Saturday, February 29, 2020

Ep. 31: The Crash Begins (podcast script)

This is the script for my Demographic Doom podcast episode (#31) released on 29 February 2020. It may differ slightly from the final broadcast. This episode is available on major platforms, including PodbeanApple Podcasts and a video version on YouTube. See the description on the YouTube version for anonations, links and corrections. You can also comment on this episode there. (If you leave comments on this blog post, I might not see them.) The main website for this project is DemographicDoom.com



I’m Glenn Campbell. I call myself a demographic philosopher. I’m looking at life and trying to predict the future through the lens of demography, or the study of human populations.

Today is Saturday, February 29, 2020, the last day in February. In previous podcasts I made some predictions about the economy in response to the coronavirus epidemic, and it looks like I was vindicated. In the past week, there's been a massive selloff in worldwide stock markets. US markets were down roughly 12% in the last week. That's the biggest drop since the Global Financial Crisis and roughly comparable to the initial fall of the stock market at the beginning of the Great Depression in 1929.

I want to talk about what this means for our future, but first I want to take a moment to pat myself on the back. 18 days ago I released my episode entitled "Coronavirus Predictions."At that time, February 10, investors were still in full denial. Even though the coronavirus news was getting worse by the day, investors were treating bad news as good news and were continuing to bid up stocks. If you go to the end of that episode, around 27 minutes 30 seconds, you will hear me say, quote, I'm going to go out on a limb here and say that by the end of February, stock markets will be in obvious distress, unquote. So I got it right. Can I get a medal for this, maybe a free buffet? You should call me Nostradamus now.

In fact, I've been predicting economic collapse long before the coronavirus. In Episode 22 on December 13, three and a half months ago, I predicted the 2020s would be a horrible, no good, stinky decade when financial systems would collapse and everyone would be miserable, and I'm sticking with it. My previous predictions of financial doom go all the way back to my first Demographic Doom video recorded in the Canary Islands over a year ago.

Of course, I knew nothing about any virus at the time. I only knew about three things: the world's colossal debt, its absurdly high asset values and its ominous demographics, where old people were retiring in large numbers while the workforce supporting them was shrinking. The shrinking workforce meant that, ultimately, the debts could never be paid and high asset values couldn't be justified. I knew a crash was coming but I didn't know when or what would trigger it.

Well, now we know. It's happening now, and the trigger was a random epidemic. Epidemiologists have long predicted something like this, but its timing was unknowable. No one gets to choose their Black Swan. When it happens, it happens, and you have to deal with it. The coronavirus and its unstoppable spread means the day of reckoning can no longer be put off. I have no idea how long the crisis will last, but we now have a clear start date. It was this past week, February 24-28, 2020. Things can only disintegrate from here.

Now to be honest, I also made the some prediction in December 2018, 14 months ago, when the stock market took a dive. In that case, the stimulus was pretty mild: The Federal Reserve tried to raise interest rates to inch them back to normal levels. This triggered an unpleasant stock market correction, and the Fed quickly reversed course, lower interest rates again. 2019 turned out to be an banner year for the stock market, which I certainly didn't predict, but it was based mainly on the free money the Fed was essentially giving away. Stocks reached new highs without any fundamental business improvements.

So what makes it different this time? This time we are facing an undeniable external threat, the  coronavirus, that would be crippling to the economy even in the best of times. It is not virus itself that is sabotaging the economy, but the widespread fear of the virus and all the actions that flow from that fear. No one wants to die or even accept a 1% chance of dying. Whether we're talking about the actions of governments or the behavior of individuals, in the end hardly anyone can ignore this threat. The epidemic is rapidly changing people's behavior and the behavior of governments in ways that can only be bad for the economy. Couple this with the huge unpayable debts of the world, and you've got an unavoidable disaster.

As of this week, it is becoming clear to any well-informed citizen that the virus has gotten loose and is coming after us all. Some people are still in denial, but I think they will accept it as soon some celebrity dies, like Tom Cruise or the Pope. There's a lot of debate about what the fatality rate is for this disease. Is it 1%? 3%? It's pretty clear that at least 85% of those who get the virus will suffer only mild to moderate symptoms, but no one wants to take the chance of being in that other 15%, where they have to depend on the medical system to keep them alive. Even if only 1 out of 100 die, no one wants to spin the big roulette wheel to see if they're the chosen one.

So the virus is going to change human behavior, and this can happen incredibly fast. I think in even the past week, a lot of people outside China have changed their opinion from "This is no big deal" to "Maybe I should be stockpiling food."

When a significant portion of the population goes into self-protection mode, it changes everything. Consumers have great discretion over the way they spend money, and most of the products and services they normally buy can be canceled or delayed at a moment's notice. As soon as great masses of consumers adopt a bunker mentality, our current economy isn't sustainable anymore, and the fear is self-perpetuating. When people stop using non-essential services, the people who provide those services get laid off, then those people stop spending money, and the cycle repeats.

