morgan stanley forecast

Morgan Stanley Forecasts GDP Plunging 30% in Q2

Coronavirus, Economics

A week ago, JP Morgan published an eye-opening forecast saying the US economy would shrink 14% in the second quarter.

That’s turned out to be a rosy estimate.

Since then, Treasury Secretary Steve Mnuchin warned unemployment could reach 20%; unemployment claims have recorded their highest increase in history; some 2.25 million people could lose their jobs in March alone; Goldman Sachs forecast -24% growth in Q2; and Covid-19 cases surpassed 50,000 with more than 600 deaths.


In light of the most recent data, Morgan Stanley forecasts the economy will contract by 30% in Q2.  That would be a 74 year low (ie, since the midst of the Great Depression).

Now, Morgan Stanley thinks that we’ll avoid a second Great Depression because the virus will peak in April or May and the economy will bounce back in the third quarter.  That’s their base case scenario.

Should the virus’s peak crest in the summer, though, Morgan Stanley sees full-year growth shrinking by 8.8%, again a level not seen since the Great Depression.


All this sounds bad – and, to be sure, is bad – but there are some upsides.

The Federal Reserve has repeatedly dug into its war chest and continues to find creative new solutions to help businesses access credit, preventing a repo market run that would spark a serious financial crisis.

Though not acting anywhere as swiftly as the Fed, Congress is reportedly close on a third-phase stimulus bill that could reach two trillion dollars in size.  That won’t be enough, but it’s a solid start that, if passed quickly, can staunch the bleeding.


Because this is a government created recession – and rightfully so: Millions of lives are on the line – the government can solve it.  We just need to bailout everyone, from individuals to states and businesses.  That keeps us on solid footing for a strong economic recovery with relatively minimal pain during the forthcoming period of high unemployment and low growth.

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coronavirus bailout

Save the Economy: Bailout Everyone

Coronavirus, Economics

The coronavirus and necessary lock downs to prevent its spread are decimating the economy.  Unemployment claims will likely jump to 2.25 million in a single week, by far a single-week record.  Forecasts show Q2 economic growth lower than anything we’ve recorded.  Some fear unemployment will jump to 20%-30%.

But this doesn’t need to be the case.  Strong fiscal policy that errs on overreacting rather than underreacting to conditions and data will help the economy bounce back immediately after the crisis.

To do so, the federal government needs to bailout everyone, from (and especially) workers to big businesses and state governments.

Send every American adult $2,000 per month of the crisis.  Add another $1,000 for each child.  


Yes, that means rich people will get checks too.  This is a crisis: We can’t waste time figuring out who’s most affected by this and devising specifically-targeted policies to hand them – and just them – money.  That takes too much time that we don’t have.  Similarly, because data will lag on-the-ground events by weeks if not months, we won’t know who’s hurting most and when.

Once we know who suffered the most from this and who didn’t need assistance – once the economy is back on solid footing and the public health crisis has passed – we can increase taxes on the rich to recoup the money handed out to them.  Take that as a 2021/2022 action plan.  (And as an interim step, we can have a public pressure campaign for those not harmed by this crash to donate their government checks to redistribution charities.)

Bolster unemployment insurance, drop the work requirement (this is for public health), and extend the period benefit.  Millions are losing jobs and there’s no reason for them to be plunged into deep economic anxiety for no fault of their own.


Unemployment insurance should match at least 75% of lost wages.  The federal government should pay the extra amount so states’ budgets aren’t further hit.  That should last for 52 weeks and not be based on people searching for jobs while there’s a deadly virus circulating.

Small businesses don’t have large – or any – cash cushions.  Huge decreases in sales, especially for local restaurants, cuts their cash flow and threatens their bankruptcy.  Provide them zero-interest loans that convert to tax credits if they retain workers on payroll.  Those loans will cover rent and make sure they’re around once people can dine out again.


Big businesses will also need bailouts.  That may sound unwarranted, but it’s not: Unlike 2008, businesses, through malinvestment and unscrupulous behavior, did not cause this crisis.  The Trump administration did by failing to prepare and tackle a burgeoning pandemic.  So we need to save big businesses, too, with the same provisions.  Zero-interest loans that become tax credits for each job kept on payroll.

