News

Donald Trump just signed a $2.2 trillion bailout package in an attempt to mitigate the coming recession as COVID-19 shuts down the US economy on a scale that has not been seen since the Great Depression.  Treasury will essentially print money that will be added to our current $22 Trillion national debt, which is predicted to grow by $10T over the next decade plus whatever bailouts and/or fiscal spending is required to defend our nation’s economy.  The US debt to GNP ratio is already approaching critical levels but this spending bill is the country’s only option unless you think 400 million guns in the hands of people living on the street with little to eat is a viable alternative.  Of course, the taxpayers will be ultimately responsible for this growing liability but there just isn’t any other politically expedient solution on the table with other western world countries expected to follow suit as reported by Bloomberg News this morning.

A back of the napkin calc indicates a need of at least another $2T or possibly twice that amount depending on how long the virus runs and how much pain 52% of paycheck to paycheck Americans can endure.  The current average US household income is $60,000 so with a one-time cash payment of $2400 that buys two weeks of living expenses which is far short of what will be needed to weather this cataclysmic storm.  If a follow up package of equal size is required, households and businesses would then have a month of governmental support which is probably a ‘hope for the best’ scenario.

If the virus peaks in 4-6 weeks, and that is a big if, then $4T is the number but with another $2T likely.  At these levels US dollar devaluations could reach epic proportions which is what I expected after the Treasury printed $4T to combat the global banking crisis but without any real lasting consequences. Over the next ten years $38 Trillion of debt ($32T + $6T) should produce two unsavory outcomes; inflation and increasing interest rates.  While property markets can respond to inflation with increasing prices it’s not that simple because along with that hedge comes higher interest rates and lower valuations which I clearly remember happening during the 1980’s and is an outcome to be avoided.

During the Great Recession stock indices fell by more than 50%, and while I am not predicting losses of that magnitude Vail Valley real estate dropped 17% during Q3 2010 which was only a third of the overall capital market reset.  While real estate has since fully recovered and is now setting all-time records, nothing is immune to volatility even in ‘best of the best’ safe harbors for capital.  Q1 2008 was the start of a two and half year long period of illiquid before wealthy ‘on the bubble’ owners started selling.  Depending on duration and the effects on employment, supply chain destruction, business credit defaults and the government’s balance sheet, the damage will only increase over time.

As an economist and real estate analyst for more than 40 years I am convinced that the longest bull market run in modern history was been driven by monetary policy which should have been inflationary but with an aftermath that yielded no real lasting effects.  Perhaps another $6T can be created out of thin air but given a projected US debt load of $38T in 2030, this trajectory will start raising eyebrows around the world as we approach the 100% of GDP “critical threshold” which hypothetically results in downgraded credit and higher borrowing costs with less money available for social and infrastructure programs.  It’s going to be a much different world with all of that debt floating around even if that world can find buyers for these to be issued credit risk bonds.  Cap rate compression, leverage and low cost financing produced the longest running bull market in history.  What do you think is going to happen as we do an about face and start going in the opposite direction?

In times of crisis bold measures are needed leaving me with no other choice but to endorse the current plan, but not without reservations that this level of monetary policy will be a game changer with scant evidence supporting much in the way of upside over the forseeable future.  How America and other affected economies will come out of this is completely unknown, but one thing is certain, it’s not going to be pretty.  The S&P rallied today closing at 2541 as Wall Street applauded the government’s intervention plan.  The facts however lead me to believe that this week’s rebound is likely to be a bull market rally trap which means on Monday you might want to go to cash.