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Welcome to the Hibernation Economy

Last update on: Jun 16 2020

We’re not in a recession or depression. We’re in a great hibernation.Economic downturns usually are triggered by tighter monetary policy or speculation that creates major imbalances.

Occasionally, an external shock to the system, such as the coronavirus pandemic, causes the economy to decline.That, in many ways, is the good news. Governments ordered the decline economic activity.

The oil price war between Saudi Arabia, Russia and Iran was another shock to the system.Because these shocks caused the economic downturn, we don’t have to correct financial imbalances before a recovery can begin. In fact, most companies, households and financial institutions are in much better shape than before the financial crisis. We only have to wait for an end to the shocks.More good news is that economic policymakers reacted fairly quickly. The Federal Reserve stepped in at the first signs of a liquidity crisis and continues to add liquidity as needed.

Congress enacted new programs to transfer money to businesses and households, aiming to replace income and revenue lost because of the forced reduction in economic activity.

In addition, Congress and the Fed are coordinating their actions. I’ve been pointing out since late 2019 that this coordination of fiscal and monetary policy is the unorthodox economic policy combination that would be needed during the next economic downturn.The downturn occurred sooner than I expected. Fortunately, policymakers recognized what they needed to do. I cover this process of creating “helicopter money” and many more details of this crisis in greater detail in the April episode of my Retirement Watch Spotlight Series, the online seminar series. You can sign up for it at on the web site at

But more action will be needed. The cessation of much economic activity creates a $4 trillion to $6 trillion gap in the U.S. economy. So far, Congress has made plans to replace a little over $2 trillion.

We shouldn’t expect a rapid turnaround, what some call an L-shaped recovery. I once hoped for that, but now I believe the resumption of economic activity will be gradual. Most who believe in the L-shaped recovery point out that China seemed able to contain the spread of the virus and lift most restrictions within two months. But even after announcing its apparent success, China’s economic activity returned to only about 65% of pre-virus levels.

Under a realistic but optimistic scenario, economic growth won’t be positive until sometime in the second half of 2020. Activities involving large gatherings, which include many entertainment and sporting events, won’t be allowed in many places until there is a vaccine or widely available testing and treatments. The markets, on the other hand, now are priced for a best-case scenario of an early end to social isolation and forced activity reduction.

Any disappointment will lead to another re-pricing of assets. As usual, most people focus on the stock markets and wonder when a good time would be to load up on stocks. I believe the real action and potential profits are in the credit markets. Prices for many bonds, preferred securities and other credit instruments dropped to ridiculously low levels at the peak of the liquidity crisis in March. They recovered a lot after the Fed stepped in.

Yet, there still are bargains in these markets, and I anticipate new opportunities in the coming months.Another reason I favor credit in-vestments over equities is many of the forces that pushed stocks to new highs already were fading before the pandemic.

These factors include low-cost labor, high-profit margins, globalization and more. I think it is unlikely profit margins and earnings growth in many industries will return to pre-crisis levels.



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