Valuation Inflation

By John Mauldin



“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

            —Benjamin Graham

You may have noticed a bit of manic activity in the stock market. You may have also noticed inflation (as measured by various government agencies) is quite low, despite a supply interruption in numerous goods and services.

These aren’t separate events. Both are consequences of the pandemic. Specifically, they result from the government and central bank response to the pandemic. As necessary as their actions may have been, they have side effects, many unintended and some of which will not be known for years. These hastily conceived programs have even more side effects than usual.

I think we actually have high inflation, but due to these side effects it is showing up in stock prices instead of consumer prices. I believe this, not V-shaped recovery expectations, is the main reason stocks are up. Today we’ll explore why this is, and how investors should respond.

This letter will be different than usual. We’ll start with a dozen or so charts showing the market is either very highly valued, or extremely overvalued, or merely stretched. But in general, you will see markets are indeed at the upper end of historical valuations.

Then we’ll consider some reasons why this is so, and why stocks could even go higher. Every previous recession had an accompanying equity bear market, often quite vicious. Why not this time? That is what we will try to answer.

I sent a note out earlier this week to my friends asking for their favorite valuation charts. Let’s look at what they sent plus what crosses my desk in a normal week.

(Warning: Printing this letter will take more pages than normal as charts take room.)

The Market in a Dozen Charts

We’ll begin with some charts from Jim Bianco. This first one looks at the S&P 500 versus “forward” earnings, i.e. analyst projections. Analysts tend to run in herds, usually tracking one another. Furthermore, they almost always overestimate even in good times.

So we can pretty much assume that earnings will be worse (because, after all, it is a recession) than projected below, but even that leaves 1999–2000 bubble-level valuations.

Chart: Bianco Research

From Jim:

The bulls cry foul… we know that the earnings over the next year are wrecked because of CV19/shutdowns. So, let’s invent a new metric, P/E ratio looking ahead two or three years.

This chart uses 3-year forward earnings estimates. That is, Jun 2022 to June 2023. You are still paying over 21 for these earnings. Not cheap!

Chart: Bianco Research

Then Jim goes on to demonstrate that three-year forward earnings are generally very optimistic:

Chart: Bianco Research

Where Is the Breadth?

In a true bull market, you see most stocks rising, often to new highs. A rising tide should lift nearly all boats. These next few charts from Peter Boockvar and Doug Kass will demonstrate that is not the case now.majority of stocks making

Let’s look at the percentage of NYSE stocks closing above their 200-day moving average, which is 37% now. It was near 70% in January.

Another way to look at valuations is the ratio of price to sales rather than earnings. Here again, we have exceeded the 1999–2000 bubble.

The S&P 10 versus the S&P 490

Tony Sagami sent me a few charts from Twitter. It turns out that much of the S&P 500 returns come from just 10 companies: Microsoft, Apple, Amazon, Google, Facebook, Visa, Mastercard, Nvidia, Netflix, and Adobe. As a group they are up 35% since the beginning of the year. As a group, the other 490 are down more than 10%.

Chart via ZeroHedge

Europe has a similar phenomenon.

Chart: Bloomberg

If That Was a Bubble, What Is This?

Jesse Felder writes an amazing newsletter called The Felder Report. This is from his latest commentary.

Just three stocks make up more than 16% of the S&P 500 Index and over a third of the Nasdaq 100 Index. I bet you can guess which three. Apple, Amazon and Microsoft together are now valued at nearly $5 trillion. That’s larger than the entire economy of Germany and nearly the size of the Japanese economy.

What is really most astounding, though, is the aggregate valuation of these three behemoths relative to their free cash flow. Only at the peak of the Dotcom Mania did we see anything like it. The difference today is that these companies are growing free cash flow at a tiny fraction of the rate they grew it back then. If that was a bubble, then what is this?

Chart: The Felder Report

About all you can say is “Wow.” These three stocks, larger than Germany, have separated from their free cash flow more than any time other than an outright bear market. If the concept of reversion to the mean holds, either their sales are getting ready to explode, or their stock prices are going to fall. Or some combination. These three stocks, in terms of free cash flow, are well more than three standard deviations above their average, and significantly more than even during the tech bubble.

We can’t talk about valuations without turning to old friend Ed Easterling of Crestmont Research. Where are we now and what are future returns likely to be? He takes us all the way back to 1900. [My comments in brackets.]

Crestmont P/E July 24, 2020: This is a basic chart of P/E. It includes the long-term average and a dot to update (and highlight) the current level of P/E in relation to history since 1900. Even though the market index is about the same level as it was at the start of the year, the CAPE P/E10 EPS (trailing 10-year real EPS) is up slightly over the past six months (mostly because recent EPS exceeds the periods at the start of the 10 years). [The only time this was exceeded was in the 1999–2000 dot-com bubble.]

Chart: Crestmont Research

Crestmont P/E+ July 24, 2020: This is the basic chart of P/E with bands that reflect the typical starting and ending levels of P/E for secular stock market cycles. As reflected in the graph, we’re at levels that are well above the typical start of secular bears and well past the end of most secular bulls (except the tech bubble of 2000).

Chart: Crestmont Research

Crestmont OpsEPS P/E July 24, 2020: This is a Crestmont original. This chart provides P/E based upon forward, operating EPS. Wall Street bulls that want to make the market seem cheap often promote P/E in the most optimistic light. As you know, operating P/E is based upon a measure of earnings (for the denominator) that adds back a series of supposedly one-time charges to reported earnings (the EPS from which dividends are paid and capital is retained).

S&P has data for operating earnings back to 1988. Prior to that year, Crestmont built a series of comparable data using the historical relationship of operating earnings to reported earnings and a forward factor to reflect the typical relationship between forward earnings and trailing earnings.

Most often, the Wall Street bulls not only use a P/E based upon forward, operating earnings, they compare that value to the historical average for P/E based upon trailing, reported earnings. Yet, the difference in the averages is almost 4 points… 30%.

Chart: Crestmont Research

Crestmont Gazing July 24, 2020: This chart overlays stock market performance and valuation. The power of this chart is that it (1) demonstrates the strong effect that valuation has on future returns, and (2) provides a gaze at the future for likely returns over the next 10 years!

The line in the chart is valuation, as measured by P/E. The bars in the chart reflect the 10-year total return for the S&P 500 Index. The line is shifted forward 10 years so that the P/E aligned with each bar is the value for P/E at the start of the 10-year period.

Peaks in the line correspond to troughs in 10-year returns. Similarly, dips in the line correspond with peaks in 10-year returns. Valuation matters!

The rightmost bar on the chart is the period 2010–2019. P/E fell significantly in 2009, setting up the potential for great returns over the subsequent decade. The market delivered! Since then, P/E not only rose, it surged! The current level of P/E is very high, which portends a decade that will likely deliver low compounded returns.

The future bar under the end of the line (and dot marking July 2020) will reflect the cumulative compounded average return for 2020–2029. If history is a guide, and the principles of valuation remain true, a low single-digit percentage appears optimistic.

Chart: Crestmont Research

The next chart comes from Ned Davis Research via Steve Blumenthal.
Notice that it shows the median price/earnings ratio is merely in the overvalued range, and nowhere near its all-time high.
That means there’s still some historical room to run.

