What’s Next for the Cares Act and the Economy?

By July 31, 2020Videos

So the Cares Act is beginning to unwind. In fact, without an act of Congress it ends July 31st. Will the economy unwind with it? As the Cares Act unwinds in just the next day or so, is the economy going to unwind with it? We know July 31st the unemployment benefit of additional $600 is expiring. Now there is an interim proposal to keep it going until a negotiated settlement has been reached. I think the Republicans would like to continue the unemployment benefit, but with just an additional $200 instead of $600. And the other issue is evictions. There’s been a moratorium on evictions for all properties that are backed by a government-subsidized loan – Freddie Mac, Fannie Mae, all of those. That has actually already hit the sunset provision. Again, if they don’t extend it, will there be massive evictions as well as the loss of unemployment benefits. Now, the Democrats and the Republicans are actually quite far apart. The Dems are offering a $3.4 trillion proposal, that frankly defies belief if you’re concerned about the future and the ability to pay for it. On the other hand, the Republicans have a $1 trillion proposal that may well not be enough, especially considering we’ve already spent two to three. And we’re really where we were two to three months ago.

Obviously this is anchoring. This is a starting point for the negotiations. Neither side really expects that we will end up at that starting point. Fair guess would be we end up somewhere around $2 trillion, maybe 1.8, 2.5, that range. And there’s a difficult trade-off here. The trade-off is between keeping the economy running and therefore keeping ongoing tax receipts, ongoing economic activity, versus paying for this pandemic later. It’s not such an easy balance. It’s not a black and white thing. If the economy collapses, it’ll cost us a lot more in future tax receipts and the cost of restoration.

And yet we can’t spend too much. There’s just really no good playbook for this. Both sides seem to agree on another $1,200 check for each and every American. Arguably a better system would be to have experimented with a universal basic income of about $300 a month from day one, because it’s going to add up to the same amount. But UBI is a toxic term in American politics. Essentially that’s what this $1,200 check is, though. Right now we’re entering a phase where landlords and retailers are battling for the future of their leases. The airlines are facing mass layoffs October 1st. And of course they’re going to be squeezing the government hard for an additional check. Needless to say the ability for that to happen without significant concessions by labor groups, it’s going to be hampered by the political realities, being most of Americans have seen some pay cut or some compromise. They’re going to expect that from the airlines. So, we’re looking to a difficult series of negotiations for additional help for the airlines. Unemployment is not where it was at the peak, but it’s the worst – it’s still at numbers that are worse than anything we’ve seen since the Great Depression.

And we are looking at additional bankruptcies. There’s a term called the Altman Z-score. And the Altman Z-score is actually a great method for predicting bankruptcies. It’s proven to be quite accurate and has become more accurate with tweaking over the years. The Altman Z-score for the average corporation in America is higher than it’s ever been since that score even existed. And it does suggest that we’re looking at a new wave of additional bankruptcies between now and the end of the year. It also suggests that there’s an enormous risk for severe recession.

What do we get out of all this? Well, the truth is we don’t know. Nobody knows. Pretty much everyone’s been shocked and surprised, both on the positive and the negative, as to what’s already happened. But they’re writing the playbook as they go along. But what we do know is that there is an enormous amount of risk out there still. A significant probability of both continued market correction, and, certainly, continued and maybe even worse recession between now and the end of the year. Where does that leave you, the investor? Be careful. Tread lightly. Be wary about yield, because yield in this environment is highly correlated with risk. With a risk-free interest rate of 0%, what seems like a low yield today relative to historic yields is actually fairly high. We’re keeping a lot of our monies in treasuries. We’re being very cautious with portfolios. We’re trying to be careful. We wish you the best of success. Thank you.

 

Sources:

https://www.texastribune.org/2020/07/23/texas-unemployment-cares-act-600-benefit-congress-feud/

https://www.forbes.com/sites/advisor/2020/06/08/the-600-federal-unemployment-boost-is-set-to-end-july-31-heres-what-happens-next/#525947116ef3

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