The markets are anyone’s game these days. Investors are now amateur virologists, attempting to predict the spread of the Coronavirus. There is sound logic behind trying to predict the spread of the disease. If the lockdown Americans are placed under lasts for an additional two months the cost to GDP would be an additional $1.6 trillion. Sure these statistics are depressing, but what’s the good news you ask. Well, Federal Reserve is lending large banks an additional $1 trillion a day to keep credit functioning smoothly. The additional liquidity should calm markets eventually. While the markets may continue to drop precipitously, all of the monetary and fiscal stimulus will eventually become reflected in Asset prices. The markets can not expect trillions of dollars in stimulus to not affect the value of securities.
Another big headline that grabbed my attention today, was a meeting of the CEOs of major oil companies meeting with the president today. The really large American oil producers like Chevron and Exxon do not require the same financial assistance as Occidental. This disparity, in need, will result in dissent and prevent a unified lobbying effort to pass a fiscal stimulus package. Occidental will not get the help they need and will go bankrupt. This is inevitable. Occidental was already an over extended company before the Coronavirus and they are unprepared for this weak economic activity. Occidental’s profit margin in the fourth quarter of 2019 was negative, and this was with an oil price 40% higher than it is currently. If oil prices remain depressed for the rest of the year, it is a certainty that they will file for bankruptcy.
Today was also the release of new motor vehicle sales. General Motors and Fiat Chrysler reported declines of 7 and 10 percent respectively. However foreign manufacturers Toyota, Honda, and Mercedes-Benz also reported declines of 30 – 50 percent. The decline of sales for American automakers will probably be significantly higher next quarter. The next quarter for American manufacturers will mirror the decline foreign automakers reported this quarter. The severe slowdown in a key part of the American economy implies a snail-pace return to growth even after the Coronavirus.
The stimulus provided by both the Federal Reserve and Government will result in inflation. It’s inevitable. The real question is if there will be a return to real economic growth. The answer to this increasingly looks like no. If we have anything to learn from history, it looks like the American economy will go through a lost decade similar to Japan’s in the 1980s.