The three crises facing the United States

Falling apart

I haven’t posted in a week because I am trying to process what’s happening in the United States right now. With the pandemic and 20-25% unemployment and cities torn by protest and violence, it really seems like the country is falling apart.

The shopping districts closest to my house have been looted, windows smashed. The pharmacy that we use was ransacked, gunshot holes through the front window according to the neighborhood listserv.

My family attends an Episcopal church called St. John’s. And my son asked me yesterday if I saw what happened to St. John’s. I told him it wasn’t our church. It was one near the White House (that my wife and I had attended for the christening of a friend’s daughter). I told him we had nothing to worry about.

Later that day, he asked if he could go play basketball today at a specific time. We said no because of social distancing rules. I offered to allow him to go out and ‘chaperone’ him at such events and he declined. Later, we found out a protest was planned at the library right next door to the basketball court at exactly the time he wanted to play ball. Coincidence? Of course not.

So, that’s where my mind is right now.

The Pandemic

All of this started with a viral pandemic that has killed over 350,000 people globally. That’s the first crisis we are facing.

Now, some people are calling it a “plandemic” in order to loosen societal resistance to vaccines. This is a conspiracy theory. But some very smart people with PhDs in science and economics are peddling it.

At the same time, we have a bunch of people who have been downplaying its lethality from day one, calling it a “flu”. At one time, early on in the crisis, US President Trump was one of those people. He came around to a different view over time, but only later than many other world leaders. And that cost the US time. It delayed the American reaction and governmental planning, making the viral contagion more deadly.

The depression

Complicating all of this is the economic depression we are witnessing. Never before have we seen such a widescale global lockdown and closure of economic life. We can debate whether this policy reaction was warranted to save lives. I saw it as inevitable before it occurred and wrote that here. But, the outcome from an economic perspective has been devastating.

For the United States, I would call it an economic depression. It is certainly deep enough of a loss of output and employment to qualify. But, with the Congressional Budget Office now saying it will take a full decade to recoup the economic losses, the economic hit is also enduring. An economic jolt that is both severe and long-lasting qualifies as a depression in my book.

Now, I single out the United States here because it isn’t clear to me how other advanced economies will fare. For example, in Germany, where the lockdown was earlier and the release from lockdown has been largely successful so far, a record 7.3 million people were furloughed using government assistance, according to Germany’s Ifo Institute.  The state assistance program means employees get full pay despite working partially or fully reduced hours. The company pays for the hours worked and the government makes up the difference. That’s a social safety net the US doesn’t have. And it was designed to prevent people getting sacked, creating huge amounts of economic friction. What will that mean for Germany’s economic fortunes? I think it means the jury is out on whether this is a depression there.

Moreover, in the US, my understanding is that companies are under no obligation to pay healthcare benefits for employees that are furloughed. That means that one loses employment, potentially recompensed by the state. But, one also could lose healthcare insurance during a pandemic. That’s an extra burden that workers in other advanced economies don’t have when they lose employment.

So, the US economic model, is uniquely poor at cushioning the blow of these dual crises.

The protests and riots

So, when the protests happened after yet another unarmed black American was killed, we added a third crisis to two pre-existing ones.

What I find remarkable in all of the violence and looting that we hear about is how often the name CVS comes up. Sometimes it’s Walgreens but often it’s CVS. When I was growing up the major chain drugstores in the Washington DC area were Dart Drug and Peoples Drug. Dart went into bankruptcy in 1989 and liquidation in 1990. People’s Drug was bought out by CVS in 1990.

If you look up CVS on Wikipedia, you find a list of roll-ups, starting in 1988 that created the behemoth we know today with 25% market share in the retail pharmacy space, ranked by prescription drug sales. Walgreens, another roll-up, ranks second with 19% share. CVS is expected to do over one-quarter of a trillion dollars in sales in 2020.

So, you can understand why we hear the word CVS so much during these protests when they turn riotous. But, what’s noteworthy is that people aren’t just ransacking and looting stores selling garments, electronics or other small-size big ticket items; they are ransacking CVS, it seems almost everywhere. To me, that points to desperation, a need for basics. And it puts in stark relief the economic depression that preceded the protests, making them that much more urgent. The local pharmacy we use that was ransacked Sunday night is a CVS.

My View

I don’t know quite what to make of all of this. I am still processing the information. But, one thing is clear. There is no historical link between protest movements and asset markets. Whether you look at any of the recent, localized protests in the US or the UK in the last thirty years or the violent protests of 1968 – that included 41 antiwar bombings and arson attacks at universities, a brutal putdown of the Prague Spring in Czechoslovakia, antiwar protests at the 1968 Olympics in Mexico City and widespread rioting after the deaths of Martin Luther King and Robert F. Kennedy – none of it had an impact on asset markets. The U Street corridor of Washington, DC, where I was born and raised, was burned to a crisp and remained dormant economically for some 40 years before being revived. But, in 1968, markets looked through all of this.

Hong Kong’s 2019 protests come to mind regarding a protest movement that did have a big economic and market effect. But, we are only a week into the protests in the US. And the US is a much bigger economy. I find it difficult to compare what happened in Hong Kong with what is occurring in the United States right now.

The most one could say about climatic protests and riots and asset prices is that 1968 marked the apogee of the post-World War II baby boom economic nirvana. The baby bust, the 1968 protests and the 1970 recession were all one continuous and calamitous transition into the stagflation of the 1970s. That might be the parallel here. But, again, it’s hard to make these kinds of stark generalizations for comparative purposes. The situation today is unique.

What we are seeing now is three crises coming together at the same time. First, there’s the worst global pandemic since 1918, bigger than the Hong Kong flu pandemic of 1968 or anything else in the last 100 years. Then, there is the worst economic hit since the Great Depression, not as severe yet as that episode but certainly deeper than anything in the post World War 2 period. And finally, we are seeing protests that, in time, could rival 1968. I have also compared this moment to the 1932 March of the Veterans Bonus Army.

I am reminded of this: The 1932 March of the Veterans Bonus Army https://t.co/bWmYIE2pMW “On the morning of July 28, 1932, President Hoover… ordered his Secretary of War Patrick J. Hurley to clear the Bonus Army camps and disperse the protesters.”

— Edward Harrison (@edwardnh) June 1, 2020

None of these crises in isolation is as severe as the historical parallels. But, the fact that they are all happening at the same time, against a backdrop of a new Cold War between China and the United States, will make this a challenging time economically, and consequently, challenging for asset markets too.

Right now, equity markets are trading on thin volume, buoyed by passive investment and algorithmic computer trading. The economic data have turned up and that has put a floor under equities at least. As a result, investors are looking through the recent horrific economic numbers, waiting for a longer-term view once the uncertainty of lockdown and the re-opening passes.

I think the reckoning is in the Fall then. The summer holiday season will be over. And minds will be focused on the future. By that time, we will have enough data to process what’s happened and start to make a long-term projection of where we’re headed economically.

Until then, caveat emptor. And, if you’re in the US, stay safe.