Chart: Ned Davis Research

Now let’s look at possible reasons why stocks are where they are today and why they could even go higher for longer than we might think. I think some of this shows a different perspective on the current mania. Little things add up.

Extra Cash

Back in March as the coronavirus spread in the US, organizations started cancelling large events. We didn’t know as much about the virus then but it was clear that crowds were hazardous. That includes sporting events.

On Wednesday, March 11, the National Basketball Association suspended its season after a player tested positive. But it was headed that direction anyway. Earlier the same day, the Golden State Warriors announced the team would play home games without fans present.

That was clearly the right move, health-wise, but it had a side effect no one considered at the time. Thousands of people who work for the teams and arenas, or in other related businesses, lost income. But sports gambling is a giant business in itself. The millions of people who wager billions of dollars suddenly had nothing to bet on. That proved important, for reasons we will see in a minute.

A few weeks later, Congress passed the bipartisan CARES Act which, among other things, gave most American adults a $1,200 one-time stimulus payment and added a $600 weekly federal payment to state unemployment benefits. This occurred as most of the country was in various levels of lockdown and many businesses closed. The payments were intended to help people through what we thought would be a short interruption.

All this happened very fast—so fast that it had to be simplified. Why not $500 or $700 for the unemployment benefit? I don’t know—but any number they chose would have been too little for some workers and more than enough for others.

As it turned out, the $600 from the federal government plus state benefits left many jobless workers making more than they did while working. This has helped. People are mostly making their rent and mortgage payments, for instance. Consumer spending held up better than expected, though its composition changed significantly.

Still, that left a lot of extra money in the hands of people accustomed to spending whatever they have. The lower-earning half of the population has little experience with saving or investing.

As noted above, sports betting was also unavailable. So where did all that money go?

Well, many of the recipients did what comes naturally: search online for advice. That led to data like this.

Source: Liz Ann Sonders

Of course, simply being interested in tech stocks, and having a few hundred or a few thousand extra dollars, only goes so far. You need some minimal amount of money just to open a brokerage account. Or at least, you used to.

Enter Robin Hood

Financial markets have been slowly “democratizing” for decades. In the 1960s, mutual funds gave the middle class a convenient way to own a diversified stock portfolio. Then came many more mutual funds, discount brokers, exchange-traded funds, and other innovations. All had the same effect: More people could invest more money in more kinds of markets.

Now we have a new stage in that process: commission-free stock trading, quickly accessible over the mobile device you already have, and in small amounts. Apps like Robinhood make investing simple and affordable. They do the same for day trading. But while they simplify the process, you still have to make the right decisions at the right time.

So now we have large numbers of small, inexperienced investors with spare cash from the government and an app in their pockets that looks a lot like a video game. And then there’s the sports connection, personified by now-famous blogger Dave Portnoy, who colorfully insists stocks can only go up and urges his large audience (which includes many idled sports bettors) to throw more money into the market. What could go wrong?

So far, not much. Portnoy has been largely right about stocks this year. His audience is fairly small but it’s big enough to matter. They are a subset of the red and pink areas in this personal income chart.

Chart: Gregory Daco

Recall, markets were very weak early in the corona crisis. February and March were volatile with several mini-crashes.
But the benchmark indexes bottomed just as the CARES Act passed and the government began distributing stimulus cash in April. They’ve kept rising since then.

The payments to individuals were only the start. At the same time, we had the Federal Reserve pumping huge amounts into not just Treasury and agency securities but also various private assets, including corporate bonds. But the specifics of what they bought are not so important. The salient point is the cash they injected into markets, which found its way to other assets.

So, the current bull market is a kind of perfect cash flow storm. We have…

  • Legions of new investors using stimulus money to buy whatever makes them feel good

  • Bored gamblers looking for action, and

  • Large institutions brimming with Fed liquidity

  • plus traders of all sizes, small investors to monster hedge funds, chasing momentum—a perfect witches’ brew

… all in the context of ultra-low interest rates that make cash and fixed-income holdings unattractive. You could not have designed a better perfect storm in which to create a market mania, and that’s exactly what we have.

If this were all Fed-driven, we would still be seeing a bull market but it would be different. Institutional investors consider fundamental factors like valuation and earnings. They wouldn’t plunge a lot of money into small-cap cannabis stocks, for instance.

For the moment, the all-in strategy seems to be working better than the cautious one. Yet history shows fundamentals eventually matter, and many of today’s buyers probably won’t like what happens.

Here’s another chart from Doug Short and Jill Mislinski, calculated as of July 6, 2020.

Source: Advisor Perspectives

We see here that the S&P 500 P/E10 is presently higher than it has been 94.4% of past periods. Stocks are in the zone (and not just in the zone, but high in it) where Easterling shows above-average returns are unlikely. It is above the 2007 peak and approaching the 1929 peak. The only higher points were during the 1990s Tech Bubble.

Now, think back to that Google search data I showed above. Interest in tech stocks is again extraordinarily high. History rarely repeats so nicely, but it sure looks like we may be in Tech Bubble II (plus Mastercard and Visa).

At the very least, now looks like a terrible time to buy stocks if your intent is to hold them a long time. If your intent is to buy high and hope to sell even higher, good luck to you. It might work. History also shows manias can persist much longer than most people think. Back in 1999, I and many others thought there was no way the bull market could go on. Yet it did, with the Nasdaq actually doubling in 1999.

Triggered Market

Overvalued markets don’t turn down on their own. Something usually triggers them. What could it be this time?

In the medical world, stimulants have legitimate uses but the dosage is critical. Too little and you don’t get the desired effect. Too much can cause great harm. And once you find the right dosage, suddenly stopping it can be dangerous.

As of this morning, the added unemployment is still set to expire at month-end. Negotiations are underway so maybe we’ll know more later this weekend or next week. But what happens when/if that stimulus goes away?

We should by now realize jobs are not going to come back to where they were a mere six months ago. We will still be in recession-level unemployment well into next year. The rest of the world is reeling. Those earnings projections that we looked at above? For the most part, they are going to be wildly wrong.

Eventually, earnings matter. Now, also eventually, we will get a vaccine or herd immunity. We will begin to come out from our isolation cells. But the world will look significantly different, and businesses, from the very smallest to the very largest, will have to adjust. That means earnings are going to have to adjust.

The world is getting ready to be repriced. Everything is going to seek a new value. Real estate, stocks, commodities, food, medical costs, college costs, government, entertainment, sporting events, clothes… Everything. Some price adjustments will be minor and some will be significant. I expect many to be deflationary, although some markets and items will see significant price increases.

“Inflation” in the general sense might be very difficult to calculate and even more difficult to understand. Your personal inflation rate will depend on what you buy. If you are trading the markets, I would tighten your stops. I firmly believe you’re going to have a much better and significantly lower entry point in the future.

Coping with COVID

I saw a cartoon the other day. Two guys in a boarded-up room, one saying, “Who knew there would be so much sitting around doing nothing after the apocalypse?”

I, for one, have plenty to do, but I hear complaints like that from friends and family. We’ve all had our routines upset, and are trying to decide whether to find new routines or just wait until we can go back to the old ones.

Personally? I think we will need to create new routines for our daily lives. They will blend past and future. Many people are leaving the inner cities and moving to the suburbs, driving home sales back up to pre-COVID levels. That also means urban apartments and condos will drop in price. That will be unpleasant for many.

