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In response to a world that has unleashed a record liquidity flood in the past two months, over the weekend China’s PBoC said in its quarterly monetary policy report that it will resort to “more powerful” policies to counter the hit to growth due to the coronavirus pandemic.

Commenting – in his traditionally sarcastic style – on the PBOC’s announcement, Rabobank’s Michael Every said that the Chinese central bank has “recognized that after having ‘beaten the virus’ the Chinese economy is still so weak it requires “more powerful” monetary policies: its latest quarterly monetary policy report dropped the vow to “avoid excess liquidity flooding the economy.” That, as Every concluded, “is as bearish for CNY, and hence for EM FX and inflation prospects, as it is positive for some local assets.”

Here are some more details, sans the sarcasm, on the PBOC’s report from Goldman, which concludes that the PBOC’s dovish stance in monetary policy since February “would continue in the coming months given the need to put more emphasis on economic growth and employment.”

The report reiterated that the “prudent” monetary policy stance should be more flexible, which has been used since February, and mentioned the need to strike a dynamic balance among multiple goals and put more emphasis on economic growth and employment. From a broad perspective, the PBOC guided down the interbank interest rate significantly, with DR007 down by around 80bp from January to 1.5% on average in April, and R007 down by around 100bp to 1.6%. The PBOC also cut the OMO and MLF rates by 30bp and accordingly, guided LPR lower by 30bp, and cut the interest rate for excess reserves from 0.72% to 0.35% (for the first time since 2008). We expect another 20bp cuts in OMO/MLF rates and another 100bp of cuts in the RRR. Given the significant decline in repo rates since April, the need to boost growth in coming months and moderation in CPI inflation (see below for more discussion), we lower our forecast for DR007 to 1.5% on average for the rest of this year (from 1.9% on average previously).

At the same time, the report also noted the PBOC’s intention to maintain a “normal” monetary policy, which only a few major economies currently have. This is consistent with what Governor Yi Gang mentioned in an article published in December last year that questioned the effectiveness of unconventional monetary policy (e.g., zero interest rates and quantitative easing) in major DMs, stating that China would not implement zero interest rates or quantitative easing. So we think the bar for large further rate cuts, particularly in short-end rates, is high in China.

Elevated CPI inflation in recent months has been an unfavorable factor for monetary policy, even though it has largely been due to virus shock impacts (primarily the supply shock to food) and the decline of sow stock in early last year. Consistent with our forecasts, the report also noted that CPI inflation has started to go downward, and inflation expectations are currently stable. The report also mentioned that the virus may continue to affect inflation from both supply and demand sides in the coming months. As we have previously analyzed, the virus outbreak could put upward pressure on food prices (supply shocks outweigh demand shocks), but put downward pressure on service prices (where demand shocks dominate). In China, we found the net impact on CPI inflation was positive, reflecting larger impacts on food inflation (in DMs the food weight is much smaller so there is typically a negative impact). But with slowing infections (and less disturbance to the food supply) and a slow recovery in service demand, the net impact from the virus could turn negative. Thus, overall inflation could be less of a constraint for monetary easing in the coming months.

From a credit supply perspective, the report mentioned that M2 and TSF growth would “roughly match and be modestly higher” than nominal GDP growth, which of course is laughable for a nation where M2 has traditionally average about double GDP growth. That said, the PBOC has emphasized in recent years that TSF growth should be roughly in line with nominal GDP growth, leading to a much smaller deviation in TSF growth from nominal GDP growth (the ratio between TSF growth and nominal GDP growth was down from around 2 in 2016 to 1.1 in 2018, but up to 1.4 in 2019) and accordingly, less pressure on macro leverage.

While this approach could put an upper bound (range) on TSF growth, with downward pressure on growth intensifying, as we are seeing this year, the report suggests the bound should be higher to reflect the counter-cyclical requirements.

* * *

And sure enough, just hours after the PBOC statement, the central banks released its latest total social financing (TSF) and M2 data which were both well above market expectations, driven by continued growth in loans and corporate bonds, which according to Goldman “demonstrated the government has been quietly loosening policy.”

