given low interest rates.

Steps that central banks including the U.S. Federal Reserve have taken recently to mitigate the current economic crisis are kind of a step in the direction of MMT 1.0 or 1.5, Kleintop said. What also concerned him is that “it’s hard to hear any voices pushing back against it” now.

One problem is that “it certainly lowers the bar against doing this stuff during future crises, but it also lowers the bar against doing it, well, any time,” he said.

“I worry about MMT,” he said, adding: “Debt levels are the biggest thing that keeps me awake at night” and are a “real long-term problem.”

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