As lock-down fatigue sets us, governments are starting to make plans to open up the economy. The question is when is it safe to do so, what will it look like, and will that be enough to get the economy going again? Kim Parlee talks to Phil Davis, founder, philstockworld.com.
- Hello, and welcome to "MoneyTalk's" COVID-19 Daily Bulletin for Tuesday, April 28. I'm Anthony Okolie. In a few minutes, Kim Parlee will be speaking with Phil Davis, Founder of philsstockworld.com, about what the various phases of opening up the economy could look like. But first, a quick wrap of today's headlines.
Round 2 of the $310 billion small business US Paycheck Protection Program got off to a rocky start on Monday as the small business loan site crashes on the first day of reopening as the program was overwhelmed by a flood of demand.
The coronavirus pandemic surpassed another grim milestone, with more than 3 million cases of COVID-19 now reported worldwide. Meanwhile, the US is quickly approaching 1 million cases, accounting for 1/3 of all cases globally.
3M, which is struggling to meet demand for N95 masks, is cutting costs as sales of its office supply products tumble as more people work from home during the pandemic crisis. Shares of Beyond Meat, a meat alternative producer, have soared as coronavirus outbreaks at US meatpacking plants have led to closures of beef, pork, and poultry facilities.
Finally, the US Federal Reserve meets today and on Wednesday. And some are growing concern the Fed may be forced to cut interest rates into negative territory if the economy takes a turn for the worse.
And that's a wrap of today's headlines. Next, Kim Parlee's conversation with Phil Davis.
- Phil, you were quite bullish at the end of March, when the market dropped. Since that time, now, we've had a 30% and change bounce back on some stocks, some hitting at all-time highs. How are you feeling now?
- Well, I think we had an overcorrection, obviously. And we bounced back quickly. And you know, for $2 trillion or $2.5 trillion now that they put directly into the economy, of course, you're going to bounce back.
The question is, is that sustainable? And we are now thinking this is more like the correct level for the economy, like 2,850 on the S&P is probably priced about right, given the stimulus, given the troubles ahead, that this is kind of a range we expect to be bound to. In fact, probably, this may be the upper end of the range that we're going to be drifting into through the summer until we have some resolution of where the virus is.
- Let me ask you, then, you know, you're basing that on some of your thoughts, I think, in terms of what the economy looks like, and the virus, and the rate at which things open. So you wrote a pretty lengthy note that came out, talked about Monday math. And you took people through your thesis on how things would happen. Can you walk us through it? It's interesting.
- Yeah. We talked about this last week with our-- in our member chatroom. And I talked about it. And then we-- I spent the weekend talking to a lot of people and reading a lot. I read about many pandemics in the past. I happen to be, like, a big expert on the 1918 influenza now. I looked at different countries and how they handled things like this. And also, I thought about the people, the government, so on and so forth.
And the idea-- and basically, given all the many, many moving currents that you have influencing people, my basic premise is, you have a government that's anxious to get the economy moving again. They're not so worried about people's overall health. And I don't want to say it's in a terrible way. But just it's not their top concern. They've got to equally weigh out the economic concerns.
And given that, given the people's attitude, especially in America, towards being locked up and kept from doing things, and the deadliness of the pandemic, I was very encouraged by-- in Los Angeles, they did a study and found that maybe 4% of the people were infected generally, if they do random testing. In New York, they found up to 20% of the people in New York City are infected. 14% of the people all throughout New York State are infected. But that's a good thing because it means that a lot of people had just some milder symptoms, didn't even realize they had the virus, and developed the antibodies to it.
Now, if we don't get reinfected, I believe-- if that starts becoming the prevalent notion-- and don't forget that everything is in super hyper speed because we've been locked up for, what, six weeks now, not even? And everybody is acting like it's been years. But it hasn't. So all these developments occur over the space of weeks, not months.
And I think that, given that narrative, if that starts taking hold, and the way states are starting to open, if there's not a big backlash against the states opening, I think what you're going to see is the-- step 1 is going to be the younger people who are 20, or in their low 20s and under are going to be like, I'm out.
So once they find out that 25% of their friends have the virus, had the virus anyway, and it wasn't a big deal, and then they find that it was somebody they were just with or just talking to, but they don't have it, or if they had it, or they find out, whatever, they'll be more like, I don't care. I'm going to see more people. I'm going to start going places and doing things. I'm going to go to the mall. I'm going to go to a restaurant, something. I think it'll start with the kids.