Here are the key numbers:

New CNY loans: CNY1700bn in April (loans to the real economy: CNY1620bn) vs. consensus exp. CNY1300bn. Outstanding CNY loan growth was 13.1% yoy in April, or roughly double China’s pre-covid GDP growth, and higher than March at 12.7% yoy. New CNY loans in April were lower than March mainly due to a sharp decline in short-term corporate loans.

Total social financing: CNY3090bn in April, vs. consensus expectation RMB 2775bn. While below the record March TSF total of CNY5.149 trillion, this was the highest April total for the series on record.

TSF stock growth (after adding all government bonds) was 12.1% yoy in April, higher than 11.6% in March. On the other hand, the implied month-on-month growth of TSF stock moderated to 15.3% (seasonally adjusted annual rate) from 17.7% in March. If we exclude central government bonds and general local government bonds from the TSF flows, the TSF stock growth accelerated to 12.4% yoy in April from 11.8% in March.

Total social financing surprised the market to the upside, driven by robust growth in loans and corporate bonds. Government bond net issuance moderated in April and shadow bank products remained muted. A breakdown of key TSF components is shown below:

Goldman expects the government to maintain the level of sequential TSF growth, especially given expected slowdown in exports growth, falling concerns about inflation, and less dramatic recovery in activity growth.

For the second month in a row, China’s shadow banking resulted in an injection in credit, suggesting that the PBOC is hardly that concerned about the current state of the shadow debt bubble. That said, the lower shadow banking activity was partially because financial institutions have concerns about regulatory repercussions. There is also less need to issue these since it is easy to extend standard RMB loans and issue bonds. Much of the shadow bank products were popular when there were tight controls on loans and bonds.

M2: 11.1% Y/Y in April (17.7% annualized) vs. Bloomberg exp. of 10.3% yoy, and above the March 10.1% yoy print.

M2’s 11.1% growth was the fastest since December 2016, above expectations, although well below the recent explosion in the US M2 (whose impact on risk assets we discussed previously).

As Goldman summarizes the April data, it demonstrated that “the government has been quietly loosening policy, more than what it may appear by looking at the magnitude of interest rates and RRR cuts.” Furthermore, there is still a clear preference to use these relatively low profile methods of loosening than tools such as RRR cuts which are often described as “heavy weapons”. Then again, how “low profile” is a CNY10 trillion credit injection in 3 months is anyone’s guess.

On the other hand, there are some concerns that there are more arbitrage activities than usual, which won’t help the real economy:

• Some firms might have borrowed at a low interest rate and then deposited the money at commercial banks.
• Other firms would then lend it to non-bank institutions instead of depositing the money at commercial banks, but this is significantly riskier since the safe borrowers such as large SOEs generally don’t need to borrow money this way.

The relatively low level of M1 is one sign indicating these arbitrary activities. If companies borrowed at a low interest rate and then deposited the money, they cannot deposit it in demand deposit accounts to enjoy the rate differential because the deposit rate is too low. The existence of some arbitrary activity almost always occurs when policy is being loosened and the interest rate is low.

So the fact that these activities exist does not mean monetary loosening is not helping the real economy – mounting evidence of stronger domestic demand growth especially in areas related to infrastructure FAI has demonstrated its usefulness. On the other hand, these concerns could add pressures on the central bank to lower the benchmark deposit rate, which hasn’t been adjusted for years, although the latest PBOC quarterly monetary policy report appeared to suggest some reluctance to cut.

However, inflation will need to drop before a wholesale rate cut. The high level of CPI inflation recently was cited by the PBOC deputy governor as a reason why they hadn’t cut the benchmark deposit rate. But there is a growing consensus that April and May CPI and PPI will likely fall further from March level. Goldman believes May CPI can be below 3.0% and PPI close to -5%. If so there will not only be a lower level of concerns about inflation, there will likely be rising concerns about deflation.

