The Recession Has Begun

 The Recession Will End

As I have mentioned in numerous past blogs, historically recessions begin when the current unemployment rate (blue line above) breaks up through the 36 month moving average (red line above). So, no surprise to anyone (I hope), with last Friday's unemployment data (and more to come) the next recession has begun.

Perhaps have a read of David Rosenberg's article in the Financial Post : "Recovery Looms, But You will Have To Wait For It"

As you may well know, David and my High Rock business partner Paul worked together at Merrill Lynch. We subscribe to David's research. During the time when the stock market cheerleaders were getting shrill about the never-ending upside potential for stocks, David was warning us that behind the scenes, things just did not look that good because we were in the very late stages of the economic cycle (and that there were plenty of underlying issues that might come to the forefront should the economy get stressed).

And we did pay attention. David took lots of heat, but stood his ground. We did too.

Now we need to start looking forward.

"A recession has not been averted, but a potential disaster has been. Counterparties now know that there is an entity with deep pockets that will ensure payment to lenders, landlords and suppliers. Most businesses will be allowed to stay alive, which means there will be jobs waiting for workers who have been forced to stay at home because of the coronavirus. This policy response is just about as good and well-thought out as can be under the circumstances".

As we mentioned to our clients on our High Rock monthly video last week, this will not be a "V" shaped recovery. More likely a "U" shape or as David suggests a "W". But there will be a recovery, in time, as there has been through history. Everything economic is cyclical: cycles begin and end and begin again.

Determining the duration is going to be a little more difficult and will depend on many things:

1) First and foremost will be achieving the levels of confidence that will allow businesses and consumers to return to the economy and begin to invest and spend again.

2) Economic growth, profitability and earnings will follow, but it will take time (more than many want, hope for and think).

3) Don't count on stock buybacks to be a factor anytime soon.

4) Expect some dividends to be cut, especially for companies that take bailout money.

5) Balance sheet deleveraging will further constrain short-term growth.

6) As in 2011, some after-shocks mostly from corporate and government debt loads, will also reverberate through the global economy.

7) The retiring baby boom generation will not invest as aggressively as they may have in the past, in fact they will continue to be drawing down investments and savings. They will also have less to spend (with stocks down 25%) and more to be worried about (their health).

8) Shell-shocked Millennial's will become more conservative with their money and savings.

9) The political environment may shift significantly away from the current populism after its major failure to safekeep the health and well-being of the population. Capitalism may take a hit as things geo-political move leftward. 

10) To pay for the huge fiscal stimulus, expect corporate and personal taxes to rise to pay for it all.

We will get to the other side. Be patient however.