THIS IS THE END: THE MYTH OF A RETURN TO NORMAL / SEEKING ALPHA

This Is The End: The Myth Of A Return To Normal

by: Mark DeWeaver, CFA

Summary

 

- The market is signaling something much worse than a temporary slowdown.

- A golden age of globalization, laissez-faire policy, and high corporate profitability is over.

- There will be no ‘V’-shaped recovery.
 

Those who expected lightning and thunder 

Are disappointed. 

And those who expected signs and archangels' trumps 

Do not believe it is happening now.  

- Czeslaw Milosz

 

 

TV pundits and US government officials continue to reassure us that once the COVID-19 nightmare is over - presumably as soon as the weather warms up - everything will quickly get back to normal.

 

But, if that is the case, why are risk assets cratering? Why this week's Donald J. Trump signature stock market crash? Aren't market participants supposed to be looking more than a few months ahead?

 

Perhaps, we are merely in the midst of a media-induced mass hysteria, and it will only be a matter of time before people snap out of it. We should then get a 'V'-shaped recovery with the economy bouncing back and the bull market picking up where it left off.

 

I find that hard to believe. Markets are clearly discounting something much worse than one negative quarter.

 

I think they are discounting not just a temporary, virus-induced slowdown, but the end of a decades-long era of strong profitability, driven by globalization and laissez-faire policy.

 

Globalization has, of course, been under threat since the beginning of the Trump administration's trade wars.

 

The abrupt disruption of supply chains resulting from China's 'people's war' on the coronavirus is only the final nail in the coffin. Businesses were already scrambling to find alternatives to war-torn China.

 

Now, the scramble will become a stampede, particularly as there is no longer any real prospect of a reset in US-China relations. At this point, each government has become entirely focused on blaming the other for the pandemic. The Chinese are even fantasizing about cutting off exports of medical supplies to the US, as fans of Tucker Carlson Tonight will be aware.

 

The problem for the multinationals is that, in the short term, there are no good alternatives to the 'world's factory'. First-world countries will obviously not be attractive places to site labor-intensive manufacturing.

 

And, no developing country will be able to match China's transport infrastructure, logistical capabilities, and vast industrial scale. Supply-chain relocation must unavoidably result in lost gains from trade and will be a long and expensive process.

 

Making China weak again will not make corporate America great again anytime soon.

A reversal of China's integration into the world economy will also result in a protracted Chinese recession, one which Beijing, its superior 'model' notwithstanding, will be powerless to arrest. This, too, will be bad news for earnings.

 

For many of the US-listed names-names like Apple (NASDAQ:AAPL), General Motors (NYSE:GM), Disney (NYSE:DIS), Starbucks (NASDAQ:SBUX), and Boeing (NYSE:BA), to cite but a few - China is either already a significant revenue generator or a key geography for future growth.

 

There are no obvious substitutes for the China market, particularly with Europe already in a demographic death spiral.

 

Ironically, even as the last remaining major socialist country goes into a tailspin, the pendulum in the developed world is already swinging from blind faith in markets to naive confidence in government intervention. This confidence can only be strengthened by the apparent effectiveness of public health measures taken in China, Korea, and Taiwan.

 

Their successes will be taken not just as evidence that market solutions are not always efficient but rather as proof that they can never be optimal.

 

One victim of this shift in the zeitgeist will be the Republican Party, which risks losing control of the White House and possibly the Senate as well.

 

Washington's current corporate-friendly regulatory policy may next year be reverting to the more heavy-handed Obama-era status quo ante. Whatever one thinks of the relative merits of these two approaches, this will surely be an unwelcome development for many companies.

 

The talking heads' tale of a return to normal is predicated on the idea that a shock as devastating as COVID-19 will have no permanent implications for the global economic order or the political climate. All that is required is to get through the next few months, ideally with the help of some temporary fiscal stimulus.

 

Sure a few companies may go bankrupt, but so what? Others will readily take their places. By the end of the year, the S&P 500 will be making new highs, and we'll be wondering what all the fuss was about.

This is little more than wishful thinking, in my strong opinion.

 

What we are actually witnessing is a major turning point for financial markets and the world economy.

 

This is the end not only of the 'fifth wave' of an eleven-year bull market and an unprecedented US expansion, but also of the 'Chinese century', the global growth story, and the retreat of the state.

 

It may not quite be the end of "everything that stands" or of all "our elaborate plans."

 

But it is certainly the end of much of what we have gotten used to taking for granted.