Deflation in the Time of Coronavirus
Rodney Johnson | March 31, 2020 | Editor's Note – After today, Harry Dent and I will no longer be writing for Economy and Markets, Boom & Bust, or any Agora publication, including successor publications such as Money & Markets.
I'm no Garcia Marquez, and the title isn't quite Love in the Time of Cholera, but hey, this is a financial piece. I'm still hung up on the number of infections from the coronavirus Covid-19 around the world. I've read a number of interesting (at least, to a math geek) articles discussing the size of the infected, but undetected, population, and the infection rate. The undetected group consists of those who have the disease but were never tested because they didn't seek medical attention. Either their symptoms were mild or they had none. The estimates for the percentage of people infected in this group range from 80% to more than 90%, so we'd have to multiply the known number of infected people, about 740,000 right now, by 10 or 12 to get an estimate of the actual number of people who have, or have had, the disease. On the low side, that gets us to almost 7.5 million. At that level, we're no longer talking about stopping the spread, but managing how it happens, which is what they are doing in Sweden. Granted, the Nordic country is hard to replicate. They have high trust in their government and follow instructions well, which aren't two characteristics we can claim in the U.S. So, we'll continue with our shelter-in-place orders, social distancing, and other mitigation measures as we try to stop new patients from overrunning our health care system. But this won't last forever. As investors, we need to be considering how this changes the financial landscape not for the next few months, but for years. Think Deflation With the Fed printing as much as they want and buying everything in sight, it might seem like we're headed toward inflation. We'll probably get there, but it will take years. Between now and then, we'll struggle to rebuild incomes and asset prices to what they were just 45 days ago. Some portion of the businesses that closed their doors will never reopen. Some part of the workforce won't have a job when this is over. And some percentage of workers who are required to work from home will adjust to the change and continue to do so when this is over. All of it will weigh on assets. Strip malls and small office parks are likely to be hardest hit from lost tenants. Big malls are easy targets, but their tenants tend to be national companies that can more easily navigate bailout funding as well as debt and expense restructuring. We talk about local restaurants, but consider all other businesses, like paint-and-wine shops, souvenir stores, local clothing stores, etc. And those that don't close will suffer severe cash disruptions that will affect their spending and expansion plans for some time. The knock-on effect is higher unemployment which dents consumption across the board, from auto sales to pizza. Residential real estate could be the hardest hit in the short-term, as people, both buyers and lenders, worry about jobs. Sellers will want to maintain current high prices, but it's likely they won't have the same level of interest as they did "BC," before coronavirus. The same story will play out across the globe, weighing on international trade and dealing a blow to demand in the energy markets, which are suffering with oversupply. All of it points to one thing, lower prices. As an investor, I've been buying through the downdraft. The equity markets are forward-looking. As we get clarity on the duration of the crisis, I expect prices to move higher but not reach the old highs anytime soon. As a consumer, I'm holding off. I think there are better prices to be had in the months, and maybe the year, ahead, on everything from new cars to rental properties. Even if the huge stimulus package replaces a large chunk of the money that went missing from the economy, I don't see how it will give individuals the level of confidence necessary to spend as if the last 45 days didn't happen. It will take time to get that risk appetite back. Until then, on the consumption side, cash and patience will be the keys to success. 
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