Lastly, states and municipal governments need bailouts.  Huge spikes in unemployment claims mean blown budgets, especially when coupled with decreased tax revenues.  Unlike the federal government, states have limited options for debt financing.  Stressing their budgets means forthcoming layoffs, exactly what we’re trying to avoid.  Bail them out.

Following these steps will make sure people continue receiving money and have jobs to which they can return once this ends.  All we need is the federal government to get its act together.

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We're Facing a Deep Recession

We’re Facing a Deep Recession

Coronavirus, Economics

Economic news and outlook keeps getting worse because of the novel coronavirus – and with alarming speed.

A few days ago, JP Morgan forecast -4% growth in Q1 and -14% growth in Q2 with the economy pulling back -1.5% for the entire year.  This would accompany unemployment almost doubling to 6.3% in June before falling to 5.5% by end of year.

But with unemployment claims spiking at a rate never before seen – Goldman Sachs forecasts 2.25 million people losing their job this week alone, the single worst week for employment on record – that forecast is likely too rosy.

Goldman Sachs released an updated economic forecast this morning.  It’s dire.  And a lot worse than numbers they published just a week ago.


  • Q1: -6% (0% in their last forecast)
  • Q2: -24% (vs -5% last forecast)
  • Q3: 12%
  • Q4: 10%
  • Full year: -3.8%



Further, because of complete demand restrictions, Goldman sees the unemployment rate jumping to 9% (right now it’s 3.5%).  That doesn’t tell the full story.  They see an larger increase in the U5 rate, which includes workers who want a job, but aren’t looking, either because of personal health or other issues or because no one is hiring.

Needless to say, these are horrendous numbers that portend incredible hardship for millions of Americans.


This can be alleviated if Congress asks quickly with a huge stimulus bill that provides money directly to Americans, gives businesses 0% loans or grants conditioned on businesses not laying off workers, picking up a large portion of employer bankroll, and generally ensuring that business and workers have access to very cheap capital.  All of that is doable – it depends on Congress doing the right thing.

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Goldman Sachs Forecasts 2.25 Million Unemployed in a Week

Goldman Sachs Forecasts 2.25 Million Unemployed in a Week

Coronavirus, Economics

The coronavirus crisis continues to get worse.

Cases continue to rise at alarming rates with rates of increase growing as well (see our coronavirus tracker here).  That means hundreds – soon to be thousands – of deaths.

On the economy side, unemployment insurance claims have spiked this week.  States sites can’t handle the traffic caused by layoffs greater than anything we saw during the Great Recession.  That’s driving JP Morgan’s forecast of -14% growth in Q2 and unemployment almost doubling by midyear.

Now Goldman Sachs is forecasting 2,250,000 workers will seen unemployment insurance this week.  That’s almost 2.2 million more than this week – this isn’t a typo: Unemployment will jump from 280,000 to 2,250,000.


The largest increase in history.

The highest level on record.

Congress needs to act or this is going to get a lot worse.  Providing checks to American workers and their children;  make zero percent interest loans available to small businesses; help businesses cover payrolls; pause mortgage payments.  It needs to be done to save the economy and the American worker.


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coronavirus recession

JP Morgan Forecasts Huge Quarterly Contractions

Coronavirus, Economics

Coronavirus is decimating the economy.  Already, unemployment insurance claims have spiked past weekly highs from the Great Recession and the crisis has only started to unfold.  We’re potentially on the brink of a financial crisis despite the Federal Reserve’s best efforts to calm credit markets and provide needed liquidity.  Now JP Morgan, the nation’s largest bank, forecasts obscene quarterly losses in Q1 and Q2, followed by a bounce back in the second half of the year.

Their forecasts:

  • Q1: -4%
  • Q2: -14% (not a typo)
  • Q3: +8%
  • Q4: +4%
  • Full year: -1.5%




Negative 14 percent growth far exceeds anything seen in the Great Recession – economic contract peaked around 8% – and rivals decreases seen during the Great Depression.

