06 May 2020


By Raul Elizalde

This article also appeared on forbes.com

It is abundantly clear that the Trump Administration has decided that it’s time to reopen the U.S. economy. Along with almost $4T in relief/stimulus spending and a “whatever it takes” stance of the Federal Reserve to prevent a seizure of capital markets, this decision is positive for U.S. stocks - and will cost lives.

Some countries like Spain, Italy or, indeed, China, implemented strict measures to contain the spread of the coronavirus known as SARS-CoV-2. In contrast, the U.S. has had an uneven approach. This is because of the deep decentralization of government authority in the U.S. and of the vast differences among states and regions. Some governors took severe measures to control infection hotspots, like in New York, but others had a laxer approach, as in sparsely populated states like Wyoming. Moreover, some densely populated cities like Atlanta lifted most restrictions, while others, like Miami, did not.

The lack of a uniform response may be part of the reason why the rate of infection has remained at a stubborn high plateau. The weekly average of new daily cases of COVID-19, in fact, remains roughly constant.

source: Path Financial LLC, USfacts.org

Apart from not having the authority to enforce a consistent policy among states, the Trump Administration has shown little conviction about insisting on nationwide measures to contain the virus spread. “Guidelines” listing a number of practices to limit contagion that were initially introduced were left to expire at the end of April; some states were praised for reopening their economies while others were scolded. This ambivalence is due to a number of factors:

The toll of restricting economic activity on the population at large

Nobody disputes that COVID-19 can kill some people. On the other hand, the economic hardship that closing businesses caused on the population seems to have contributed to a spike in the incidence of domestic violence, substance abuse and mental health problems, including suicide. More than 30M Americans filed for unemployment so far, a clear illustration that the “Paycheck Protection Program” missed much of its mark. Having lost jobs and health coverage, and finding it difficult to apply for unemployment in many states, many Americans have drawn from whatever savings they had, and have gotten closer to desperation as those savings run out.

The political consequences of closing the economy

The measures taken to contain the virus caused an economic catastrophe. Some public demonstrators have demanded to be allowed to risk infection (and a prolonged pandemic) as opposed to being forced to tolerate financial disaster. It has also become clear that there was no effective safety net in place that could alleviate the economic pain imposed on people when the economy was shut down by decree. In an election year, voters tend to assign blame for their woes on the incumbent party, so the Trump Administration has been receptive to these reopening demands even when they are in conflict with the advice of medical experts.

The possibility that the pandemic could morph into a financial crisis

One of the least discussed potential consequences of the economic shutdown is a sharp increase in bankruptcies and corporate bond defaults. Unattended, this can easily turn into a financial crisis if, for example, a large number of companies cannot access the market to refinance bond maturities. While the Federal Reserve has made a commitment to intervene – by buying corporate bonds, among other actions – it can turn the Fed into an enabler of “zombie” companies who are kept alive by a constant infusion of bailout financing. This can end up costing enormous sums, way in excess of the trillions of dollars spent so far, if the economy remains closed. The alternative would be to let many companies go bankrupt, but the credit carnage that would ensue could inflict serious long-term damage in economic productivity, competition, and financial markets.

There is a consensus among scientists that reopening the economy will, at the very least, increase the death toll. The worst case would be that it results in an uncontrollable spread of COVID-19 cases, with an accordingly large number of additional deaths.

But the Trump Administration, facing a dismal choice between two unpalatable alternatives, seems to have decided that when considering the factors listed above, the cost is acceptable and the risk is worth taking. There is also the possibility that they are also hoping on a breakthrough development on the treatment of the disease that could reduce the fatality rate, rather than leaning on the more difficult path of controlling the infection rate with a vaccine that does not yet exist.

Leaving aside all ethical or moral considerations of trading lives for economic growth, the impetus to reactivate the U.S., along with similar and somewhat more cautious initiatives in Europe and elsewhere, reduces the risk that stocks will retest the low values of March. Investors, however, should count on persistent volatility, and more deaths, until the public health outlook improves.

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