Here’s some thoughts on what I see coming for the economy and life in general. These are just my opinions based on what I know. Time will tell how good or bad these predictions are.
Global situation
- China will come out of this first. They are already restarting their economy. That doesn’t mean they will bounce right back. They depend on the rest of the world to buy their products. They will do all they can to stimulate their internal economy but this won’t be nearly enough to make up for the downturn in the global economy.
- The U.S. will be in comparatively better shape than the rest of the world at least initially. This is because the borrowing and spending that the U.S. government is doing is directed only at U.S. citizens.
- The EU will try to do something similar but with less capability, as will Japan and to some extent Britain.
- The rest of the world will have less ability to borrow and spend and are being hit hard. This may have political and eventually military implications.
- The trend toward globalization will reverse in critical areas where we have found we are vulnerable. Incentives will be added to establish local suppliers and supply chains. Prices for goods will increase in these areas.
Investments
- Interest rates are nearing the bottom and don’t have much room to go lower. This means that traditional bonds have terrible yields, and don’t have much room to go up in price but have lots of room to go down in price if interest rates rise. The Fed will continue to do all it can to keep interest rates low for as long as possible, which may last quite a long time. Eventually interest rates will rise again. This makes bonds a poor investment in the short to mid term, and a terrible investment for the long term.
- The 5-year TIPS (Treasury Inflation-Protected Securities) auction on April 30 resulted in an interest rate of 0.125% but a yield of minus 0.320% (because they sold for $102.37 per $100). The only way this could turn into a positive investment is if the inflation component overcomes the negative yield. This indicates an expectation of moving from the current overall deflation to some amount of inflation within the next five years.
- The large increase in debt and buying of assets by the Fed will lead to increased asset prices in the short term (stocks will go up). This already happened in April.
- This activity by the Fed will eventually lead to devaluation of the currency and inflation (gold and other inflation-hedge assets will go up). But in order for that to happen demand for goods will need to exceed supply. Right now both demand and supply for non-essential goods are way down. In general the supply of essential goods has kept up with demand so far.
- Recovery of demand for non-essential goods will be slow. People will be reluctant to go out and do many things due to fear of the virus. Many people have burned through their savings and gone into debt or worse. Some jobs will not be coming back due to reduced demand.
General
- A greater share of the economy is shifting to online activity. This was already happening but has accelerated greatly. This will likely remain as people maintain social distancing.
- Online retailers and delivery services will continue to do well.
- Large numbers of people will continue to work at home.
- Internet connectivity is now viewed as a necessary utility like electricity and water.
- