- Jim Rickards — a 35-year market vet and best selling author — thinks the fallout stemming from the coronavirus pandemic will cause a dramatic shift in the behavior and psychology of those who live through it.
- He says we’re in an economic depression.
- Rickards thinks that monetary and fiscal policy will both be ineffectual in trying to rout the downturn.
- “I think equities have a lot further to fall,” he says.
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“So, the pandemic is getting worse; it’s going to last longer than people think. The economy may or may not still be in a recession, but we are in a depression that’s going to last for years — and the psychological and behavioral effects will be intergenerational.”
That’s what Jim Rickards — a 35-year market vet and best selling author — said in a recent interview for Fat Tail Media to summarize his views of current market landscape.
“A depression is much more profound, much more long-lasting … much more damage than a technical recession,” he said. “The point being: We’re not going to get to 2019 levels of output until 2023 at the earliest. We’re not going to get to 2019 levels of unemployment — get to those lows — until probably 2025.”
Rickards notes that although key facets of economy have started to recover a bit — as recently demonstrated by upticks in GDP and unemployment — they remain well below pre-pandemic levels.
Here’s a look at GDP.
And here’s a look at the unemployment rate. Although recovering, both metrics are still a long ways away from pre-pandemic levels and the gains that would have been realized if there were no pandemic.
Rickards thinks that the profound effect the pandemic has had on the economy — as demonstrated by unprecedented drops in both GDP and employment above — will change the psychology and behavior of the people living through it, similar to the way Great Depression changed the behavior of those unfortunate enough to weather it. It’s a key reason he believes the efforts of central banks and governments around the world to alleviate the brunt of the impact will be for naught.
“But here’s the point: So we talk about behavioral changes, so lets apply that to finance and money,” he said. “And this is why monetary policy will not work — will not change the outcome. And fiscal policy will not change the outcome.”
It’s a phenomenon Rickards is observing in real time.
As far as monetary policy is concerned, Rickards thinks the efficacy of policies by the Fed (and other central banks around the world) can be observed through the vetting of the velocity of money — how often money changes hands.
To demonstrate this idea, Rickards offers a quick example of a night out: It start with a dinner; he tips the bartender. The bartender then takes a taxi home and tips the taxi driver. Then, the taxi driver puts gas in his or her car. In that example, Rickards dollars changes hands three times.
But with much of the economy still shut down, the velocity of money has come to a standstill; it’s just sitting there.
“$5 trillion dollars times zero is zero — meaning if you don’t have velocity, you don’t have an economy,” he said.
Here’s a look at the M2 velocity of money. When the pandemic hit, it fell off a cliff. Today, it’s barley recovered.
A look at savings rates tells a similar story. If money is being saved, it’s not moving. At least for the time being, Rickards hunch about behavior seems to be accurate.
That brings Rickards to fiscal policy. It’s another facet he thinks will be ineffectual, widely differing from the majority of market participants.
Rickards cites the work of Kenneth Rogoff, a Harvard professor and former chief economist at the International Monetary Fund, and Carmen Reinhart, the chief economist of the World Bank, as fodder for his view. The duo also authored “This Time is Different: Eight Centuries of Financial Folly,” back in 2011.
“They show, convincingly, over centuries — developed economies, developing economies, all economies, 19th century, 20th century, etc. — that when your debt-to-GDP ratio goes over 90%, the Keynesian multiplier goes below one, meaning: You can borrow a dollar and spend a dollar, but you only get maybe 60 cents or 70 cents of GDP,” he said.
Here’s a look at US debt-to-GDP ratio today. At the end of the second quarter, it stood just below 136%.
To Rickards, that means every dollar the US government spends to try to dig the economy out of this conundrum will only make things worse.
“And so, monetary policy falls down because of velocity, fiscal policy falls down because the debt-to-GDP ratio is too high, and then that induces a behavioral response,” he said.
In Rickards’ mind, this means more savings and less consumption — and that’s a big problem.
“Our economy runs on consumption,” he said. “Consumption is 70% of GDP, so when you substitute savings for consumption, it might have some benefits five years from now, but that’s a really long time. And that’s why I call it a depression.”
Against that backdrop, it’s safe to say that Rickards isn’t too keen on today’s stock market.
“I recommend lightening up on equities,” he said in a recent interview for Stansberry Research. “I think equities have a lot further to fall. There’s been a spectacular rally from March 23 to September 2. We had the shortest bear market and the fastest return to a bull market in history, but it doesn’t mean this is over.”