JP Morgan sees the economy recovery come June.  In theory, warmer weather will slow the coronavirus’ spread and consumers, following months of forced saving, will accelerate their spending.

That could of course fall apart should the virus linger longer or unemployment spike more than expected.


On the unemployment, JP Morgan sees it jumping to 6.25% midyear (levels seen in late 2014) before subsiding to 5.25% in December.  Right now, unemployment stands at 3.9%.

These numbers, despite their shock value, still are rosier than other forecasts.  Treasury Secretary Steve Mnuchin warned GOP senators that unemployment could peak at 20% – yes, 20%.  A former Trump administration official sees a million jobs lost in March.

This again highlights the need for a rapid and huge fiscal response.  Let’s hope Congress mails those checks….

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Treasury Market Volatility Suggests Potential Credit Crisis

Treasury Market Volatility Suggests Potential Credit Crisis

Coronavirus, Economics

The treasury market, where individuals and businesses and buy and sell US government debt, has rocked recently.  A few weeks ago, yields on debt plummeted to all-time lows.  Since then, prices have fluctuated in a bizarre nature atypical to one of the deepest and most liquid market in the world.

But a clear pattern has emerged from the volatility: Yields are again rising – and prices falling – and rising quickly.

coronavirus financial crisis

Optimistic observers argue this decrease in bond price (yields and prices move in opposite directions) stems from optimism about a proposed fiscal response to the coronavirus.  A fiscal response would, in theory, make a recession less-bad, leading businesses and individuals to keep money in riskier assets rather than fleeing for the safety of treasuries.


But this seems misguided.  Capitol Hill has yet to reach a consensus; meanwhile, the Fed is pouring hundreds of billions into the repo market to control the yield curve and keep rates down.  These markets movement happen despite the Fed’s efforts, indicating something more sinister is at play.




In all likelihood, this surge in treasury yields foretells a potential financial crisis.  Firms are desperately selling treasuries – and any other highly liquid assets – to raise cash, either to hoard and weather the storm or fund daily operations.

This is dangerous.  Businesses are feeling a dramatic pinch from the coronavirus and its shutdowns.  And they expect that pain to continue given unemployment surges that will only get worse.

As the bond markets roil and borrowing gets more expensive because everyone is selling assets and few buying (ie, parting with cash), business will pay premiums on interest that could otherwise be invested in the company itself or, at worst, be unable to access needed capital and go bankrupt.


Luckily, the Fed is taking this risk seriously and opening facilities not used since the Great Recession to keep credit flowing.  But if the forces of supply and demand – and an unhealthy mix of animal spirits – override their best efforts, this black swan event could push us into another financial crisis.

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coronavirus flatten the curve

Tracking the Coronavirus

Coronavirus

Updated 4/1 at 2:00p CT.

Coronavirus Infection Tallies

The coronavirus, which causes the disease covid-19, has engulfed and changed our lives.  Restaurants, bars, movie theatre, gyms have all shuttered.  Millions now work from home.  Others cannot leave their homes.  Unemployment is surging.  Thousands have fallen ill – and hundreds have passed away.

Recently implemented quarantines and lockdowns serve one purpose: Flattening the curve.  Doing so will save hundreds of thousands – if not millions – of lives.  Slowing the rate of infection keeps people safe and prevents our woefully inadequate medical infrastructure from being overrun with cases, worsening health outcomes for everyone.

But we aren’t there yet.

With data from 1Point3Acres.com, the plot below tracking the total number of US cases shows an unmistakeable exponential trend.  Cases double and treble with alarming frequency and future extrapolations show obviously horrendous numbers.   Tracking the Coronavirus



The log-adjusted rate of increase shows a linear pattern, meaning new cases still exhibit an exponential pattern.

Tracking the Coronavirus



This graph shows the difference in confirmed cases from an unflattened to flattened curve.  Looking just one week ahead, failing to flatten to the curve means tens of thousands of additional cases and thousands more deaths.

Tracking the Coronavirus



Flattening the curve means flattening the rate of increase, not dropping it to zero.  That means instead of increasing exponentially, cases rise at a linear rate – and eventually the rate of new cases falls.  A continued curve shows a linear log-adjusted slope whereas a flattened curve will see it drop to zero.  The difference?  Hundreds of thousands of cases.

