By the Curmudgeon
Today was truly momentous regarding the many coronavirus related announcements that show the U.S. and the global economy will be hit much harder than previously thought. The IMF once again downgraded its global growth forecast.
Latest Coronavirus Stats:
ท There have been just under 9.5 million COVID-19 cases worldwide, with more than 483,000 deaths. More than 4.7 million people have recovered.
ท More than 2.3 million COVID-19 cases in the U.S., including 121,979 deaths. The five states with the highest death tolls are New York with 32,257; New Jersey with 13,076; Massachusetts with 7,937; Illinois with 6,770; and Pennsylvania with 6,518.
ท 38,115 new infections were reported by U.S. state health departments on Wednesday, June 24th surpassing the previous single-day record of 34,203 set on April 25. Texas, Florida, and California led the way, with all three states reporting more than 5,000 new cases apiece.
ท Three states California, Florida, and Oklahoma reported record highs in new single-day coronavirus cases, while hospitalizations hit a new peak in Arizona, where intensive care units have quickly filled.
ท At last count, there were 196,030 COVID-19 cases in California, including 5,724 deaths. CA infections are speeding up: more than 190,000 people in CA have tested positive for the coronavirus, with nearly 28% of the total cases reported in the last 14 days. John Swartzberg, an infectious disease expert at UC Berkeley, said increased testing accounts for part of it, but that testing alone is insufficient to account for the increase in the number of cases.
Dead people received $1.4 billion in coronavirus stimulus payments:
Let us start out with U.S. government negligence, which seems pervasive. Nearly 1.1 million coronavirus stimulus payments totaling nearly $1.4 billion were sent to dead people, according to a congressional independent report released Thursday June 25th. The U.S. Government Accountability Office (GAO) said that U.S. Treasury and IRS officials did not use death records to stop payments to deceased individuals for the first three batches of payments because of the legal interpretation under which IRS was operating.
The report also stated: The Internal Revenue Service (IRS) and the Treasury moved quickly to disburse 160.4 million payments worth $269.3 billion. The agencies faced difficulties delivering payments to some individuals, and faced additional risks related to making improper payments to ineligible individuals, such as decedents, and fraud. According to the Treasury Inspector General for Tax Administration, as of April 30, 2020, almost 1.1 million payments totaling nearly $1.4 billion had gone to decedents. GAO recommends that IRS should consider cost-effective options for notifying ineligible recipients how to return payments. IRS agreed.
When the U.S. Treasury learned that payments had been made to dead people, Treasury and the IRS determined that people are not entitled to a payment if they are dead at the time the payment is made, and Treasury instructed the IRS to stop issuing payments to deceased individuals, according to the GAO report. The report says that the stimulus payments to dead people could be considered improper payments under a 2019 law.
U.S. Economy Hit Hard by Coronavirus:
1. US GDP fell at 5.0% rate in Q1-2020; much worse declines expected
The U.S. economy shrank at a 5.0% rate in the first quarter with a much worse decline expected in the current three-month economic period, which will show what happened when the pandemic began spread across the U.S. A revised government estimate found that consumer spending in the first quarter was weaker than previously thought.
The Commerce Department reported Thursday that the decline in the gross domestic product, the total output of goods and services, in the January-March quarter was unchanged from the estimate made a month ago. The 5% drop was the sharpest quarterly decline since an 8.4% fall in the fourth quarter of 2008 during the depths of the worst financial crisis since the Great Depression.
Federal Reserve officials and private-sector economists believe that GDP plunged around 30% from April through the June (2nd quarter). Economists surveyed by MarketWatch expect a decline at a 29.5% annual rate. The data will be released on July 30th.
That would be the biggest quarterly decline on record, three times bigger than the current record-holder, a 10% drop in the first quarter of 1958.
2. California unemployment claims on the rise:
New claims for unemployment benefits in California (CA) rose sharply last week compared to the week before, the latest Department of Labor figures show. Continued high job losses suggest the damage from the coronavirus is spreading into more sectors, economists said.
3. CA Governor Newsom declares budget emergency to support states virus response:
CA Gov. Gavin Newsom on Wednesday. June 24th declared a budget emergency to ensure the availability of funding for personal protective equipment, medical equipment and other expenses as the state continues grappling with the coronavirus. The proclamation clears the way for the Legislature to pass legislation allowing the (largest populated U.S.) state to draw from the CAs rainy day fund to help California continue to meet the COVID-19 crisis, Newsoms office said in a statement. The proclamation is needed so California can tap its contingency reserve funds, a key component of the state budget deal that Newsom and legislative leaders agreed to this week.