And then after a couple-- if they don't all start getting horribly sick-- they'll be the guinea pigs. And if they don't all start dropping, them people under 40, under 45 are going to start saying, you know what? Our risk group is minuscule. And they're going to start going out and saying, you know what? Hey, even if we get the virus, it's usually a very mild case, statistically. Everyone's going to become an epidemiologist. You know, all of a sudden, everybody's going to be an expert in viruses.
- So let me ask you-- so you talk about the younger kind of cohorts of population. You know, they're feeling OK. They get out. Then the under 45s. And then it's probably, I assume, you're going to get to the 45 to 65s, and you keep on moving. But you're going to get to a point where you're going to have a bifurcation of the economy.
- You're going to have the people who feel confident, whether through immunity-- although we don't know the science around that yet, but they're feeling bolder-- to the ones that are not. How does that affect the economy? I mean, what does that mean in terms of your company selling things? How do things get structured?
- Well, that's going to be interesting because what we have going on is, if you look at it, here's the steps. I mean, you have the 20-somethings go out. They're fine. These are assumptions. The 20-somethings go out. They're fine. And by fine, it doesn't mean nobody gets sick, nobody dies. It means not enough people where they're going to stop. So the 20-somethings will be the guinea pigs. They'll go out. They'll decide how good it is, how bad it is.
Their parents, who are the 45s and a bit younger or even a little older, are going to say, well, gee, my kids are going out. I'm already infected by 30, 40 people they go out with. So I mean, what's the difference if I go to work? Those people will start going to work.
And then you'll get to-- and then, of course, in the riskier group, in the 45-to-plus range, or especially 45 to 65, how many of those people are going to go-- once we get past two months, how many of them are going to want to go without a paycheck? So for economic reasons, even if it's not in their best interest for health or whatever, they're going to get up and go to work. And they're going to go out.
And if you go to work, you're going to stop somewhere on the way back from work. You're going to visit a friend. You're going to do something. So things will start opening up. But what's going to happen is first, you're going to see restaurants, bars, clubs opening up for people who are-- who have antibodies, basically, people who have tested positive or have antibodies in their system, so the people who don't care anymore.
Those are the people who are going to go out. And you're going to start seeing businesses cater to those people, say, hey, it's going to be like normal. That's basically what they're going to mean. They're going to say, it's just like it was before. Just sit down and have a nice time. Don't worry. Hang out with your friends.
There'll have to be a section of businesses, though, that cater to the shut-ins, the people who don't want to risk it, the people in a higher risk group. I'm overweight. I'm 57 old. I'm not going out. I can't afford not to, though. But not a lot of people get to make that decision. But I'm not going to go out and needlessly get at risk for that sort of thing.
But eventually, most people are going to end up getting it. Just like the flu, most people will eventually get it. It's just a question of when.
- But you've got basically a demand model that's going to come back gradually at some sort of rate, in some sort of way until it gets back to some sort of normal, whatever that looks like. But then, how do you do that? Like if you're looking at stocks, looking at earnings in companies, how do you even begin to figure that out?
- Well, you look at the macro of it, which is basically saying, like, right now, looking at data from Asia, looking at data from Europe, we're seeing roughly a 30% hit to the economy in the peak of the virus. So you have a three-month, 30% hit to your economy.
The month after that, we don't have good data yet because China and Japan are just getting out of their second month-- their second month out of the-- out of the-- they haven't gone through a quarter of being free of the virus. But they're only just coming through the worst quarter. Second quarter, probably half as bad. So if you're down 30% in one quarter, maybe you're down 15% the next quarter as things get back to speed.
By the next quarter, so for us, that'd be quarter 2, it started. Quarter 3 is our worst quarter, and quarter 4, we're down about 10%, 15%. But by beginning of next year, it's like it never happened.
- Especially taking into account the stimulus that props up the remaining. You know, because you're flat-out no stimulus effect on the economy, minus 30%. You throw a couple of trillion dollars on that, and minus 30% of a $4 trillion quarter is only $1.2 trillion off. The government threw $2.2 trillion at the problem. You pretty much solved that problem.
Not in a neat way. It's very irregularly distributed. That's a whole nother conversation about how poorly the money has been allocated. But some way, somehow, we're looking at a-- you know, we're looking at an economy that doesn't take the biggest hit. Maybe overall, down 10% for the year or something like that.
But that's manageable. And then you can move back and recover next year. But again, that's why we're at 2,850 though. We don't-- we think this year, we muddle through at around where the S&P is. Next year, hopefully, we make some progress back towards 3,000.