Tracking the Coronavirus



Clearly, from these graphs, we need to flatten to curve.  Please do your part to help public health!

Keep checking back for refreshed charts.

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coronavirus unemployment claims

Coronavirus Unemployment

Coronavirus, Economics

The coronavirus shutdowns spreading across all 50 states have already wreaked havoc on unemployment.  Weekly unemployment insurance claims have jumped from the depths of the Great Recession – and most of the data only cover Monday through Wednesday.

This table shows current weekly unemployment claims from select states where data has been made available either via news outlets or reporters (all verified sources) on Twitter.  It compares these numbers with those reported on January 10, 2009, the height of the financial crisis.



Coronavirus Unemployment Claims

State1/10/093/21/20Percent Increase
California85,952190,000121%
Colorado7,28418,700157%
Connecticut13,02330,000130%
Florida33,90376,000124%
Indiana28,61622,580-21%
Massachusetts14,89920,00034%
Michigan76,70220,000-74%
Minnesota13,60150,000268%
New Hampshire3,2419,500193%
New Jersey22,47515,000-33%
New York52,953159,000200%
Ohio40,82978,00091%
Pennsylvania59,669120,000101%
Rhode Island3,48910,000187%
Texas30,83029,000-6%
Wisconsin30,14629,400-2%
Total517,612877,18069%

Secretary of the Treasury Steve Mnuchin warned GOP lawmakers that the unemployment rate could temporarily skyrocket to 20%.  That dire warning – it’s an unemployment number not seen since the depths of the Great Depression – should prompt Congress into immediate action. Claims have increased 61% from Great Recession lows across the seven states and are bound to rise further.


We need a strong fiscal response that includes mailing checks directly to Americans.

Thankfully the Federal Reserve is taking care of monetary policy.  But that only goes so far.  Alleviating immediate pain and paving the way to a strong recovery lies in the hands of Congress.

Keep checking back as this page refreshes with the most up-to-date numbers.

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federal reserve repo

No, the Fed Didn’t Bailout Wall Street

Bernie Sanders, Economics

A week ago, the Federal Reserve announced a $1.5 trillion operation to stabilize the repo market and help firms such as banks access cash needed for day-to-day operations.

That price tag immediately aroused the fire of America’s most ignorant populists; a calling card to the crooning know-nothings who sing the song of simplicity – and stupidity.  Bernie Sanders and Alexandria Ocasio-Cortez, naturally, joined the choir and racked up hundreds of thousands of retweets in the process.

They either lied to your face or demonstrated their incompetence.  Here’s what the Fed actually did.


The Repo Market

Many businesses – probably too many – rely on the repo, or repurchase, market to access cash for daily operations.  Think processing payroll or paying vendors.  Generally, institutions loan money to each other at rates managed by the Federal Reserve (the federal funds rate).  This is where money in your savings account ultimately goes.

Businesses put up collateral in the form US government bonds (treasuries, or t-bills) – risk free assets worth at least the value of the loan – and agree to buy, or repurchase, the bonds for a slightly higher price after a few months.


Credit Crunches and Repo Runs

In times of crisis or other extraneous events, however, the repo market breaks down.  Spreads, the gap between where someone is willing to buy or sell an asset, surge and liquidity breaks down as firms want to hoard cash and are disinclined to part with it even as interest rates rise from the lack of cash supply.

This started happening in October 2019 for a number of reasons and the Fed stepped in to stabilize the market after interest rates surged.  It began loaning money to banks and things settled down.

The coronavirus crisis has exacerbated these problems.  Liquidity in the repo market dried, spreads surged, and businesses started worrying about losing access to the money needed for operations.  In short, the market flashed signs of a potential run.

What It Means for Main Street

A repo or credit market run risks collapsing the entire economy.  In fact, a run on the repo market helped start the 2008 Financial Crisis.  We know how that ended.  When businesses either don’t have access to money or can’t borrow it without huge interest costs, they have little choice but to contract or end operations.  That, of course, leads to bankruptcies and lay offs.

