COVID-19. Exogenous event needed for US recession. John Mauldin.

Here are some excerpts from John Mauldin's latest newsletter:

"For the last 3+ years, I have maintained it would take an “exogenous” event to send the United States into recession. The coronavirus obviously qualifies as an exogenous event. We actually face two concurrent crises. One is about public health, the other about the economy and markets. After talking to economists and medical researchers this week, I am pretty confident in two things:

  • The virus will spread slowly but widely.

  • We’ll get through this. Not without some damage and tragic loss of life, but it won’t be the end of the world. I wasn’t thinking of viruses when I said the 2020s would be the Decade of Disruption, but COVID-19 may mark the beginning of it.

Here’s the worst part: The Federal Reserve and other central banks can’t bail us out this time. Their tools aren’t designed for this kind of problem. Powell, Lagarde, Kuroda, and others are all making their ritual pledges to “stand ready” with support. They may even be serious. But they have little to offer. Rate cuts are not vaccines.

So what do we do? I am not a buy-and-hold advocate."

Full article here: https://ggc-mauldin-images.s3.amazonaws.com/uploads/pdf/TFTF_Feb_28_2020.pdf

John Mauldin is a great researcher - in the sense of being a good collector and collator of information and research and ideas from others ... and he is also a good thinker.

I think Mauldin's assessment of COVID-19 as a disease and its likely spread is fairly accurate - you judge for yourself ..... nothing in what he says is in conflict which what I have read on that front ... and I think he summarises the issues fairly well.

And I think that his assessment of COVID-19 is largely fairly accurate regarding impacts on economics and markets:

  • which includes recession in Europe and China - and recession in China pretty much guarantees recession in Australia - but I think he is far too optimistic about the probability that the US might avoid recession as a result of this. Given the number of 170-year economic and market extremes that the USA is currently experiencing, it is extremely vulnerable to an economic shock that could burst one or more of those economic extremes ... with the US corporate debt bubble being just one of those. And once one of the bubbles burst, I suspect we will see a cascading series of second-order of events, possibly taking the USA (and the world) into deep recession.

  • And he is also right about the impotence of central banks in this .... we need vaccines, not lower rates ... and central banks cannot give us vaccines.

Of course, on the economic front, we should see at some point in the near future, some form of coordinated global fiscal and monetary stimulus to try to head of COVID-19 causing a major financial crisis..... and in due course, during 2020 this seems likely to morph into some form of Modern Monetary Theory style economic policy but fiscal and monetary stimulus are still no vaccine.

On Modern Monetary Theory (MMT), this is quite controversial theory among economists. Eg Professor Warwick McKibbin's views are here: http://puzzlefinancialadvice.com.au/2019/AFR/190313_AFR_McKibbin_The_theory_thats_too_good_to_be_true_Is_money_printing_good_economic_policy.pdf but that said, MMT has been gaining popularity among both the Democrats and Republics in the USA ( eg http://puzzlefinancialadvice.com.au/2020/Articles/190601_modern_monetary_theory_T_Rowe_Price.pdf but many more articles are the web. ) And Ray Dalio argues that we are likely going to see MMT implemented this year, as we are basically following the economic and market script that we last followed in the late 1920s and 1930s.

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