My wife has a special friend named Eric Fulcrum. He and his wife visit us from time to time. He is a gifted body worker. He has his own combination of massage, kinesiology, yoga, and chiropractic. It can actually be quite painful, although it really helps. We have been working on my shoulder, where I tore my rotator cuff (for the third time) about a year ago. It really hasn’t released properly since then. He starts on my lower back and wrist, towards the shoulder, and then goes to the top of my head, through my neck and down. After just two days, my range of motion is significantly better. And I have four more nights of this. Now if I could just get into a gym…

You have a great week and I hope you’re enjoying a new routine. Stay safe out there!

Your needing to shake up his own routine analyst,

John Mauldin
Co-Founder, Mauldin Economics

The leveraging of America: how companies became addicted to debt

With the corporate sector already owing $10tn, many businesses are doubling down on new loans to survive the pandemic

Mark Vandevelde in New York

© FT montage

The year was 1973 and as the Vietnam war wound down, an oil embargo was threatening the very foundations of the US economy. Petrol stations were running dry and highways began to empty. At Hertz, the car rental company then known for its pioneering computerised booking system, executives realised that transport companies would inevitably be among the first casualties. Hertz’s response? It loaded up on debt.

Within weeks of the embargo starting, Hertz was selling off the gas guzzlers that made up three-quarters of its fleet, and borrowing heavily to replace them with smaller, more efficient cars. The gamble proved wildly successful. The next year, as an oil price shock ravaged competitors and triggered a bout of “stagflation” as high inflation combined with low growth, Hertz’s revenues and profits hit new records. Soon, the company’s advertising department hired a young athlete named OJ Simpson and proclaimed itself “the superstar in rent-a-car”.

Yet almost half a century later, Hertz is bankrupt, the victim of a coronavirus pandemic that has brought large parts of the global economy to a standstill. The company, which employed 38,000 people last year, and operated from about 12,000 locations, was unable to escape the weight of a $17bn debt pile. The bet that prospered in the 1970s has come unstuck in the 2020s.

Other rental chains have taken out new loans to ride out the drought in travel bookings, but Hertz’s borrowing capacity was already spent: after 15 years of aggressive financial engineering, it owed $12,400 for every car worth $10,000. Much of the money came from complex financial instruments that allowed creditors to demand their cash back when the company could least afford it.

Hertz’s demise has drawn attention to the relentless build-up in corporate debt in the US, where companies now owe a record $10tn — equivalent to 49 per cent of economic output. When other forms of business debt are added in, including to partnerships and small businesses, that already extraordinary figure increases to $17tn.

Even before the pandemic, the level of corporate leverage was beginning to cause alarm. At the end of last year, the IMF issued a striking warning: as much as $19tn of business debt in eight countries led by the US — or 40 per cent of the total — could be vulnerable if there were a “material slowdown” in the economy, a scenario that, if anything, now seems tame.

A Hertz rental station in 1971, two years before an oil crisis prompted the company to load up on debt to replace its fleet of gas-guzzling vehicles - a gamble that proved wildly successful
A Hertz rental station in 1971, two years before an oil crisis prompted the company to load up on debt to replace its fleet of gas-guzzling vehicles — a gamble that proved wildly successful © Fairfax Media via Getty Images

After 15 years of aggressive financial engineering, Hertz owed $12,400 for every car worth $10,000. The bet that prospered in the 1970s has come unstuck in the coronavirus pandemic
After 15 years of aggressive financial engineering, Hertz owed $12,400 for every car worth $10,000. The bet that prospered in the 1970s has come unstuck in the coronavirus pandemic © Bloomberg

With companies filing for bankruptcy at the fastest pace since 2013, the American authorities have been forced to take exceptional measures to save jobs and prevent more companies from collapsing. The Federal Reserve pledged in April to buy trillions of dollars of debt, much of it owed by the corporate sector, while the government has set up a $500bn small business loans programme.

This is the second time in just over a decade that the Fed has mobilised the full force of its balance sheet to put a floor under creaking credit markets.

Unlike during the 2008 crisis, the financial sector was not the immediate cause of the turbulence: investors can legitimately claim that they have been confounded by a once-in-a-century event. But fearing a much greater meltdown, the Fed has again found itself obliged to support a wide range of debt instruments, some of which have questionable credit quality.

Amid the prospect of a new generation of “zombie” companies unable to pay their interest bills, the pandemic is reviving the debate about whether it makes economic sense for the corporate sector to have taken on such a large volume of debt — and whether there is a way to unwind it without causing a broader crisis. The financial crisis prompted a similar discussion about excessive financial engineering, but the response in the decade since that crisis has been to increase leverage, not to wind it down.

Business borrowings have soared in the US, non-financial business debt (as % of GDP)

This addiction to debt has developed over five decades. Encouraged by the tax system, and perhaps with an eye on their own pay, corporate leaders were quick to embrace the trend. Pension funds and insurance companies bought the debt in bulk, while private equity firms — including Clayton, Dubilier & Rice, which acquired Hertz in 2005 — put together leveraged buyouts as if they were running an assembly line.

The result has been a dramatic change in how the US economy channels savings into the financial capital that fuels growth. Arguably, it made America more competitive, as public companies have slimmed down or gained focus, while private equity firms perfected the art of eliminating fat from company payrolls — as well as equity from their balance sheets. Yet critics believe that the huge focus on financial engineering in recent decades also contributed to the weak productivity of the US economy.

The pandemic has underscored the fragility of an economy built on corporate debt in a time of crisis. Many companies now risk digging themselves a deeper hole: new loans might help them through the worst period of lockdowns, but it means they will be entering a potentially weaker phase of economic growth with even higher debts.

Michael Milken change the rules of business in the late 1970s by inventing a form of corporate venture capital, issuing debt for companies whose bonds were rated as junk from the start
Michael Milken change the rules of business in the late 1970s by inventing a form of corporate venture capital, issuing debt for companies whose bonds were rated as junk from the start © Rick Maiman/Sygma/Getty

“It’s corrosive to a well-functioning market,” says Mark Zandi, chief economist at the analytics arm of Moody’s. “It’s going to start eating away at the productive capacity of your economy. Business models have changed, but you’ve got companies still surviving and getting credit, and [they] are not going to adjust. You’re creating longer-term problems.”

Engineering a new financial reality

The leveraging of America was little more than an idea until a young bond salesman reimagined the function of the credit markets, and set in motion a debt machine that would change the rules of business.

Michael Milken’s insight was that lending to risky companies at high interest rates could be more profitable than earning reliable but meagre returns from the debt of industrial champions. By the late 1970s, he had graduated from trading the deeply discounted bonds of struggling companies to inventing a form of corporate venture capital, issuing debt for companies whose prospects were so uncertain that their bonds were rated as junk from the start.

Hertz added debt even as its equity value plummeted ($bn)

To this day, many who worked with Mr Milken at Drexel Burnham Lambert regard themselves as financial revolutionaries whose innovations brought fading industries to life and financed the rise cable television, the reconstruction of Las Vegas, and more besides. Former Drexel board member Chris Andersen once described a discussion among bond market veterans about the impact of the bank’s innovations. Someone “called for a vote on who had the greatest positive influence, Michael Milken or Mother Teresa,” he recalled. “Milken won hands down.”