The stock market is not the economy. The fact that it fell 12% this week doesn't affect most consumers directly, but it has ripple effects. It's just one more piece of evidence that tells consumers it's time to hunker down. It doesn't matter if you are hunkering down to avoid the virus or hunkering down because your 401K just lost 12% of its value. As soon as you stop spending money like you did in the past, and millions of other consumers do the same, the real economy begins to plunge, and once it begins it may be unstoppable.

So now that I'm a little cocky over my success in predicting the past week's stock market, what are my predictions for the coming week? The truth is, I don't know. Stock prices could go up or could go down. The Fed could lower interest rate, which could fuel a temporary bounce back. I don't know what's going to happen next week, but in the long run these indexes are going to keep falling, and I don't know where they will stop. At some point the whole integrity of the monetary system is at risk.

Consider this: As investors are pulling out of stocks, they are putting money into bonds, especially US government bonds, where the effective yield is being pushed toward zero. People, in effect, are loaning the government money for ten years and getting virtually no reward for it, and this is one of the most dubious assets of all. Given its deficits and soon-to-be-plunging tax revenues, the government can't possibly pay back all the money it owes, yet investors are treating its promises as though they were gold. Something has to fail here, and I don't know what, when or how.

And what about real gold. Where is that going? I have to admit that gold is the asset I understand the least. You can't use it for much, but people treat it as a store of value. How high can the gold price go? I have no idea. What happens when everyone on Earth tries to buy gold? What does this do to the price of all the other assets? I just can't get my head around it.

If you sell your stocks and put you cash in a bank account, well, banks can fail, and they will. You may think your deposit is guaranteed by the US government, but what does that mean? What good is the word of an insolvent debtor?

Keeping you cash in a mattress? Well, I don't know if dollars tomorrow will have the same buying power as dollars today. Ultimately, if the Federal Reserve keeps printing money, there has to be more consumer inflation, but I don't know when it is going to come. In the meantime, deflation might be the order of the day as foreign investors seek the perceived safety of dollars.

The bottom line is that I don't know where things are going in the long run. I only know that there are more perceived assets in the world, more perceived wealth, than can possibly be backed up by reality. You may think you own a house worth a million dollars, but in the long run it is really worth a lot less. No matter how you cut it, most of the wealth people think they have is going to evaporate, but I know yet how that evaporation will take place.

I feel more comfortable making predictions for the medium term, say the next few months. It is clear now that the coronavirus has breached its containment walls and will race through countries outside China, including Europe and North America. Regardless of the fatality rate, it's going to change human behavior. People are going to be a lot more cautious about where they go and what they touch, and they know that they safest place to be is at home. This may be great for Netflix, but it's bad for any business that requires people to go out and do things, or that requires people to give up money they could otherwise hold onto.

We've already established that the travel industry is already screwed for the rest of 2020, but think of all the other industries that require people to step outside or otherwise interact with other humans. Restaurants seem vulnerable, along with retail stores and shopping malls. Who's going to want to go to a sporting event or the Olympics? If your retirement fund just lost 12% of its value, who is going to feel comfortable initiating a home renovation project. You might not even go to the dentist for routine checkups, because things like that can be put off.

Right now, the main fear is the virus itself, but I predict that in the next month or two this will morph into financial fear. People will either lose their jobs or fear losing them. Retirees and prospective retirees will discover that much of the wealth they thought they had has vanished. Everyone who thought they were financially comfortable will feel less comfortable. The virus itself encourages people to not leave home, which only incidentally prevents them from spending money. Financial fear encourages them to hoard their money and spend as little as possible. Up til now, people with money were spending it in all sorts of insanely wasteful ways, and in an instant, all that wasteful spending can dry up. This is disastrous if your whole economy is built on wasteful spending, as is ours.

I think that within the next few months, we're going to start seeing massive layoffs. As of today, there is no evidence of it. The unemployment rate in the U.S. is just about the lowest it has ever been, 3.6%. Just about anyone who wants to work and is functional enough to show up can get a job. It may not be a great or well-paying job, but it's a job. I predict in the next few months, those jobs are going to start going away. It's going to start in industries that are already under stress, like travel. Around the world right now, there are already a lot of idled airplanes and unoccupied hotel rooms. The people who service this market are going to get laid off or have their hours reduced.

And that's just the most obvious example. Any product or service that could be labeled as "luxury" or "fashion" or "entertainment" or "relaxation" or "self-fulfillment" could take a hit, and a lot of people in those industries are going to get laid off. Laid off people are especially tight with their money. They spend only the bare minimum they need to stay alive. When push comes to shove, they're probably going to pay for food and their electric bill, while debt and mortgage payments will start to slide.

Debts are so high in all sectors of the economy that it takes only a small downturn to trigger widespread defaults. When people default on, say, their car loans, this is going to have a chilling effect on the whole automobile industry. For one thing, it's going to push a lot of repossessed cars onto the market, which will suppress used car prices and make new cars less attractive.

