Covid-19’s economic cost

NICK EICHER, HOST: I want to turn back to David Bahnsen, financial adviser and analyst with offices in New York and Southern California.

Dare I say it to a financial guy? Good morning?

DAVID BAHNSEN, GUEST: Well, look, I’m sure a lot of people aren’t using the adjective good but to the extent that days and weeks like this are part of our job and want every day to be a good day, I’m fine to hear the adjective.

EICHER: Last time we talked, we were defining the term “correction” in the stock market. Again, a major stock index suffering a 10-percent drop from its most recent high. Now we’ll define another term, “bear market.” That builds—in a negative way—on the concept of correction. But instead of 10 percent down, correction, we’re talking 20 percent down, bear market. And so the bear market came and that pushed aside the bull market, which had been running for 11 straight years.

So here we are, even after a nice Wall Street recovery on Friday to close out the week.

You said panic selling last time we talked. Is this just more of the same, taken to the n-th degree?

BAHNSEN: No, I mean—well, yes and no, OK? Certainly the levels and the magnitude of the selling is clearly a byproduct of a panic, but I think one thing that’s different than two weeks ago is that right now they’re responding to at least one level of known information that two weeks ago was unknown. 

And that is the degree to which the economy is going to go on pause for a bit. But there’s no question now that economic activity is going to come to a screeching halt. And the big question will be when things kind of normalize. And if you start seeing the health data go to a positive direction, normalization, some decrease in diagnosis count, some ongoing favorable metrics in fear and recovery, not to mention low mortality. Those are the things we want, obviously, on a human level and they’re also things that the market wants and has very good reason to think will happen—particularly now with the severity of the response.

And this week, market actors didn’t wait to see what would happen. They went straight to the worst-case scenario and priced in a recession—and I’ll share with your listeners—the quickest in history. Sixteen days to go from a peak to down over 20 percent, which as you accurately said is the technical definition of a bear market. And when you look at every bear market we’ve had going back to the Great Depression, even the famous crash in 1929 took over 30 days to get to a bear market. And you have 1980, it was over 300 days. So this is something for the history books. It happened so quickly but what that tends to mean is that they took their medicine quickly so the recovery will end up happening quicker as well.

EICHER: Let’s come back to the Fed. Again, last time we talked, you perfectly predicted an interest rate cut. But the central bank has taken a few extra steps beyond the emergency half-point rate cut, steps that are pretty highly technical: one of them an injection of funding into the short-term lending market, and then a big purchase of government bonds? What’s the point of that, and do you think it’ll help?

BAHNSEN: Well, if you mean market psychology, I think that they help on the margin. I don’t think that’s the extent of what they’ll do though. Now, remember there’s no free lunch and this is an ironclad rule of economics and so to the degree one argues they help, you have to also wonder what the hurt is. You don’t just get free help from interventions in central bank as they have a magic wand. But in this case, I expect much more intervention from the Fed. I think some of it will be psychologically beneficial to financial markets. I think none of it is materially substantive. And I think all of it comes at a cost at a later date.

EICHER: What’s your feeling on the drastic measures we’re seeing all around us—from sports leagues shutting down and so forth and people not gathering in large groups—seems prudent as virus mitigation, but at what point does the economic cost become too high a cost?

BAHNSEN: Well, the economic cost is very high, but the question is the magnitude and the duration. A temporary shutdown of all these things is going to take a big hit, but there’s something economists call a pent up demand. So, there are things that get cancelled that never come back and that represents economic loss—either in opportunity cost or real subtraction. But then there’s pent up demand where you simply move an activity from one month to another month. The vast majority of what’s going on right now will result in pent up demand and if indeed we get the help, the recovery that we all pray on a human level we get, then economically there’s still chance for there to be a v-shape recovery. There’s no chance to avoid contraction now. These things are going to hurt the economy badly. However, the idea that perhaps you will see a resurgence of activity that makes up for a lot of it in the third quarter is still, to me, very much on the table and going to require an ongoing monitoring of data in the days, weeks, months ahead. So, that’s my assessment of the economic implications of a lot of these responses.

EICHER: David Bahnsen is a financial adviser and analyst based in California. David, thank you so much for your time. I appreciate your insights.

BAHNSEN: Thanks for having me. Take care.

(AP Photo/Mary Altaffer) A customer wears a facial mask as she lines up to enter a Trader Joe’s grocery story, Friday, March 13, 2020, in New York. 

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