Real Life Economic Research

I have written in the past that Federal Reserve Quantitative Easing and other Federal stimulus has grossly distorted the "traditional" economic principles in place since the 1930's. It has led to artifically restrained interest rates which in turn has changed asset values and reported inflation. Coupled with what I call the "Great Globalisation" of manufacturing and services as well as the rise of Hedge Funds, the field of economic forecasting for investments and investors has forever and dramactically changed.

Now, in 2020, we have the added situation of a Global Pandemic and additional government actions wihout any historical precedent.

Any forecaster that claims to "know" the future with any reasonable certainty is a fool or a charlatan.  We are now relegated to managing probabilities and risk acceptance. 

As always, a exhaustive and continuous search in the economic news media and academic literature is important. But today, I assert that it is also critical to physically observe economic activity, in person. 

Obviously, one cannot travel extensively globally or even nationally while maintaining "social distancing", but one can do so regionally. Traveling in one's personal vehicle on a regional basis, can provide valuable information from first hand, personal observations. Traffic levels, cars in parking lots, activity at recreational locations like parks and waterfronts. Interviews with places where people consider making large discretionary purchases--car dealers, marinas, yacht and aircraft brokers. 

During these uncertain times, it is important to assess some sort of probability distributions for asset price levels. I am engaged in that very activity and applying the knowledge gained toward intelligent investment advice and management of your portfolios.

Fortunately, Secretary Mnuchin has declared the Financial Service sector as "essential" so I am permitted to travel as long as social distancing guidelines are followed.

The recovery after the dramatic and global  "Great Shutdown" will certainly be uneven.

The greatest casualty is probably the sit down restaurant business.  Projections are that 75% of the businesses will be lost along with those employed.  Great uncertainty exists as to the hotel and other parts of the travel industry as "at home" work and "video" conferencing is likely to grow. Massive unemployment in these sectors is likely and the effect on the economy will be large.

People are likely to drive more in personal automobiles for "socially distanced" pleasure, but will be commuting to work less. Auto auctions are building used car inventory rapidly which will certainly lead to a glut in the used car market--falling prices will effect new car sales. There will likley be massive unemployment in the auto industry.

Despite a falling stock market, a large segment of the retired population hold significant wealth.  Socially distanced family entertainment may drive and increase in RV and Yacht sales.

Be skeptical of the present bump in stock prices. The market is dominated by institutional action reacting to Fed actions and massive stimulus. It has not yet factored in the almost certain unemployment drag on the economy.

Another underestimated issue is the probable cost cutting by state and local governments that cannot run deficits. They will have massive shortfalls and will cut employment as well as try to raise taxes--both will be a big drag on the economy,

On the other hand, be aware that central banks are printing money at a rate never before seen.  There is no way that it will not lead to inflation.  But, how that inflation shows up may be a surprise.

There is a significant probability that it will not appear in the price of necessities, but that it will appear in the price of assets. 

For sure--its complicated!

In a recent "field observation" I made for Baltimore, DC, Richmond, and Norfolk, I was shocked that road traffic was significantly higher than expected. Lunchtime lines are drive thru fast food restaurants were very long. Cars parked in strip center retail parking lots were much more numerous than expected.

Given, the continuing number of new Covid cases, even after 4 weeks of shutdown, it is apparent that more people are working than reported, and many more people are "out and about". I suspect some are simply ignoring the stay at home orders...and..I also suspect that we are beginning to see a growing "black market" cash only, under the table, economy that is growing. 

Interestingly though, there appears to be a wide variance in the level of "fear" as I noticed a large % of drivers, driving their cars with windows up and masks on....and many others walking about without a mask. 

The economic damage from the "stay at, shelter at home" orders has already plunged the country into a deep recession.  It will surely snow ball to affect many industries--including local and state government employees. The only remaining question is the recession's duration and speed for recovery. 

I think the effects on autos, banking and commercial real estate will be far greater than expected.