The craze for debt spread far beyond junk bonds, which were being issued at a rate of $25bn a year by the end of the 1980s, up from barely $1bn at the beginning of the decade. Industrial conglomerates, utilities and other investment grade borrowers also loaded up. Even far smaller companies got in on the act, taking out loans that were often repackaged into securities that could be traded on the markets. Insurance companies and pension funds — many of which have regulatory reasons to avoid investing in equities — lined up to buy it all.

Companies faced a number of incentives that pushed them in the direction of taking on more debt. “Equity financing has double taxation: you pay corporation taxes, and then shareholders pay tax on the dividends.” says Markus Brunnermeier, an economics professor at Princeton University. “Whereas if you pay interest, the expense is tax-deductible. There is a huge distortion coming from the tax system, and economists have argued for decades that it is unwise.”

Traders in Chicago signal offers as Ben Bernanke, former Fed chief, speaks on TV. Many policymakers recommended a reduction in debt levels after the financial crisis but corporate leverage has soared in the decade since
Traders in Chicago signal offers as Ben Bernanke, former Fed chief, speaks on TV. Many policymakers recommended a reduction in debt levels after the financial crisis but corporate leverage has soared in the decade since © Getty Images

Shareholders cheered on the extra borrowing. Some were persuaded by the work of Harvard professor Michael Jensen, who argued debt financing would keep executives honest by forcing them to meet quarterly repayments instead of squandering the company’s cash flow on uncertain growth initiatives or personal perks.

Executives, too, had financial incentives to jump aboard. The value of stock options and similar pay schemes “rises if a risky project pays off, but cannot fall below zero if things go wrong”, Alex Edmans, a professor at London Business School, told a government inquiry into executive pay. “So the CEO has a one-way bet.”

Wall Street turned America’s corporate debt burden into its most attractive product. That would have profound consequences for how companies are run.

Wall Street’s favourite fuel

The $15bn private equity deal that took Hertz private in 2005, led by Clayton, Dubilier & Rice, was the second-biggest on record. It also turned out to be one of the shortest; just nine months later, Hertz returned to the stock market.

But even that brief period under private equity ownership transformed Hertz’s balance sheet. Before the 2005 buyout, interest payments on the company’s borrowings absorbed about one-fifth of its operating income. Under new ownership, Hertz added $4bn to its debt pile, Moody’s cut its rating to junk, and the average interest rate on the company’s borrowings increased.

After that, interest absorbed nearly three-quarters of the company’s operating income.

US life insurance is a trillion-dollar business, largest life insurance companies, by assets, 2018

It took a sprinkling of Wall Street ingenuity to raise the additional $4bn. To make it more attractive to investors looking for “safe” assets, much of the debt took the form of “asset-backed securities”, a structure that aims to ringfence cash flows for the benefit of lenders and make it easier to seize collateral in a bankruptcy. Then, the debt was sliced up, with the layers on the top having first dibs on cash if Hertz were ever to fall short. Billions of dollars of the debt carried the highest triple A rating, even after Hertz itself was downgraded.

This exercise in financial engineering was a triumph. When Hertz returned to the stock market in November 2006, its equity was worth about $4bn, roughly double what the private equity firms had paid for it a year earlier. When CD&R sold its last shares in 2013, the firm listed its achievements at Hertz, which it said included improving operating efficiencies, changing the way the company bought and sold cars and creating a flexible capital structure that withstood the great recession.

But one powerful legacy was the vast pile of debt, and long after the private equity firms had gone, Hertz’s management team kept adding to it. By last December, borrowings accounted for $17bn of the rental company’s $19bn enterprise value, with only a sliver of equity on top. If the economy ever faced a severe reckoning, Hertz would be among the first to fall.

Businesses borrow over $5bn in asset-backed loans every quarter, asset-based loans issued quarterly in the US ($bn) 

Temporary reprieve

More than 3,000 US companies filed for bankruptcy between January and late June. For tens of thousands more that may be teetering on the edge, Mr Zandi, the Moody’s chief economist, identifies what he calls “a Hobson’s choice: do I make my debt payment on time, or do I [keep] investment and jobs?”

The fate of millions of livelihoods — and America’s future economic productivity — therefore depends on whether over-indebted businesses can extricate themselves from danger before they are forced to prioritise their own survival.

“What we have done is postpone this, by adding to the debt,” says Mohamed El-Erian, who spent seven years as chief executive of Pimco when it was the world’s biggest bond fund. Since the Fed announced its bond-buying programme in March, “we’ve seen an explosion of corporate debt, together with an explosion of financial engineering. The influence is huge, because they [the Fed] are non-commercial, they are not price sensitive, and they have an infinite printing press.”

Yet few believe that reprieve can last for ever. Unless struggling businesses once again see their revenues begin to rise, many will confront a stark choice between orderly restructuring and default.

For those that choose the first option, one source of possible help is the private equity firms — despite the role many of them played in building up corporate leverage in the first place. “They’ve got a lot more operating chops than they did 12 years ago,” says University of Chicago professor Steven Kaplan. “If there's a company that has going concern value and needs to be restructured . . . there are billions and billions of dollars of funds getting ready to put money in to help with that process.”

People watch the sunset from Elysian Park in Los Angeles amid the coronavirus pandemic, which has brought large parts of the global economy to a standstill
People watch the sunset from Elysian Park in Los Angeles amid the coronavirus pandemic, which has brought large parts of the global economy to a standstill © EPA-EFE

A Hertz shuttle bus at LA airport. The collapse in used car prices and international travel during the pandemic allowed lenders to call in the money they had lent against Hertz's fleet
A Hertz shuttle bus at LA airport. The collapse in used car prices and international travel during the pandemic allowed lenders to call in the money they had lent against Hertz's fleet © Bloomberg

The authorities are effectively betting that a revival in the economy will allow many companies to grow out of their new debts. “By subsidising the debt markets, we were able to avoid a liquidity problem becoming a solvency problem,” says Mr El-Erian. “That’s exactly what central bankers will tell you: we’re going to keep finance going through higher debt — and we hope that higher debt will be validated by growth coming back.”

It is a fragile hope, but one at least partly vindicated by the course of the crisis so far. Days after the Fed’s extraordinary intervention in March, car rental group Avis seized a lifeline, issuing $500m in junk bonds that could enable it to weather the pandemic.

For Hertz, however, there was no rescue. While revenues evaporated across the travel sector, the rental company had bigger problems, as used car prices collapsed, allowing lenders to call in the money they had lent against its fleet.

Almost 50 years earlier, Hertz had moved deftly to turn an economic shock to its advantage.

This time, within weeks of the first shutdowns, the world’s biggest car rental company had run out of road.


More corporate defaults seem to be on the way

Despite a mini-boom in the bond market, defaults are priced in

It was a company revered by business-school gurus and investors alike. British consumers cherished it for its value-for-money clothing. Its own-brand biscuits were unrivalled. But the glory days of Marks & Spencer are long gone.

As if to underscore this, it recently became a “fallen angel”: its bonds were demoted to speculative-grade (or “junk”) status by S&P, a rating agency.

Many other once-admired companies have been similarly humbled.

Ford, Renault and Kraft Heinz are among the bigger angels to have fallen in recent months.

Companies are mercilessly sorted by recessions. The strongest credits grow stronger.

The weakest investment-grade firms descend into junk territory. And the most frail speculative-grade firms go into default.

