Now Doesn’t Always Mean Now

If you want to understand the rate at which the gloom in the U.S. is thickening, consider this. When this writer downed his morning coffee Jan Hatzius and his team of economists at Goldman Sachs were predicting that the economy would contract at an annual rate of 5% in the second quarter. At that point Bruce Kasman, chief economist at JPMorgan Chase led the Eeyore sweepstakes with a prediction of a 14% decline in the coming quarter, the worst quarterly contraction in GDP in 50 years. Michelle Meyer, head of U.S. economics at Bank of America, held second place with a predicted drop of 12%.

As I took the first bite of my luncheon sandwich, Goldman’s team had a rethink, and revised its 5% forecast to 24%, the annual rate at which they expect the economy to shrivel in the coming three months. This, either despite or because of announcements by the Federal Reserve and the government of massive relief plans either already implemented or about to be put in place. Intended as reassurance, these announcements apparently revealed the depths of the concern of policymakers. And the inability of congress to act promptly on those concerns despite its majority and minority leaders repeating that relief is needed “now”. As you read this, action might be on the way. Whether it will be effective or not is a separate question.

Which brings us to the new economic alphabet – V U L – short-hand for describing the resilience of the American economy. If this recession is V-shaped, we are in the midst of a quick plunge that will be followed by an equally rapid recovery. President Trump is a V man, “Our economy will come back very rapidly.” Others say the shape will be that of a U – down, a period of bumping along the bottom, and then a recovery. Still others have gone to L – a plunge followed by a long period in the doldrums, with no uptick in sight.

Most of the forecasters at major banks are still predicting growth in the neighborhood of 3%-4% next year. Prompting recollection by this scribbler of an old Yiddish expression, “From your lips to God’s ears.” And fear of the next round of forecasters’ re-thinks.

All predictions of a brighter future are predicated on two assumptions: that the spread of the virus will be brought under control by the behavioral and other measures recommended by the authorities, and that the policy measures adopted by the government and private sector will be effective. The first assumption seems realistic, although the refusal of millennials, often unsuspecting carriers of the virus, to put their lives on hold, as they put it, threatens the effectiveness of these largely voluntary policies.

As for policy measures, the President has ordered all federal agencies, important players in the mortgage markets, to suspend foreclosure and eviction proceedings in process (182,000 out of 28 million mortgages) until the end of April. Congress passed and the President signed into law a package of benefits that includes free testing and paid sick leave for many workers. The sort of thing that makes bipartisanship easy.

As does the odd trillion. Bipartisanship now means that I will approve your spending plans if you reciprocate by approving mine. Even such deals cannot obscure the fact that congress remains riven by age-old partisan divisions. Press reports of personal animosities – the President vs. the speaker, the senate majority leader vs. the minority leader – tend to obscure the ideological differences that are preventing a bipartisan approach to most problems, including not least the current pandemic. Republicans generally although not exclusively want to relieve companies in distress to get the economy moving and save jobs, while Democrats prefer to aim dollars directly at laid-off workers and others who find themselves dependent on the kindness of strangers. Of which there are many, and are likely to be a million more very soon. The compromise will be some of both, and a package costing a stunning $2 trillion, 10% of U.S. GDP.

The airline industry has been hit by a catastrophic decline in the demand for seats as business meetings are cancelled, and consumers stay home. Even after idling large parts of their fleets — Delta has slashed capacity by 70% and United by 60% — major airlines are flying 20%-30% full. The carriers are asking for a $58 billion dollar taxpayer contribution in the form of loans, tax relief and cash grants – three times what they received after the 9/11 terror attacks.

Trump says the airlines are his “number one priority”, presumably not only because he remembers the pain he felt when his Trump Shuttle, bought for $365 million in 1998, defaulted two years later after he poured millions into upgrading the planes with gold-covered lavatory fixtures.

The carriers do not come with clean hands. Airline executives and boards have ordered share buybacks over the past decade that consumed 96% of free cash flow, about double the average for S&P 500 companies. Buybacks are attractive to CEOs because by reducing the number of shares outstanding they raise earnings per share, driving up share prices. Since many executive and board-member compensation packages are based on share prices, buybacks not incidentally increase compensation in the executive suites and boardrooms of the companies. But they sap the carriers’ ability to cope with crises.

My guess is that the airline bailout and others will be approved, with conditions. Executives will have to work without pay, they will have to promise no layoffs, and the U.S. Treasury will be given an opportunity to earn a profit, as it did on the cash it invested in bailouts during the 2008 financial crisis.

If Treasury Secretary Mnuchin’s negotiators want to make a contribution to the future well-being of abused travelers they might insist that the airlines surrender some slots to potential competitors. The President would undoubtedly consider that a reasonable quid pro quo for his government’s largesse. And no more buybacks by bailed-out companies. “Not now. Not a year from now. Not twenty years from now. Not ever,” as Mark Cuban, billionaire owner of the Dallas Mavericks and regular on Shark Tank.

Other industries, some representing tiny restauranteurs, others giant, heavily indebted companies, are queueing up, their begging bowls in hand. American companies have been adding debt at a rate that is now proving unsustainable. Non-investment grade corporate debt – junk in the pithy phrase favored by investors – now totals $3 trillion, about 30% of all outstanding corporate debt. Ignored was a Fed warning, “Growth in business debt has outpaced GDP for the past ten years, with the most rapid growth in debt over recent years concentrated in the riskiest firms.” Now the piper, and lenders, must be paid.

Warren Buffett, who reportedly is now snapping up billions of shares at bargain prices, once quipped, “Only when the tide goes out do you discover who’s been swimming naked.” Share prices crested on February 12, the tide rolled out, and over-indebted companies, not to mention Trump, who had dismantled the government’s pandemic-fighting infrastructure, were discovered naked. Unable to hide themselves from the markets.