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Why we need another New Normal

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      By Bill HackneyAtlanta Capital Management

      Atlanta - Who would have thought the longest US economic expansion in history and one of the greatest bull markets would be ended by the sudden arrival of a global pandemic?

      Here's a table I created to provide investors with a framework for analyzing the economy and financial system as we follow the course of the pandemic, which I've divided into three phases: Panic, Transition and New Normal.


      Changes in the pandemic — i.e., the success or failure of medical protocols — will determine when we move from one phase to another. In this blog, I'd like to focus on the longer term, when we've journey past Panic and Transition into the next New Normal. That phase will begin only when we have a vaccine or a therapeutic capable of curing the virus. I call this phase the New Normal because I doubt that life in the US or elsewhere will ever be quite the same after this episode with the coronavirus.

      There are three reasons underpinning the need for a New Normal:

      1. The coronavirus served to remind us that deadly novel viruses, for which we have no defense, can always attack again. So our behaviors must change.
      2. This episode unmasked severe shortcomings in our economic and medical systems. To wit, we have inadequate public heath reserves of supplies and equipment to implement a surge in medical care caused by a pandemic. In addition, both consumers and businesses have grossly inadequate liquid financial reserves to sustain themselves for even short periods of time when the economy is weak or shut down.
      3. The way the federal government has dealt with this crisis is without precedent. The CARES Act resulted in federal government borrowing of about 10% of GDP. The Federal Reserve is also buying about $2 trillion (about 9% of GDP) in various mortgage, municipal and corporate securities to provide additional liquidity to our financial system. These amounts vastly exceed the amounts provided during the Great Recession of 2008-2009 and will add greatly to the federal debt burden and money supply. There will be unintended consequences — probably higher interest rates and higher inflation in 2021, since these are the effects most people, including the Fed, are least expecting.

      What else might we expect to see in the new normal? Certainly, medical screening at airports and for cruise ships, or what's left of the cruise ship industry. Medical cards signifying health or qualification to travel or the presence of antibodies in your system. Perhaps mandatory face masks at crowded entertainment venues, particularly during flu season. Reformatted seating in restaurants with screens between tables.

      For business, you can expect much less emphasis on global supply chains and cost efficiency and more emphasis on control and resiliency of the supply chain. International operations will be brought back to the US, despite the greater expense of doing so. The federal government will mandate, on national security grounds, that certain medical products be produced in the US. Many companies will establish greater liquidity reserves on their balance sheets to insulate themselves against future credit crises caused by a pandemic. This will improve their financial strength, but lower their returns on equity.

      The demand for commercial real estate could be negatively affected. In recent decades, economic growth has disproportionately favored large, densely populated urban markets over small and medium sized cities. Given what we've seen the coronavirus do to the cruise ship industry and New York City, it doesn't require a leap of faith to surmise that many major urban markets may suddenly find themselves with a glut of commercial and multi-family real estate.

      Bottom line: One closing thought posed as a question. Over the last 30 or 40 years, there have been many trends that shaped the investment landscape, but the three most important have been the proliferating use of debt by individuals, governments and corporations; falling interest rates, which facilitated the build-up of debt; and globalization. Before the coronavirus, excesses were developing in all three trends. I wonder, could government actions to deal with the current pandemic further undermine each trend?