Just a few months ago there was a real concern that the sorting would be too brutal. Good companies might go under for a want of cash to see them through the Covid-19 shutdown.

But governments and central banks acted decisively to support the economy. Stockmarkets fell, and then rallied. Corporate-bond issuance surged.

Now you hear a different concern: not that some worthy firms might die, but that too many unworthy firms will live on in a zombie-like state. That is a testament to the dramatic change in market mood. This does not mean that the angelic and diabolical are treated exactly the same, though.

This particular turning-point in the business cycle has its own peculiarities, but in some important respects it mirrors the past. And the general pattern after recessions is for corporate-bond markets to rally months before defaults reach a peak.

Begin, though, with the peculiarities. Even before the recession struck there was a widespread concern about an overhang of debt rated bbb, a notch above junk. The fear was that a deluge of falling angels would overwhelm the speculative-grade market.

That this didn’t happen is in large part down to America’s Federal Reserve, which has backstopped the corporate-bond market. Since March 23rd, when the Fed first announced it stood ready to buy corporate bonds, companies have issued more than $1TRN-worth.

Yields on the best investment-grade credits—low-debt firms in defensive sectors like technology or health-care products—have fallen ever closer to those on government bonds. These are far from default.

But not every issuer has been saved. Corporate defaults have already picked up. s&p expects the trailing 12-month default rate for junk bonds to rise to 12.5% in America and 8.5% in Europe by March. Many debt-laden firms in America opt for the protection of Chapter 11 bankruptcy, which allows them to keep operating as they settle their debts.

In some cases, the trigger for default is a “distressed exchange”, where a company buys back its own bonds, or swaps them for new ones, when they are trading at a price much below their par value. And there is still a sizeable rump of bonds that trade at distressed prices—defined as yields that are ten percentage points above those of government bonds (see chart).

This default cycle will be more industry-specific than the one following the recession in 2008-09, says Mark Kiesel of pimco, a big bond house. One lot of vulnerable firms had cloudy long-term prospects even before the pandemic—think carmakers, oil firms and retailers. Another lot, including airlines and hotels, may be permanently scarred by changing consumer behaviour.

A bounce-back in economic activity seems assured. But there is still much uncertainty about what comes after that. Even a smooth recovery will leave some firms insolvent. And setbacks are likely. Investors seem willing to take a punt on risky credits all the same.

In part this is a desperate search for yield when the safest bonds yield next to nothing. But there are other considerations.

When the Fed buys corporate bonds, investors feel invited to follow its lead. And if a firm has access to cash, it has a chance to stay alive—and perhaps eventually to repay its debts.

“Liquidity allows companies to extend their lives so you’ll have more survivors,” says Robert Tipp of pgim, an asset manager.

History says you get the rally first, and then defaults peak: 2009 was a great year for corporate-bond returns even though plenty of firms stopped paying their creditors. Soon attention will move on. The next phase of the cycle is one of balance-sheet repair, says Max Blass of Morgan Stanley, a bank.

Firms will pay down debt to lower their cost of credit—to avoid becoming a fallen angel, or perhaps even to become a rising star.

The Last Stand

Trump’s Handling of the Coronavirus Could Cost Him Presidency

With the infection rate exploding and the economy in collapse, Donald Trump has failed spectacularly as a crisis manager. It would probably take a massive shock for him to get re-elected, but it appears he’s trying to make that happen, too.

By Guido Mingels, Ralf Neukirch, René Pfister, Marc Pitzke und Mathieu von Rohr

Foto: Doug Mills / Sipa USA / ddp images

An American president setting off a war somewhere in the world to win an election he thinks is already lost - it’s a script familiar to moviegoers. But an American president who threatens to wage war on American cities to turn an election campaign around? That’s unheard of.

At least it was until now.

Amidst the clouds of tear gas, anonymous federal police in battle gear throw stun grenades into a crowd, arresting protesters in the streets, locking them up without warrants. The videos showing the deployment of militarized troops in the United States look like scenes from the combat video game "Call of Duty.” But they’re real.

Donald Trump has deployed the federal troops from his Department of Homeland Security as a kind of presidential militia in Portland on the West Coast, where they have been using brute force against Black Lives Matter supporters who have been protesting in the city for weeks. The heavily armed security force is usually reserved for things like counter-terrorism operations or going up against drug smugglers. They are in plain clothes and their vehicles have no license plates.

Every day, hundreds of mothers are peacefully standing up to the authorities. They call themselves the "wall of moms” and sing "please don’t shoot us” and nursery rhymes. But the security forces have no regard for them. "Every night, moms have been teargassed, moms have been arrested, moms have been treated violently," Joselyn Merrill, one of the protesting moms, says by phone. Merrill is an Air Force veteran with three children.

"A member of my congregation, who is also a city commissioner, was teargassed," says Merrill.

"The street medics have also been targeted. These are people that are volunteering their time to make sure that everybody's safety is of the foremost importance every night. It's shocking that this is happening."

Merrill says she took an oath on the constitution as an Air Force veteran. "I never thought that this was going to happen on U.S. soil."

The president, who is lagging far behind challenger Joe Biden of the Democratic Party in virtually all polls, is doing something that none of his predecessors has done: He’s invading American cities. "We’ll do something,” Trump said. New York, Chicago, Philadelphia, Detroit and Baltimore, he said, are ruled by "liberal Democrats,” by the "radical left.” He argued that if Biden wins the presidency, the same would happen in the rest of the country. "The whole country would go to hell. And we’re not going to let it go to hell.”

Portland was the start. The president now wants to turn to cities where he believes there’s too much crime, which has in fact gone up in some places during the pandemic. But the fight against crime is normally the responsibility of the local police, with federal forces usually only stepping in if they are requested by local authorities. 

On Wednesday, Trump announced a "surge,” a military term from the Iraq war period that describes a massive increase in the number of troops with the goal of pacifying the country. Hundreds of federal officers are now heading to cities like Chicago.

Critics warn that Trump, who is not exactly coming across as sane in the White House these days, is sowing the chaos only so that he can then portray himself as a savior. Earlier this week, leftist New York Times columnist Michelle Goldberg wrote: "Trump’s occupation of American cities has begun.”

It feels like the last stand of a failed leader hoping for some major event to happen that would enable him to get re-elected in November – like fighting in the streets, or maybe even a miracle.

Historical Failure

Donald Trump’s presidential campaign is marked by a historical failure. The man who sold himself as a born manager literally fell apart when America faced its biggest crisis. COVID-19 has laid bare Trump’s talents as president – which is to say, a complete lack thereof. It has also horrified many of his former voters.

He publicly suggested that injecting bleach could help protect against the virus and said that he told his people to test less in the country – since the problem for him wasn’t the many people who are sick, but rather the number of people being tested.

The number of COVID-19 deaths in the country is nearing the 150,000 mark. The COVID-19 pandemic has pushed around 30 million Americans into unemployment and robbed 5 million of their health insurance. With the rising number of infections preventing the economy from getting back on track, the recession is increasingly eating away at the American middle class.

The idea that the U.S. is a special nation is deeply anchored in the American soul. Under Trump, however, the word exceptionalism has taken on a whole new meaning. No developed nation has managed the COVID-19 crisis as terribly as the U.S.: The country of 330 million is counting 66,000 new infections per day. In the European Union, which is home to 446 million people, the daily new infections number less than 5,000.

The U.S.’s top pandemic expert, Anthony Fauci, one of the last remaining voices of reason in the Trump administration, has described it as a "nightmare.” This prompted Trump’s press team to start a campaign against the immunologist, who did nothing more than state things as they are, scientifically. That alone was enough to attract Trump’s ire.

Holy War

The coronavirus pandemic could have been the opportunity for Trump to show that he was a crisis-capable president who transcended party politics. In the end, nothing could have been further from the truth. Trump turned the fight against the virus into a holy war in which the mask was a symbol. 

For months, the president refused to wear one. The message he sent was clear: Only liberal weaklings who are susceptible to the propaganda of the left-wing mainstream media wear masks. There are countless videos online in which furious Trump supporters defend their right to mask-free shopping.

Trump’s crusade against the mask has mostly backfired on him. Few things have spurred the spread of the virus like the refusal of many Americans to wear masks. Many governors, especially in Republican strongholds, shied away from mandating that people must wear face-coverings out of fear of Trump’s hardliner supporters. This recklessness has allowed the number of infections to explode, for example, in Jefferson Parish, a community on the edge of New Orleans.

A first wave of the pandemic rolled through the community in March. Mayor Cynthia Lee Sheng managed to dramatically lower the number of new infections by imposing a lockdown. "I had the feeling we had the virus under control,” she says.

But after businesses and restaurants reopened, the numbers of infections went up again – partly because many refused to wear a mask. Now, Louisiana is the state in which the number of daily new infections is growing second-fastest in the country, after Florida.

Since neither the president nor the governor, a Democrat who didn't want to issue a general mask requirement, helped, Lee Sheng had to act alone. On June 29, she imposed a mask requirement for her community. The decision was controversial. "There were emotional reactions, people protested in front of my office for two days,” she says. 

"But it is my job to contain the virus, and for that we need the mask rule.” Lee Sheng is a Republican, and she has a clear opinion of Trump’s coronavirus policies. "Anybody who's a role model, regardless of party, should be wearing a mask," she says.

Devastating Poll Figures

Is a president with this kind of disastrous record even re-electable? If common sense and the rules of politics still mean anything, Trump should lose on Nov. 3. His poll numbers are almost at an all-time low. No president since Jimmy Carter has had such devastating numbers. In the national polls, Trump is on average trailing behind Biden by 9 percentage points. As things stand now, Biden would also win the crucial swing states of Pennsylvania, Wisconsin and Ohio.

Federal law enforcement agents in Portland: "Trump’s occupation of American cities has begun."
Federal law enforcement agents in Portland: "Trump’s occupation of American cities has begun." Foto: Noah Berger / dpa

It is mainly older voters and whites with a college degree who are turning on Trump. His core voters, whites without college educations, are still sticking with him, but based on the polls, he has even lost support there. If Trump is disappointing even his most loyal voters, then he has serious problems.

"Polling is inexact, you have to be careful how you interpret it. There are just so many moving parts,"says Micah Cohen, one of the senior editors at FiveThirtyEight, a leading American poll-tracking website. "Trump is down by enough that it would take a historically huge polling error for him to win again like in 2016."

Trump has been written off once before – and that resulted in a trauma for Washington’s political class. In the fall of 2016, only a few outsiders believed that the greedy real-estate shark, who boasted that he could grab women by the crotch without being asked, would win. Even on election day, the New York Times put Hillary Clinton’s changes of victory at a whopping 85 percent.

That only made the hangover worse. The errors behind those incorrect predictions went beyond the statistical one. They became part of a larger narrative about an aloof Washington bubble that had completely lost touch with what was happening in the rest of the country. Is history repeating in 2020? That’s what Trump is hoping. In an interview, he claimed that the polls had already been "fake” in 2016, and that today they are "even more fake.”

He claims that there is still a lot of enthusiasm for him, but that his supporters are simply afraid of expressing it publicly. "The silent majority is stronger than ever before,” he recently stated.

Does he really believe that? Trump’s show of brute force in American cities, and his recent behavior, cast doubt on that.

"Scripted Trump”

It was a new Donald Trump who appeared in the White House Press Room on Tuesday. "I have no problem with the masks,” said the man who helped politicize masks more than anyone else in the U.S. 

But now he was playing a different tune: that "anything that potentially can help is a good thing.” He also said he has a mask himself, which he wears in elevators.

Trump sounded calm, reasonable, almost boring. The wall behind him showed the infection curves – a graph that has become a kind of fever curve for his presidency -- that he liked to keep quiet about during earlier press briefings.

Did the U.S. suddenly have a new, reformed president? A leader one could trust to lead the country through the terrible crisis?

This new Trump could be called the "scripted Trump,” a man who listlessly reads what others have written for him, a Trump who popped up especially often during the 2016 election campaign, when his advisers believed that it was best to hide the real Trump.

Scripted Trump made his return appearance at the Tuesday briefing, which also marked the resumption of the White House coronavirus briefing. Early in the pandemic, the president appeared in front of the cameras almost daily, but the appearances would spin out of control, with Trump denying the dangers of the virus and, in the eyes of his advisers, doing so much damage himself so much that the briefings were discontinued in April.

Now they are back, with a more serious-looking Trump. But past experience suggests that he won’t last long in this role. If the new edition of the briefings suggests anything, it’s that the fear of defeat has reached the president himself.

An Apocalyptic Air

In recent days, he hasn’t just been plagued by the polls – his appearances have also had an apocalyptic air to them. After the CEO of Goya, a bean company popular with Latinx Americans, said he supported Trump, left-wing Latinx politicians announced a boycott, and the president was photographed holding a can of beans. 

There have also been devastating books published by his former National Security Advisor John Bolton and his niece Mary Trump, both of whom portray the president as mentally incompetent.

And finally, Trump gave a devastating interview to journalist Chris Wallace of Fox News, usually his favorite channel. It marked a rare moment in which a journalist from the station questioned the president’s statements and thwarted his performance with precise questions. 

The president went off the rails, seeming tired and irritable.

Then casino owner Trump in 1990: Trump has never been a very successful entrepreneur. He inherited a large part of his fortune, more than $400 million, from his father.
Then casino owner Trump in 1990: Trump has never been a very successful entrepreneur. He inherited a large part of his fortune, more than $400 million, from his father. Foto: ddp images / interTopics

Trump made it clear that he might not accept defeat in the election, and Wallace confronted him about his false claim that Joe Biden wants to abolish the police. Trump also repeated that he had passed a cognitive test that he claimed Biden would be unlikely to pass. The Montreal Cognitive Assessment is designed to detect early forms of dementia in patients – and, contrary to what Trump may think, it is not an IQ test.

The journalist had to point out to Trump that the test was very simple, and merely required someone to, for example, recognize a drawing of an elephant. Nevertheless, the president boasted in another interview this week that, as part of the test, he had actually managed to memorize and repeat the words "person,” "woman,” "man,” "camera” and "TV.” The video became a viral sensation.

The problems faced by Trump in his campaign are especially evident in the Republican stronghold of Texas. "Financially,” says restaurateur Adam Duran, "I can only hold out a few more months.” He’s sitting at the counter of the Fry Street Tavern, sipping a glass of water. It’s eerily quiet in the bar, which is located in the central Texas town of Denton, about 40 miles north of Dallas. The only sound is of the whirring of the new ventilation system Duran installed for $2,000 to protect his guests from the virus. It was of no use. A few days later, Governor Greg Abbott announced that all bars in the state had to close again. "I had just ordered more alcohol,” Duran says.