There are also more renewed concerns about the spread of virus in some areas following a mini outbreak in Jilin province. This has led to a lockdown in a low tier city—though this doesn’t have a significant economic impact, it does tend to make policy makers in other parts of the country more cautious when they need to decide on whether to relax virus control policies. It also can directly affect consumer behavior as they become more concerned.

In paring, Goldman states that its current forecast for TSF growth implies the ratio between TSF growth and nominal GDP growth will rise to around 3 this year, consistent with the view that “the demand stimulus the government needs to implement could be larger than in 2016, but smaller than the GFC.” This reflects the need to accommodate the ramping-up of infrastructure investment while mitigating the potential crowding-out of credit availability for private firms. The acceleration in local government bond issuance, along with a significant pickup in Rmb loans and corporate bond issuance…

… has driven a material pickup in TSF growth, with the TSF flow to GDP ratio up 14% in Q1. On the other hand, the report continued to emphasize consistency in housing policy and reiterated that policymakers should avoid using property as a short-term stimulus.

Authored by Scott Minerd, Global CIO, Guggenheim Investments,

Eight weeks have passed since the Federal Open Market Committee held an extraordinary Sunday meeting and cut the fed funds rate to zero. Since then the Federal Reserve (Fed) and Congress have unleashed vast fiscal and monetary resources to support the economy and financial markets. I have my opinions on the efficacy and long-term consequences of those policies, but as an investor, I do not have the luxury of moralizing. My job is to understand how markets function, assess value in whatever conditions we find ourselves, and position client portfolios accordingly.

Our portfolios reflect the view that we are likely going to be facing a long period of repression in the yield curve, and that the risk of significant widening in high-quality credit spreads has been reduced by the market’s faith in the Fed’s new facilities. As a result, we believe our conservative positioning before the crisis has positioned us well to aggressively take advantage of market dislocations and opportunistically add credit exposure.

Interest rates are not likely to skyrocket anytime soon despite massive Treasury issuance. Given the economy’s and U.S. Treasury’s need for continued support by the Fed, utilizing bond buying and forward rate guidance will, over time, continue to exert downward pressure on rates. I see the yield on the 10-year Treasury note falling to 25 basis points or lower very soon, with a possibility that it will go negative in the intermediate term—our target is -50 basis points, and in certain circumstances it could go meaningfully lower. The long bond could ultimately reach around 25 basis points as the 10-year and 30-year area of the curve shifts down by over 100 basis points from where it is today.

Treasury Yields Are Heading Even Lower From Here

The Fed’s and Treasury’s expanded support for credit markets and corporate borrowers has significantly reduced tail risks in pricing. Liquidity provided by the Fed will keep prices in check for a wide range of securities. It has also removed some of the hazards that lead to default, such as being shut out of the market when in need of money. Prior to the March 23 announcement of the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF), it was unclear if companies like Boeing would be able to raise money in primary credit markets at any affordable level. But on April 30, Boeing raised $25 billion on a deal that was met with $70 billion in orders, making it the sixth largest corporate bond placement on record. In fact, investment-grade corporate bond issuance this year has broken the previous monthly record twice, with March volume of $262 billion breaking the previous record in May 2016 of $168 billion, and April volume of $285 billion breaking March’s record. Year-to-date investment-grade bond issuance through April totals $765 billion, putting 2020 on track to easily surpass last year’s total of $1.1 trillion.

Many companies, including Boeing, Southwest, and Hyatt Hotels, have likely gained access to financing simply on the strength of the government’s intentions to intervene in credit markets. Successful debt offerings have also been completed by recent fallen angels like Ford and Kraft Heinz, both of which had corporate bonds trading at or near distressed levels only weeks ago. This was a real success for corporate bond issuers, but it was also a success for the Fed.

