Are the Markets Underestimating the Coronavirus Depression?

One of the most enduring images to come out of the last financial crisis more than a decade ago was that of former Federal Reserve Chairman Alan Greenspan—once seen as the “maestro” of markets—expressing his “shocked disbelief” that Wall Street had blown itself up. How could people so smart act against their own “self-interest” and get things so wrong? Greenspan wondered aloud during testimony to Congress in the fall of 2008. “The whole intellectual edifice,” he famously said, had “collapsed.”

In the subsequent decadelong record bull run of the markets—which lasted until the coronavirus pandemic sent them tumbling a few weeks ago—the hoary conventional wisdom of Wall Street reasserted itself: The brilliant traders and analysts on the Street will always find a way to protect their self-interests, and they usually figure things out before anyone else, pricing in the worst possibilities. But today, with financial markets seesawing day by day yet generally holding steady—even as some economists and knowledgable pundits suggest the U.S. economy is heading into a depression—it’s worth second-guessing Wall Street once again.

Indeed, it’s probably not too much to say the financial markets may now be whistling past the graveyard of the American economy.

One of the problems is that when faced with something truly huge and world-overturning—something unprecedented and therefore unpredictable—disbelief recedes slowly. That was the case in 2007 and 2008, when major authorities, even Fed Chairman Ben Bernanke, kept reassuring Americans that housing prices were supported by “very strong fundamentals,” and investors looking for safer ground put up a constantly eroding wall of denial against the rising tide of defaulting mortgages. This continued right up until Lehman Brothers collapsed and hundreds of thousands of trading counterparties, unseen until then, defaulted and panicked, nearly bankrupting most major financial institutions. The smartest minds in finance had deluded themselves into thinking they were spreading risk around the world when mainly what they were doing was hiding it. All at once, it seemed, everyone realized that the entire financial system was infected and there was no safer ground any longer.

[Mapping the Coronavirus Outbreak: Get daily updates on the pandemic and learn how it’s affecting countries around the world.]

In recent weeks, after a big initial plunge in March, the markets have been bumping along even as the signs of economic devastation become clearer every day. Economists are warning that unemployment is going to hit Depression-plus levels, and Trumpian hopes for a sharp V-shaped recovery—one in which the economy regains its prepandemic vitality and shape after only a couple of months—are dimming rapidly. On Thursday it was reported that another 6.6 million people had filed for unemployment claims, adding up to 10 million in two weeks, and a day earlier a Federal Reserve of St. Louis economist projected the jobless rate could reach 32 percent, higher than the worst of the Great Depression, indicating that many businesses will go under and not come back. The Paycheck Protection Program that launched Friday as part of the $2 trillion disaster relief plan will help a lot—under it, businesses that keep workers on their payroll for eight weeks or promise to rehire laid-off workers will have federal loans forgiven—but this is only an island in a sea of soon-to-default debt. Meanwhile, many economists argue that much of the new stimulus is ill-designed, and Senate Majority Leader Mitch McConnell is balking at another one any time soon.

The new unemployment numbers released Friday, showing an uptick to 4.4 percent, up from 3.5 percent in February, with 701,000 new job losses, are widely recognized as not reflecting this rapidly developing new reality. The Dow Jones Industrial Average reacted to the news with only a slight downturn of 361 points, or 1.69 percent. But at current rates, the unemployment numbers to come look staggering: Thousands of restaurants and hotels, and possibly many airlines, will never return to solvency, nor will many entertainment and leisure companies such as casinos and movie houses, and a wide range of other small businesses from auto repair to construction. The so-called gig economy of millions of self-employed workers is beginning to go under; most of these people will fall into serious debt and will have to reinvent themselves in some new way.

The social consequences will be long-lasting. The gap between the rich and everyone else, already jarring to social stability, will only widen: The less money you earn now, the less able you are to ride out the pandemic at home without going out to put food on the table—and therefore the more susceptible you are to the disease. Ironically, it is many of these less fortunate—“first responders” like the cashiers and stockers at big outlets such as Walmart and Target, warehouse workers, and delivery people—who are keeping the U.S. economy and indeed American society running right now, and at little better than minimum wage. And they’re not happy, understandably, with their lot. However soon the coronavirus dies out, that social instability is not going away.

“This is not going to be an easy recovery once we do hit bottom,” said Lawrence White of New York University. “I’m afraid of the deterioration of intangible but very important relationships, whether supply chain relationships or employment relationships. Or customer relationships. Or lender-borrower relationships. The longer we go, the more they deteriorate, and the harder it is to recreate what we had.”

Some analysts argue that the markets are doing the best they can with little information or precedent, and typically markets try to price in worst-case scenarios, with a great deal of success most of the time.

“Financial markets are forward looking,” said Liaquat Ahamed, a former bond trader and author of the Pulitzer Prize-winning book Lords of Finance, in an email. “We knew just anecdotally that millions of people had been thrown out of work because of the lockdown. So the unemployment numbers are not news. What matters now for the stock market is how long this lockdown has to be. With the $2 trillion package (10% of GDP) the federal government has been remarkably aggressive in providing a cushion that could tide us through the next six weeks (i.e. 10% of the year). The trillion dollar question is will the lockdown have to be longer than the middle to end of May?”

That’s probably a safe bet at this point, with health experts saying the coronavirus could linger on through the summer, and possibly recur in the fall. What is hardest of all for markets to digest now is the sheer, unprecedented speed of the economic shutdown, which has stalled the entire world economy in a matter of weeks. “Whereas the Great Depression was a slow-motion economic disaster, we are experiencing ours in hyperspeed,” said Lawrence Glickman, a historian at Cornell University.

In the longer term, the larger question is how this changes not only the United States but also the globalized trading system—and the international community itself. For U.S. President Donald Trump and key advisors such as Peter Navarro, his chief trade negotiator, the crisis is also an opportunity to shut down globalization, especially by “decoupling” from China, which has been their apparent goal ever since this frankly protectionist president took office. “If we learn anything from this crisis, it should be never again, never again should we have to depend on the rest of the world for our essential medicines and countermeasures,” Navarro told the White House briefing on Thursday. “And if there’s any vindication, it’s the president’s Buy American, secure borders, and a strong manufacturing base philosophy, strategy, and belief.”

Many experts are now suggesting the neo-isolationists will have the upper hand post-crisis. The coronavirus is threatening “the economic and political sinews of globalization, and causing them to unravel to a certain degree,” the Yale University disease historian Frank Snowden told the Wall Street Journal. He said the “coronavirus is emphatically a disease of globalization,” proving most damaging to cosmopolitan cities such as New York that are “densely populated and linked by rapid air travel, by movements of tourists, of refugees, all kinds of businesspeople, all kinds of interlocking networks.”

Against those trends the advocates of global capitalism will have to find fresh ways to justify a rebirth of the international system and turn globalization into something more than what it has been, which is mainly a profit machine built on complex supply chains and cheap labor. “The question is whether this crisis of capitalism is different from the many that have come before,” said Cornell’s Glickman. “Will the legitimacy of the system be challenged in a thoroughgoing way, as it was not in 2008-2009? Will political solutions, such as Medicare for All, that seemed extreme a few weeks ago gain political purchase? Will we change how we value labor, now that we see that restaurant, retail, postal, health care workers, and journalists (among many others) are doing essential labor that is massively underpaid? Will unionism take off, in the wake of the labor actions by Instacart and Amazon workers?”

Are the markets really pricing all this stuff in right now? Probably not.

April 3: This story was updated with the Dow’s close.