There is probably no other place in the United States where the policies for containing the coronavirus are as contradictory as they are in the Republican-governed state of Texas. When the virus began spreading in the spring, Dan Patrick gave what has since become an infamous interview to Fox News. Shortly before his 70th birthday, the state’s lieutenant governor said that he was prepared to sacrifice his life to keep the Texas economy going. "I'm all in,” Patrick said, as if fighting the virus were a game of poker.

The state’s response mirrored that attitude. For weeks, Governor Abbott acted as though COVID-19 was a disease that would only hit states governed by Democrats. It wasn’t until March 19, when the intensive care units in New York were filling up, that he ordered a comprehensive lockdown in his state, even though it wasn’t officially even called that. Everyone was free to leave their home, Abbott assured. He also forbade cities governed by Democrats from fining anyone who refused to wear a mask.

On April 30, Abbott lifted most of the restrictions in Texas. Restaurants, nail studios and hairdressing salons opened, along with bars, including the one owned by Adam Duran. Looking back, Duran says it was far too early. "I think the restrictions should have been in place for at least another month,” he says. Almost as soon as his business started up again, infection rates began to skyrocket in Texas. Almost 10,000 new infections are currently being reported each day in the state.

"We have a lack of competent politicians,” Duran laments. For him, it is no longer just a question of the 35 people he employs at his establishments. He’s also worried he won’t be able to pay the mortgage on his home. "What we need is a return to normality,” Duran says. "I, for one, am going to elect a politician in November who knows how to run the country and is not busy with his Twitter account all the time."

The front page of the New York Daily News reporting on how close Trump’s casinos were to bankruptcy in 1990.
The front page of the New York Daily News reporting on how close Trump’s casinos were to bankruptcy in 1990. Foto: Daily News

In November 2016, Trump carried Texas by 9 percentage points. Now it seems at least theoretically conceivable that, for the first time in decades, the Democrats will prevail in the state in this November’s election. A June survey here showed Biden with a five-percent lead in the state. If Texas, with its nearly 30 million inhabitants were to vote for the Democrats, the election would be as good as lost for Trump.

Bankrupt As a Businessman and Politician

Perhaps the greatest misconception about Donald Trump before he got elected as president was that, even though he didn’t have experience as a politician, he was a good manager -- a successful businessman and a self-made billionaire who knew about deals.

But that was wrong even then. Trump has never been a very successful entrepreneur. He inherited a large part of his fortune, more than $400 million, from his father. The New York Times has reported that his companies posted losses of a billion dollars in the 1980s and 1990s alone. Germany’s Deutsche Bank, of all institutions, stepped in from the 1990s onward with loans to the tune of billions, long before Trump became president. Many of his companies went bankrupt, including three casinos in Atlantic City and the Plaza Hotel on Fifth Avenue in New York. The stories of contractors and subcontractors Trump never paid are notorious.

But it took the coronavirus to unmask Trump for what he really is and for him to be stripped of his apparent Midas touch, making it impossible to overlook the fact that Trump is bankrupt not only as a businessman, but also as a politician and president.

It’s Tuesday morning, and a long line has formed again in front of the Salvation Army building on Texas Avenue in Atlantic City. Several dozen people are waiting to pick up a package with sandwiches, a bottle of water and some fruit. The casino skyscrapers are just a short distance away and a several of the men and women in the line have worked there or in the restaurants and shops of the malls connected to them.

The situation in Atlantic City isn’t likely to improve anytime soon. The casinos have partly reopened and people are strolling along the Boardwalk, but the city was already in trouble before the coronavirus. The pandemic has merely accelerated the decline. Numerous buildings are empty and many streets are filled with litter. Things deteriorate quickly when you get just a few blocks away from the casinos.

Here, Keith Fullmer has twice fallen victim to Donald Trump.

In 2000, Fullmer landed a job as a bartender at the Taj Mahal, the Trump organization’s largest casino in Atlantic City. It was the year Trump personally took over the management of his casino empire. Thanks to Trump, who owned three buildings there, Atlantic City appeared to be on its way to overtaking Las Vegas as the gambling capital of the world.

No Viable Business Model

Fullmer, who is 69, talks fast and incessantly. He saw Trump occasionally when he inspected the Taj Mahal. "He never shook anyone's hand," Fullmer says. "He was afraid of germs." Business was already bad by that point. Trump had financed the casinos with loans and junk bonds that were shackled with absurdly high interest rates. It soon became clear that the casinos would never generate enough income to pay back the creditors. Indeed, Trump lacked a viable business model.

The consequences were dramatic for many people. Hundreds of employees lost their jobs, including Fullmer. Suppliers had to accept a fraction of what they were entitled to. Investors also had to pay. Only one person escaped the whole episode nearly unscathed: Trump. He received millions of dollars in salaries, bonuses and expenses he billed through the company. 

Trump didn’t have a good reputation among ordinary employees, and it was particularly bad among those like Fullmer who were union members. "He didn't want unions in his casinos," Fullmer says. "He kept trying to squeeze our wages and cut our health insurance."

Trump's casino companies went into bankruptcy proceedings four times. "I knew many of the alcohol suppliers,” he says. "Trump owed them a lot of money. When he filed for bankruptcy, they went bankrupt.”

Two of Trump's casinos changed owners. The third, the former Trump Plaza, still stands empty on the Boardwalk, the famous stretch of casinos. Parts of the white facade have crumbled off, and the grounds are secured with a fence to prevent anyone from getting injured. The complex is scheduled for demolition next year. Nobody here talks about Las Vegas anymore.

After the Taj Mahal was finally acquired by another company, Fullmer found employment there as a bartender. But in contrast to the times under Trump, he says he was treated decently as an employee. "The difference is like night and day," he says.

This year, Trump’s incompetence hit him a second time. Because Trump didn’t take the pandemic seriously, infection figures rose to dizzying heights. Atlantic City’s casinos had to close and Fullmer has been furloughed ever since. The only thing he has left for the president is anger.

Republicans Won’t Revolt

So far, no high-ranking Republican politicians have turned their backs on Trump. The only issue on which several senators have contradicted him is masks and how to contain the virus. He doesn’t need to fear a revolt against him in the Republican Party. Even if some members of the House and Senate are worried they will be voted out of office along with the president this autumn, they don’t dare to oppose him because he’s still highly popular at the grassroots level.

But a small group of Republicans have turned their back on Trump and the party, and have been fighting fiercely. The most prominent anti-Trump organization is the Lincoln Project, which is run by former Republican campaign strategists and floods the net with videos aimed at the president.

"Something’s wrong with Donald Trump,” one video informs. "He’s shaky. Weak. Trouble speaking. Trouble walking.” The whole thing is interspersed with footage of the president holding a glass to his mouth with two hands or walking down a ramp at the West Point Military Academy on shaky legs. "We’re not doctors, but we’re not blind,” the narrator says. "It’s time we talk about this. Donald Trump is not well."