The Fed has yet to buy a single bond in the SMCCF, but the mere announcement of the program has managed to tighten credit spreads dramatically and greatly ease liquidity issues. This reminds me of the period between 1942 and 1951, a period in which the Fed targeted a maximum rate of 2.5 percent on long-term Treasury bonds. Amazingly, the Fed ended up buying only a small amount of Treasury debt during that period. The reason, of course, is that the market perceived that the Fed had given Treasury investors a put. Any time rates began to approach 2.5 percent, investors would step in and start buying because there was very little downside. A similar dynamic is at work right now in the credit markets.

The support on offer to corporate America during this period of economic shutdown risks the creation of a new moral obligation for the U.S. government to keep markets functioning and help companies access credit.

This means that corporate borrowers are most likely on the way to becoming something akin to government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. The difference is that in this cycle, it is not a specific institution that is too big to fail, it is the investment-grade bond market that is too big to fail.

Before the financial crisis of 2007-08, Fannie Mae and Freddie Mac operated with the implied backing of the U.S. government, and the senior securities they issued—mortgage-backed securities and Agency debentures—were referred to as moral obligations of the U.S. government. There was no legal requirement for the U.S. Treasury to pay off or guarantee their senior securities, but during the extreme conditions of the financial crisis, when liquidity dried up for the Agencies’ securities and their capital position deteriorated, the Treasury stepped in. The Fed played its part, with the first de facto quantitative easing (QE) program taking the form of outright purchases of Agency discount notes and, ultimately, the U.S. Treasury offered its unconditional guarantee on Agency mortgages and debentures, which ended in conservatorship. The implicit support that the markets and rating agencies had relied upon for years to justify their pricing and low capital charges turned out to be correct. Fannie and Freddie actually were an obligation of the U.S. government, and the government made good on it.

Rating agencies and regulators had long assigned value to the implicit government support that led to similar treatment for Agency debt as that of U.S. Treasury obligations. If the rating agencies believe that these pandemic programs are going to reduce default risk then it logically follows they will be slower to downgrade companies (or may, under certain circumstances, consider upgrading them). That does not mean every company is going to get bailed out, or that every bad credit will be turned into a good credit, but at the margin some questionable credits will not only have lower risk of default, but they will also have lower risk of downgrade and pay lower rates of interest.

What could go wrong with my outlook?

We are already in uncharted territory and another black swan might emerge in the midst of a very fragile market. Or a second-order event could create irreversible damage such as large default volumes in the emerging markets. Risks from reopening the economy are two-sided: State and local governments could ease up on lockdown restrictions, the spread of the virus could prove to be manageable, and the economy could come roaring back—unlike what we’ve predicted, which is more of a checkmark-shaped recovery than a V-shaped recovery. On the other hand, the easing of restrictions could lead to a second spike in the coronavirus that is even worse than what we have already lived through, leading to a new leg down for the economy and markets.

Another risk is the Treasury itself. The Fed will need to conduct another $2 trillion of QE this year to keep the Treasury market functioning given the size of the deficit. Net coupon issuance for the rest of 2020 will approach $1.5 trillion, and net bill issuance could add another $2 trillion. There is just not enough available credit in the world to absorb all of these Treasury securities without crowding out other borrowers. If at some point markets begin to question the efficacy of QE, or the Federal Reserve is perceived to be behind the curve in making necessary asset purchases, we could very well get a tantrum in the Treasury market, which would likely spill over into a tantrum in corporate credit, and into the stock market.

Treasury Issuance Will Shatter Records in 2020

Any of these risks could affect my outlook. But as Americans we will need to have more faith in the willingness and the ability of our government to print money as the ultimate solution to every problem. In extreme conditions, the real function of central banks is to print money when necessary to make sure the government gets financed. This is the dirty little secret of central banking. Central bankers won’t openly admit to this, but we have seen this reaction function time and time again, and in every cycle it only gets bigger.