Debt is a big interrelated web. Once one class of debts fail, then other kinds of debt follow. We saw this during the global financial crisis, where the crisis in subprime mortgages in the U.S. eventually led to a sovereign debt crisis in Greece and other countries far from the U.S. Last time around, central banks were able to intervene. They lowered interest rates and pumped cash into the economy to to stimulate spending. That's not going to work this time. If you are hunkered down at home because you fear the virus, and the Federal Reserve lowers interest rates, it's not going to change your behavior. It's not even going to change the behavior of businesses that are hunkering down. Nothing the central banks can do will encourage people to spend when they are fearful. They won't get on a cruise even if the cruise is 50% off.

Here's a specific prediction for you: I think the cruise industry is dead. I think all those massive Princess of the Seas ships with five swimming pools and fifteen restaurants are going to get mothballed in 2020 and most of them will never be returned to service. If there was anything emblematic of things you don't need, it's a cruise. You need a huge economy of scale to run those things, and I don't think the traffic will ever be back, even after the virus abates.

If enough purchases get put off or canceled, the Doom Loop begins. Once a certain threshold of fear is crossed, a feedback cycle takes over, and it can't be stopped. Companies that are on the edge of solvency right now are going to fail. Consumers are going to lose confidence, and there's nothing the government can do to bring it back.

Even if we could just stop the virus in its tracks right now, I don't think things can ever go back to the way they were. The trigger has already been pulled. All the market absurdities built up over the past decade must face a reckoning. Governments can't pay their bills—especially the US government. Consumers can't pay their debts. Assets values for things like real estate are fundamentally unsupportable. Everything has to crash in some manner.

I can't envision what this will look like on the ground. I only know that a lot of people will be in dire straits. On a worldwide basis, I honestly wonder whether starvation will kill more people than the virus. That's what happens when millions lose their jobs.

So as of this moment, the last day of February 2020, the official unemployment rate in the U.S. is 3.6 percent, which is just about the lowest it has ever been. I predict that by the end of June, 4 months away, it will be at least twice that: 7.2 percent. Although the viruses—both medical and economic—will move more quickly than that, there will probably be a lag time before people get laid off. As a reference point, unemployment in the US peaked at 10% during the 2009 crisis, from a prior level of 5%. After June, I think things will continue to get worse, but my crystal ball gets cloudy at that point. There are too many variables to allow me to see beyond the summer. Everything I foresee is bad, but I can't make out the form of that badness right now.

If you want to see the news I'm seeing and read what I'm reading, you should subscribe to my Twitter feed, DemographicDoom. Every significant article I come across is tweeted here. I try to focus on significant changes in the coronavirus story and the financial crisis, without too much repeated information. Furthermore, all my tweets are linked together by an indexing system based on hashtags. I have my own set of special hashtags that begin D-D-O-O-M underscore. This lets you call up my tweets from the past relevant to a certain topic.

When I started the twitter account last year, I wasn't concerned with pandemics, only with demographic and economic collapse, hence the name "Demographic Doom". Now that a pandemic has begun, I realize it is a demographic issue. For one thing, this pandemic is probably going to trigger the financial crisis I talked about all last year. That crisis, in turn, is partly fueled by falling birth rates and the growing proportion of old people in the world.

A pandemic also has an direct effect on demographics because it kills off people in certain predictable proportions. Right now it's clear that children and young adults will be largely spared by the virus, which is good. We can't afford to lose any of them. Old people are much more likely to die. Fatality rates are extraordinarily high for the elderly. It's at least a 10% death rate for people 80 or older. Ironically, this going to have an effect on pension plans, reducing their costs, but I don't think this will be enough to rescue Medicare or save fragile retirement systems.

Here's a definite demographic effect: If this week was the beginning of deep, long-lasting recession, it's going to suppress birthrates even further than they are. No one wants to bring a child into a world that seems to be falling apart. If South Korea's fertility rate is 1.0 right now, it is certainly not going to rise during a prolonged financial crisis. Women are going to be having half a baby each. As long as people lack confidence in the future, they're going to have fewer babies, which is only going to exacerbate the workforce and retirement problems decades later. In a global financial collapse, babies are one of the first luxuries that desperate people are going to do without. Outside of Africa, the world's baby making system could essentially seize up. No one with foresight is going to have a child if they are not sure they can safely raise them.

The more I think about the coming economic crisis, the more my brain malfunctions. The only thing I can equate it to is the devastation of World War II. The best I can say about the coming crisis is that I don't think it will be that bad. 85 million died in the war. I can't say whether the virus will kill more than that or less, but at least it is targeting the old and sick, and it isn't blowing up cities and killing children. So that's my worst-case prediction: Not as bad as World War II. I know this doesn't sound very reassuring, but it's the best I can offer.

No comments:

Post a Comment