World Views | A Look at Economies and Markets After Covid-19

The 1920s didn’t “roar” until viewed from the perspective of the depressionary 1930s. Similarly, in the aftermath of the serious global recession I believe the coronavirus has sparked, the 2010s will look like a Golden Age of slow but steady economic growth with rising employment and declining inflation and interest rates. Here’s what to expect when things return to “normal.”
The drift from free foreign trade and globalization toward protectionism that started when China entered the World Trade Organization in 2001 will accelerate. The decline in manufacturing activity and related jobs in the West resulting from globalization and the vulnerability of worldwide supply chains will promote self-sufficiency but also the accompanying inefficiencies. The hopes of politicians that protectionism promotes domestic jobs and incomes will be dashed as, like in the 1930s, trade barriers reduce economic growth and spawn deflation.
The business and education shutdowns due to the virus reveal the waste of much of business travel and classroom time.  Face-to-face interactions won’t disappear, but instead will be reduced, to the benefit of communications hardware and software and to the detriment of airlines and hotels. Working at home will become even more acceptable.
Consumer caution will linger longer after the coronavirus crisis subsides, much as it did after the 2008 financial crisis. The attitude of use it up, wear it out, make do or do without may prevail for years, weighing on consumer spending and retail sales.
Fiscal stimulus will be magnified as monetary policy proves impotent. Beyond recession-induced unemployment relief and income supplements, major infrastructure spending is likely. Both Republicans and Democrats agree it’s needed, and the collapse in U.S. Treasury yields in the face of soaring federal deficits have extinguished Washington’s fear of huge borrowing  to fund deficit spending.
Barring all-out protectionism, global supply will continue to exceed worldwide demand. The resulting saving glut will depress inflation and interest rates. The low rates of inflation, and possibly even deflation, will damp the zeal for spending, further restraining any economic recovery.
The recession may well kill President Donald Trump’s re-election hopes and put Democrats in control of the White House and Congress. Then some sort of federal-sponsored medical care-for-all is likely. Also, tax rules to redistribute income from the rich to the poor would be enhanced.
The plunge in crude oil prices may force the Saudis and the Russians to cooperate to try to drive out U.S. frackers. Oil prices would then recover to the $40 to $60 per barrel range, but the resilient frackers will keep nipping at their heels.
The recession will push many junk bonds into default, especially those in the energy area. The expanding universe of “fallen angels,” or those issuer who have been stripped of their investment-grade credit ratings, may lead to a collapse in junk-rated debt prices and spark a rush into U.S. Treasuries.  Lending standards will tighten, much as they did for residential mortgages after the subprime collapse.
As usual, scapegoats will be needed to shoulder the blame for the coronavirus crisis and the recession it’s initiating along with the collapse in stock prices. Candidates include the federal government, especially health care officials, and computerized trading on Wall Street. As usual, expect more government regulation in response. Gary Shilling, Bloomberg