Further, because treasuries are risk-free, they serve as the basis for other interest rates.  Riskier assets have spreads from the t-bill (risk-free) rate to offset risk.  So as interest rises for treasuries, it also increases for mortgages, variable-rate student loans, small business loans, etc.  A run on the repo market pushes up secondary market interest on treasuries, which spills over into markets that affect our everyday lives.

In other words, the repo market is the financial plumbing.  Cash flows through pipes collateralized by treasuries.


It’s a Loan, Not a Giveaway

To prevent this calamitous chain of events, the Fed announced it would spend $1.5 trillion within that market to ensure cash and credit continue flowing.  This isn’t a bailout: It’s a loan.  And it’s not just any loan: It’s a loan secured by US debt worth more than the loan itself, so even in the case of default the Fed – and, by extension, John Q. Taxypayer – still profits.

Bernie Sanders and AOC claim this money could instead go towards student loan forgiveness or mortgage assistance.  Hogwash!

It would be the height of cruelty and impossibility for the government to demand that a 25 year old borrow with $80,000 in debt post at least that much in treasuries as collateral for a government loan and then, one month later, buy back that amount plus interest from the government.


Monetary policy isn’t fiscal policy.  Any loan forgiveness or massive spending programs need to originate within Congress and the realm of fiscal plans, not loans from the Federal Reserve.  Right now we need the Federal Reserve to operate independently from the foolish political rhetoric of cultish politicians riling up class-based anger.

Shame on you, Bernie and AOC.

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mail the checks

Mail the Checks

Economics

The coronavirus has almost certainly tipped the US – and global – economy into contraction.  Rosy estimates for Q2 growth show -5%, as bad as the financial crisis.  A former Trump administration economist warned we could lose 1 million jobs in March.

Obviously, fallout from Covid-19 threatens a long-lasting recession driven by concentrated unemployment and persistent demand shocks (especially if the virus persists during the summer months).  The Fed has done it’s job.  Now we need a strong fiscal response from the federal government to provide confidence in the economy and economic security to millions of people.


Stimulus Checks

The federal government needs to immediately mail $1,000 to every adult American and $500 for each child.  This is the bare minimum.  Ideally, those amounts would be doubled or even tripled and repeated if quarantines and demand constriction continue beyond 2-4 weeks.

$1,000 helps those facing layoffs pay bills, rent, and buy groceries.  For those still working, it provides a cushion should their companies start to struggle.  These individuals would either begin spending that money on takeout, delivery, online purchases, etc – providing an immediate lift (or softer crash) – or save it until things return to some amount of normalcy, increasing the rate of recovery.

Such a universal and temporary program also helps stop the virus’ spread.  Fewer people would be inclined to go to work sick because they suddenly have a cash cushion.  That decreases infection rates and helps flatten the curve.


Better Than Payroll Tax Cuts

It’s also a better policy than payroll tax cuts.  Payroll tax cuts are both regression and slow.  High-earners benefit most because they pay more money in payroll taxes.  Those individuals have lower rates of marginal consumption – ie, they are less inclined to spend those tax savings than a family struggling to make ends meet.  We want to increase the velocity of money.  Cuts also take a while to accrue because they’re dependent on paychecks; it’s not a sudden fiscal influx and many people might simply overlook an additional $50 in their paycheck.

And, of course, a payroll tax cut means nothing if you’re been laid off and no longer receive a paycheck.

Right now, the government can borrow money for free.  Its interest rate on a 10-year note is negative when adjusted for inflation.  That means the government effectively pays $900 10 years from now for $1,000 borrowed today.  This is the perfect time for a massive stimulus.


Lastly, $1,000 in the mail means rich Americans also receive free money, a potentially off-putting theoretical.  However, in times of crisis, we can’t afford the delay needed to properly means-test or devise the most-targeted solution.  We need to act swiftly and decisively.  Any concerns about a handout to the rich can easily be resolved by increasing taxes once the economy recovers.  There are ways to claw-back the money to those who don’t need it.  But don’t let perfection get in the way of necessity.

Congress: Mail the checks, protect Americans, and boost the economy.

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