Questions I Can't Answer
I often hear investors say they want to wait for clarity about some issue before investing. Of course, once clarity is achieved it is too late to profit from it and those investors will inevitably be waiting for clarity on some other issue. One thing I can tell you for certain is that certainty and high returns are incompatible. If you want a return that is better than average, you’re going to have to make decisions before you get the clarity you want.
I may not have answers – clarity – but I have lots of questions. Here are some I’ve been pondering lately:
How long will it take for the unemployment rate to fall to single digits? At least for now, restaurants and other hospitality businesses are operating at reduced capacity. And we know a lot of them have closed their doors forever. So how many of the people who have filed for unemployment benefits will be offered their old jobs back? 75%? 50%? 25%? I don’t know but I’d be shocked if it was any higher than my first guess. Of course, new jobs will be created too, even for unskilled or low skill workers. But how many contact tracers, temperature takers and extra cleaning crew will we need?
What is the real impact of the extra $600/week unemployment benefit provided by the Feds? I’ve read article after article about companies saying they can’t get workers to come back because they are making more on unemployment. I thought that if they were offered their old job they had to accept or lose benefits but I’ve heard that some states aren’t enforcing that. Is that true? If so, who makes that decision and when might they decide to force people off benefits and back to work?
How many people applied for unemployment benefits because of the Federal bonus who would have normally not filed? I know plenty of people who have lost jobs in past recessions who never bothered to file for benefits due to pride or stigma or something. But when the total adds up to $1000/week, pride and stigma may take a back seat to cold hard cash.
Has government spending been permanently expanded? Every time I write about my disdain for deficits John Tamny reminds me that it isn’t the deficits that matter but the rather the spending. He’s right, of course, but I still hate deficits and I’ll probably have plenty of reason to bitch in coming years. Government spending this year (Federal, State and Local), assuming another “stimulus” package, will be roughly 50% of GDP. How much will long term economic growth be reduced if government spending stays that high?
Are people buying stocks today because they believe the US economy will have a “V” shaped recovery? Or are they betting on continued government support? If it is the latter, I can’t believe they won’t be disappointed. Not that they won’t get another package of government spending measures. I’m pretty confident they’ll get that. But anyone who believes that government spending, so called stimulus, will be effective in creating economic growth doesn’t know history. As for the “V” shaped recovery, I would think that we’ll see a surge of activity coming out of lockdown but after that, if people don't have a regular income other than government benefits with an unknown end date, will they spend?
How many families discovered during the lockdown/layoffs that they really don’t need that second income? That second income is so tempting but in a lot of cases it really doesn’t make economic sense after you factor in commuting and child care costs. I keep seeing articles about the drop in the labor force participation rate and they all frame it as a negative. But maybe, from a societal standpoint, a lower participation rate that allows more family time is the better option.
How many people discovered that they really could save a lot if forced? Will they continue to do so voluntarily? What are the implications for consumption and overall economic growth? Will people save more now that they realize how fragile things can be?
Has MMT been normalized? The federal government is spending large sums and the Federal Reserve is buying large amounts of government bonds. Isn’t that essentially MMT in a nutshell? Since I do not believe in free lunches, I wonder what the consequences will be. What price will we pay for essentially monetizing the government deficit? My gut says inflation but that was the fear when the Fed first started QE and it hasn’t happened. Will this time be different?
Will we really see big changes in where people live and work? There is an expectation that fear of the virus will push people – and companies presumably – out of cities and into the suburbs or smaller cities. That trend was already in place – the fastest growing cities are all small and mid-sized cities in the Midwest and the South – but the idea is that the virus will accelerate the trend. In addition, remote working, especially tech workers, makes this an easier transition. Maybe, but will people give up the convenience and amenities that cities offer?
I don’t know the answers to these questions yet but I think they could have big implications for the US economy and therefore on your investments. How you answer them will shape your portfolio but I’d suggest maintaining a lot of flexibility. One thing I can guarantee is that if you answer all of them, you’ll be wrong about, at least, some of them. One other thing I can guarantee is that this isn’t an exhaustive list. There are lots of questions right now and I’ll be back soon with another list.