The policy of the central bank to continually step in, lower interest rates, and encourage companies and people to take on more debt has been in place since the 1930s. The idea that the central bank could push interest rates down and make more credit available to smooth out the business cycle is designed to have an economy that operates with fewer recessions, less severe recessions, and ultimately longer periods of expansion. This policy worked, but it also created the Great Debt Supercycle: Every time we get ourselves into a recession, the total debt of the U.S. economy rises relative to gross domestic product (GDP) to new and higher levels. This is not sustainable in the long run, even if we are able to push interest rates into significantly negative positions on a sustained basis.

Policy Drives the Debt Supercycle

“We are all Keynesians now” is the famous phrase attributed to Richard Nixon during the financial crisis of 1971 as a sign of his reluctant acceptance of an economic theory he found objectionable. I understand how he must have felt. I see lower interest rates coming and tighter credit spreads ahead. There may be hiccups along the way, but the resetting of valuations across most sectors has presented attractive opportunities and prompted us to significantly increase credit exposure. Our confidence is based on thorough credit analysis and informed relative value assessment. But it is also based on my reluctant acceptance of the policy framework that is now in place.

As wholesale beef prices exploded to record highs and President Trump ordered workers at meatpacking plants around the US to get back to work after COVID-19 outbreaks prompted ~1/3rd of them to close (as we explained at the time, meatpacking plants are veritable breeding grounds for SARS-CoV-2), the plants that were still on-line continued to churn to try and prevent the US “food-supply chain from breaking”. However, rather than doing their patriotic duty, a Reuters investigation has found that these plants have been increasingly exporting to China since the crisis began.

Of course, this shouldn’t surprise experienced analysts who have been watching China for years. Since President Xi’s rise to power, China has been taking steps to secure a growing share of American pork and other meats. Analysts warned at the time that this could create serious problems for the US food supply as China turns America’s own ‘hyper-capitalist’ system against it.

China promised to increase purchases of U.S. farm goods by at least $12.5 billion in 2020 and $19.5 billion in 2021, over the 2017 level of $24 billion. Since Jan. 1, ~31% of American pork produced has been exported, totaling about 838,000 tons, according to data from the US Meat Export Federation. 1/3rd of that went to China, accounting for more than 10% of total Q1 production, according to the MEF.

What’s more, the growing exports are actually a good thing, in a sense, since it means Beijing is technically taking steps to abide by its agreement to buy more than $200 billion in additional American goods over two years – though China has mostly limited its purchases to goods that benefit China (often these involve purchases of ag or energy commodities). But as reports published in the Chinese press on Monday raised new doubts about the viability of the US-China trade deal, it suddenly appears that perhaps President Trump has finally realized that his ‘largely-for-show’ trade deal is no longer the PR win he once believed it to be, now that ~70% of Americans are now suspicious of China.

“We know that over time exports are critically important. I think we need to focus on meeting domestic demand at this point,” said Mike Naig, the agriculture secretary in the top U.S. pork-producing state of Iowa who supported Trump’s order.

And now, it looks like that’s exactly what’s happening, as data cited by Reuters have shown:

Processors including Smithfield Foods, owned by China’s WH Group Ltd, Brazilian-owned JBS USA [JBS.UL] and Tyson Foods Inc temporarily closed about 20 U.S. meat plants as the virus infected thousands of employees, prompting meatpackers and grocers to warn of shortages. Some plants have resumed limited operations as workers afraid of getting sick stay home.

The disruptions mean consumers could see 30% less meat in supermarkets by the end of May, at prices 20% higher than last year, according to Will Sawyer, lead economist at agricultural lender CoBank.

While pork supplies tightened as the number of pigs slaughtered each day plunged by about 40% since mid-March, shipments of American pork to China more than quadrupled over the same period, according to U.S. Department of Agriculture data.

Smithfield, which China’s WH Group bought for $4.7 billion in 2013, was the biggest U.S. exporter to China from January to March, according to Panjiva, a division of S&P Global Market Intelligence. Smithfield shipped at least 13,680 tonnes by sea in March, Panjiva said, citing its most recent data.

Smithfield, the world’s biggest pork processor, said in April that U.S. plant closures were pushing retailers “perilously close to the edge” on supplies.

