The last time we had zero interest rates was during the great recession of 2008-09. If you are a movie buff, that was one scary horror movie. Unfortunately, the sequel maybe even scarier. The plot, so far, is similar in many ways. The world faces a major crisis with high unemployment, massive government spending (bailouts), zero interest rates and central banks printing money.
How do you make a horror movie scarier than the original? The writer has to intensify the plot line and add some terrifying developments not seen in the original movie.
- This crisis affects the whole world with every economy feeling the pain.
- The percentage of people unemployed could be worse than the great depression of the 1930’s (25% or more)
- The government stimulus package was in the billions last time and now in the trillions with more to come.
- Central banks are buying huge amounts of government debt and now are buying low grade corporate debt. (Even some junk bonds)
More terrifying developments
- Although tragic that many consumers lost their homes in the last recession, small business failures will have a more negative effect on the economy. Small businesses are responsible for employing 48% of the U.S. workforce and have generated 65% of net new jobs over the past 17 years. The unemployment rate will be higher for longer.
- Consumer spending accounts for 70% of economy growth. Unemployed consumers will have less money to spend. Plus, images of body bags and continuing daily death counts will inhibit consumers from risking their lives to go out and even spend money. The last recession had little impact on travel, movie theaters, theme parks, sporting events, restaurants and bars. These businesses will continue to suffer until consumer confidence returns
- The last recession didn’t produce long lines at grocery stores. Disruption of food production was unheard of and has become a real concern as some meat packaging plants have been forced to temporarily shut down. A shortage of fruit and vegetables could be next as migrate workers could face high rates of infection.
- Normally a drop in oil prices has a positive effect on consumer spending but a total collapse does more harm than good. Oil companies have started to suspend capital expenditures, cut dividend payouts and reduced their workforce. Countries which depend on revenues from oil production will face large budget deficits making it harder for them to stimulate their economies.
- Food banks are experiencing a surge from a high number of people who have never needed their help before. Images of long line ups are popping up all over the United States.
- There was a coordinated world response to the financial crisis which is sorely lacking in dealing with this pandemic. Too many leaders are more concern with keeping their jobs than going their job.
The spread of misinformation by some world leaders and some media outlets could cause a second wave of this virus. The image below is an example of irresponsible leadership. Some of these people will get sick and some may even die. However, they will also spread the virus to their families, their friends and critical medical personal at hospitals. Being a Canadian, I hope that a change in leadership in the United States will help the North American economies recover sooner rather than later.
How will this horror movie end? My best guess is when a scientist shows up holding a treatment in one hand and a vaccine in the other!
Stay tune for some investment ideas during these turbulent times.