4. Texas pauses reopening plan as coronavirus cases surge and hospitalizations rise:
Texas Gov. Greg Abbott announced Thursday that the state will pause any further reopening as it continues to report record increases in Covid-19 cases and hospitalizations.
Businesses that were permitted to open under the previous phases can continue to operate at the designated occupancy outlined by the Texas Department of State Health Services, according to statement from Abbotts office.
Texas is one of the states in the American West and South experiencing a recent surge in Covid-19 cases. On Wednesday, the state reported more than 5,500 additional Covid-19 cases.
5. ShadowStats John Williams latest comments on U.S. Economy:
IMF (yet again) Lowers Global Growth Forecast:
The International Monetary Fund (IMF) has once again lowered its global growth forecast for this year and next in the wake of the coronavirus pandemic. It now predicts a decline of almost 5% in 2020, substantially worse than its forecast only 10 weeks ago in April.
The recession caused by the pandemic - globally and in many individual countries - is likely to be deeper than the IMF previously thought.
The IMFs gloomier outlook partly reflects the fact that data since April have pointed to a sharper downturn than its earlier forecast envisioned. The global central bank now expects a larger hit to consumer spending which is somewhat unusual. Consumer spending usually takes a much smaller hit in a downturn than business investment. But this time, lockdowns and voluntary social distancing by people who are wary of exposing themselves to infection risks have hit demand.
The IMF also expects people to do more "precautionary saving," which will reduce their consumption because of the uncertain outlook ahead, especially for jobs and business re-openings and staying open.
More firms going out of business and people being unemployed for longer may mean that it is harder for economic activity to bounce back as quickly as many optimists had hoped.
There is also a danger that, the efficiency of surviving businesses is likely to be undermined by the steps they must take to improve safety and hygiene - to reduce the risk of workplace transition of the coronavirus. (Restaurants implementing social distancing protocols and extra cleaning is the best example we can think of for such coronavirus impacted firms.)
The Fed on U.S. Economic Risks:
Esther George, President and Chief Executive Officer, Federal Reserve Bank of Kansas City in a June 25th speech to the Economic Club of Kansas City:
One risk is that consumers and businesses react to the new uncertainty introduced by the virus by pulling back on consumption and investment with the goal of building precautionary buffers against future disruptions. While rational at the individual level, such a pullback can hamper growth across the wider economy.
Another risk comes from the global economy. Foreign demand for U.S. exports had already been weak for some time before the crisis. Now, with the virus rolling across foreign economies at varying times and intensities, it seems unlikely that we should expect much support from overseas as our economy picks back up.
Finally, while fiscal policy is currently providing substantial support for growth, there is a risk that the impetus from fiscal policy will turn negative before the recovery has been fully realized. The coronavirus pandemic has created serious financial consequences for state and local governments, which unlike the federal government, must balance their budgets. In the near term, governments are facing liquidity challenges, as many tax deadlines have been postponed, leading to massive drops in income tax collections this spring. Also, shelter-in-place orders have sharply reduced consumer spending, thereby lowering sales tax collections. While state revenues are under pressure, the demand for state services, including spending on medical supplies and temporary health facilities, is growing.
While significant, all of what was reported today is just a drop in the bucket. The real concern is that this does not seem to be going away. My conference in San Diego is now virtual. We will be working remote until at least September. Travel is going to remain restricted so no vacationing.
I really do not think people realize how serious this virus is going to be once it really gets going (i.e. 2nd wave of cases). The Fed has done a great job propping up the stock and credit markets (see chart below), but the economy may be in trouble for years.
Curmudgeons Closing Comment:
The disconnect between financial markets and the real economy can be illustrated by the recent decoupling between the soaring U.S. equity markets and plunging consumer confidence (two indicators that have historically trended together), raising questions about the rallys sustainability if not for the boost provided by the Fed and other central banks.
This divergence increases the probability of another MAJOR correction in risk asset prices should investors bullish and complacent attitudes change. Such a negative wealth effect would pose a very real threat to any economic recovery. As weve noted in many previous Curmudgeon posts (with tables) bear equity market rallies have occurred in the past during periods of significant economic pressures, only to unwind quickly and sharply (like a falling knife or waterfall decline).
Be well, safe, and healthy. Success and good luck. Till next time ...
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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