The company is now retooling its namesake pork plant in Smithfield, Virginia, to supply fresh pork, bacon and ham to more U.S. consumers, according to a statement. The move is an about-face after the company reconfigured the plant last year to process hog carcasses for the Chinese market, employees, local officials and industry sources told Reuters.

Of course, the owners of slaughterhouses have opposed the president’s order, claiming forcing workers back into the plants could result in unnecessary sickness and death. Of course, the falling supplies they’ve warned about could potentially benefit the bottom lines of these companies. Remember, Smithfield Foods is the biggest pork producer in the world.

Source: Reuters

On top of the coronavirus crisis, China has been struggling with a brutal outbreak of African swine fever, which wiped out roughly one-third of the country’s live hogs last year, forcing China to ratchet up imports (one reason why striking the ‘Phase 1’ deal was politically advantageous for President Xi).

KeyBanc Capital Markets outlines in a new report, using internal credit card data, that Apple’s iPhone sales recorded a “sharp decline” in April as coronavirus-related shutdowns crimped consumer spending and kept many of the company’s brick and mortar stores closed.

The report says iPhone sales plunged 77% on a year-over-year basis in April and were down 56% over the previous month. 

“Our Key First Look Data indicates a sharp decline in iPhone sales in April (-77% y/y, -56% m/m), which reflects the first full month that Apple brick-and-mortar stores were fully closed,” analyst John Vinh wrote. 

Apple closed US retail stores on March 14, which contributed to a significant deterioration in iPhone sales through April. Shipments in the month declined 57% year-over-year basis and 37% on a month-over-month basis. 

Vinh notes that “online sales did increase m/ m but were unable to offset store closures, so sales were still down y/y.” He said a “modest bump” in iPhone sales in 2H April was observed, likely the result of President Trump’s stimulus payments to the working poor, adding that iPhone sales in 2H April jumped by 14% compared to 1H April.

The KeyBanc analyst notes that consumers are shifting towards cheaper iPhone models over the month. This trend will likely persist as high unemployment, recession, and uncertainty plagues consumers. 

KeyBanc’s data is based on anonymous spending data from 2 million KeyBank credit and debit cards, showed the slowdown in iPhone sales at stores and online began last summer and accelerated into early 1Q20. By the time the pandemic triggered lockdowns in March, sales at stores collapsed. It wasn’t until April when store sales plunged to zero with a slight increase in online sales, but as noted above, the offset is not enough to stem year-over-year losses in iPhone sales. 

Apple investors have overlooked KeyBanc’s warning about plunging iPhone sales as Tim Cook continues to fuel debt-fuelled stock buybacks. 

Despite souring fundamentals, Apple’s stock continues to rise. It was noted that the Swiss National Bank’s latest 13F, as of March 31, said it purchased $4.4 billion worth of Apple in the market rout last quarter. Possibly explains Apple’s share price levitation. 

With tens of millions of Americans out of work and some might not be able to find jobs as the probabilities of a V-shaped recovery for the real economy in the back half of the year continues to wane — KeyBanc’s data is an eye-opener for a consumer that has been severely damaged and might not be able to afford expensive iPhones this year. 

A new report from the University of Chicago found that pandemic-induced layoffs will result in permanent job loss, which shreds the Wall Street narrative of how many of these lost jobs will return once lockdowns are lifted. As if the Wall Street consensus has a damn clue about the job situation in the back half of the year.

The U.S. economy lost 20.5 million jobs in April, and the unemployment rate spiked to 14.7%. Optimism on Wall Street last Friday ramped stocks higher as Wall Street cheered more than 18 million of those jobs lost were considered temporary reductions and were likely to come back once restrictions were lifted quickly. 