Donald and Melania Trump at Mount Rushmore, where the president described a nascent "far-left fascism.”
Donald and Melania Trump at Mount Rushmore, where the president described a nascent "far-left fascism.” Foto: Andrea Hanks / ZUMA / picture alliance / dpa

Normally, Trump is the one casting doubts about the physical and mental health of his political opponents. His Democratic Party challenger Joe Biden has never stooped to that level, but the Lincoln Project has no qualms about doing so.

"We have become a social movement,” says Mike Madrid, a Republican political adviser and one of the founders of the Lincoln Project. That may sound slightly overblown, but the figures seem to back Madrid’s claim. More than 10,000 supporters attended the group’s first virtual town hall meeting two weeks ago.

But aren’t they just Trump haters who wouldn’t vote for the president, anyway? "We know from the data we have collected that a third of the people who support us are committed Republicans,” says Lincoln Project CEO Sarah Lenti. During the past quarter, the group raised $16.8 million, mostly from small donors, she says.

The Lincoln Project’s videos are having an effect, too. At a major event in Tulsa, Trump spent 14 minutes explaining why he was walking down the ramp so slowly at West Point. Nothing could have shown as clearly how concerned his is about accusations that he has anything but perfect health.

It may also have something to do with the fact that the Lincoln Project videos are as direct and aggressive as Trump is with his opponents. "Michelle Obama has said the Democrats will not stoop to Trump’s level,” says Madrid. "That was a tactical error. If Trump wants to go down to gutter level, we will welcome him there."

"It’s the Economy, Stupid!”

Even if only a small percentage of people change sides or stay away from the polling booths in contested states like Wisconsin or Arizona, it would be enough to impede Trump’s re-election. The fact that Biden is the Democratic candidate makes it easier for moderate Republican voters to oppose Trump, especially now that the president has lost his most important campaign argument: a booming economy. Before the coronavirus struck, unemployment in the U.S. was at 3.5 percent, the lowest it had been since the 1960s.

Things were also looking up for Africa Frasier. The 42-year-old mother of three was promoted last year to head a Family Dollar supermarket in North Charleston, South Carolina, she explains, with great pride. She had separated from her partner "for the better,” as she puts it, and moved into a new home in the spring with enough space for her children, Kayla, 13, Bobby, 12, and Angelo, 5. The rent was cheap, the school was good and there was decent childcare. "I had my life under control,” she says.

It was the life of a single mother on the lower end of the American middle class, but things were looking promising. Then the virus struck and schools closed. She had to reduce her workload to take care of her children, but her employer refused. This left her with no choice but to quit her job, she says. Like millions of other Americans, she has few savings and was living from paycheck to paycheck. As of May, she has no longer been able to pay the $700 a month in rent on the house. Her landlord is trying to evict her now and Frasier will have to go a court appointment in July. "If we get kicked out, I don’t know what will happen next,” she says.

Poll tracker Micah Cohen: "Trump is down by enough that it would take a historically huge polling error for him to win again like in 2016."
Poll tracker Micah Cohen: "Trump is down by enough that it would take a historically huge polling error for him to win again like in 2016." Foto: Dina Litovsky / Redux / laif

According to estimates by the Aspen Institute, a prominent American think tank, around 20 million renters in the U.S. could be facing eviction between now and the end of September. Even though the U.S. government has imposed a partial moratorium on evictions and foreclosures during the crisis, those restrictions end this week. Other important aid measures are also threatening to run out soon.

"It’s the economy, stupid,” is probably the most famous piece of American campaign wisdom, reflecting the belief that no candidate can prevail against poor economic figures. The remark is allegedly attributable to James Carville, the political strategist who helped steer Bill Clinton’s successful election campaign in 1992 against George H. W. Bush. The latter’s failure to get re-elected actually had more to do with the global recession than with Clinton’s strength.

Bush Sr. was the last U.S. president to fail to land a second term. Trump could be the next. Carville, still a sought-after politician commentator, recently said in a television interview that he was certain Trump has "no chance” of re-election in November.

A Fast Crash, Slow Recovery?

Trump’s own people know that he won’t prevail without a dynamic recovery to the economic crash caused by the coronavirus. That’s why Trump is now commenting on better-than-expected labor market figures from May and June with his characteristically aggressive and calculated optimism. Speaking in front of the White House just a few weeks ago, Trump predicted that the U.S. economy would take off again with a "big bang.” "This is better than a 'V’,” he said. "This is a rocket ship.”

Better than a V? It has become common to compare the course of the economy to the shape of letters. The "V” stands for a quick restoration of growth; the "U” for a longer period of stagnation before the subsequent upswing; and an "L” for a prolonged period of economic suffering.

Michael Boskin, an economist at Stanford University, has added another option – the Nike swoosh, representing a fast crash and a slow recovery. Boskin, who still believed at the end of February that Trump should "win easily” based on the economic situation at the time, now sees "greater than normal uncertainty” in the forecasts because "the speed of economic recovery is dependent on the health situation.”

And it looks bad right now. In recent weeks, the U.S. has been setting sad new records for infections on a daily basis. "The economy can't really recover as long as so many people are or are getting sick," says Boskin. However, he also points out that voters still have more confidence in Trump than they do in Biden when it comes to the economy.

And there is indeed an economic scenario that could yet save Trump: If the president and Congress extend their emergency aid and stimulus payments beyond July and the economy picks up again in time for the election. Boskin considers that to be "possible, but unlikely.” The U.S. labor market did grow in June by an astonishing 4.8 million jobs, but that’s still 15 million jobs fewer than in February.

The Congressional Budget Office (CBO), a bipartisan federal budgetary agency in Washington, estimates that the U.S. economy will not fully overcome the pandemic until 2028. The agency is forecasting that the unemployment rate, currently at 11 percent, will remain at a higher level than before the crisis until 2030.

Trump Will Have To Hope for a Miracle

So, Trump will have to hope for a miracle -- or for his opponent to stumble. Probably the greatest weakness the Democrats have right now is their own presidential candidate. Biden is 77 years old and already has two unsuccessful bids to become the Democratic presidential nominee behind him. Each time, he managed to stumble over himself. The fact that he got so far this time has less to do with Biden’s skills than with the fact that the man who is called "Uncle Joe” within his party is the person the most people could live with as the Democrats’ candidate.

And that’s still no guarantee that he can prevail against Trump, who has proven more than once that he knows how to put up a fight.

Africa Fasier had to quit her job when her employer refused to let her work less to care for her children.
Africa Fasier had to quit her job when her employer refused to let her work less to care for her children. Foto: Leslie Ryann McKeller / DER SPIEGEL

Trump’s great skill has always been his ability to massively divide the country. That’s also likely the calculation behind the police operations in American cities.

Not a day has passed in recent weeks without Trump calling on his supporters to join the culture war against a purported "leftist mob” which, together with Biden, wants to "wipe out our history” and "defame our heroes.”

In his now infamous 4th of July speech at Mt. Rushmore, Trump even went so far as to claim "there is a new far-left fascism” on the rise in America and that he’s the only one who can stop it. He said the leftists are not only determined to tear down statues of generals from the South who once defended slavery, but also those of historical presidents like George Washington and Thomas Jefferson because they had themselves been slave owners.

It sometimes seemed like Trump’s primary interest was statues: He announced the creation of a statue park and said he wanted to use some of the statues at his campaign rallies. These days, however, one bust seems to be more endangered that all the others: his own.