However, a recent working paper from the school’s Becker Friedman Institute for Research in Economics discovered there were only three new hires for every ten layoffs caused by virus-related shutdowns. The authors — Jose Maria Barrero, Nick Bloom, and Steven J. Davis estimated that 42% of the layoffs seen over the last several months would result in permanent job loss: 

“Drawing on our survey evidence and historical evidence of how layoffs relate to recalls, we estimate that 42 percent of recent pandemic-induced layoffs will result in permanent job loss. If the pandemic and partial economic shutdown linger for many months, or if pandemics with serious health consequences and high mortality rates become a recurring phenomenon, there will be profound, long-term consequences for the reallocation of jobs, workers, and capital across firms and locations,” the authors wrote.

The report went on to say that virus-related shutdowns have devastated the U.S. economy with nearly 28 million people filed for new claims for unemployment benefits over the six weeks ending April 25. It said at an annualized rate, the U.S. economy is expected to contract 4.8% in 1Q20 and 25% in 2Q20. 

The authors quoted a recent Wall Street Journal piece that noted, “The coronavirus pandemic is forcing the fastest reallocation of labor since World War II, with companies and governments mobilizing an army of idled workers into new activities that are urgently needed.” In other words, the pandemic has created a “major reallocation shock.” As for anecdotal evidence, the report said the new hirings by Walmart, Amazon, and Instacart are evidence of this.

They went onto say that “historically, creation responses to major reallocation shocks lag the destruction responses by a year or more,” adding that, “we anticipate a drawn-out economic recovery from the COVID-19 shock, even if the pandemic is largely controlled within a few months.” 

The authors said several economic forces will delay creation response. They said government intervention can prolong the creation response, slowing the recovery.

“In this regard, we discuss four aspects of U.S. policy that can retard creation responses to the pandemic-induced reallocation shock: Unemployment benefit levels that exceed earnings for many American workers under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, policies that subsidize employee retention irrespective of the employer’s longer term outlook, occupational licensing restrictions the impede mobility across occupations and states, and regulations that inhibit business formation and expansion,” they wrote.

“If we are correct that many of the lost jobs are gone for good, there are important implications for policy,” the report said.

What this report suggests is that Wall Street’s optimism about a V-shaped recovery this year is absolutely wrong and the recovery may not be seen until 2021 or beyond. 

A former Federal Reserve economist, Claudia Sahm, who is now director of macroeconomic policy at the Washington Center for Equitable Growth, has also shared similar remarks that some furloughed workers will have trouble finding jobs. 

“For a lot of those furloughed workers, a non-trivial number will have no job to go back to, because the company they worked for will have failed or will need fewer workers than they used to,” Sahm said. 

Since aggregate demand collapsed, and will likely not revert to 2019 levels for several years, factories are shuttering their doors across the country, resulting in permanent job loss. Here are several closings: 

“Factory furloughs across the U.S. are becoming permanent closings, a sign of the heavy damage the coronavirus pandemic and shutdowns are exerting on the industrial economy.

Makers of dishware in North Carolina, furniture foam in Oregon and cutting boards in Michigan are among the companies closing factories in recent weeks. Caterpillar Inc. said it is considering closing plants in Germany, boat-and-motorcycle-maker Polaris Inc. plans to close a plant in Syracuse, Ind., and tire maker Goodyear Tire & Rubber Co. GT plans to close a plant in Gadsden, Ala.

Those factory shutdowns will further erode an industrial workforce that has been shrinking as a share of the overall U.S. economy for decades. While manufacturing output last year surpassed a previous peak from 2007, factory employment never returned to levels reached before the financial crisis,” The Wall Street Journal reports. 

Scott Minerd, CIO Guggenheim Investments, believes it could take upwards of “four years” for a recovery to take place adding that “to think that the economy is going to reaccelerate in the third quarter in a V-shaped recovery to the level where the gross domestic product (GDP) was before the pandemic is unrealistic.”

Teddy Vallee, Founder & CIO of Pervalle Global, recently tweeted, “Global equities for the second time in a year price in a growth rebound that our Real-Time PMI model does not confirm.” 

And here we are, the Wall Street consensus is pricing in a V-shaped recovery this year that will likely not happen.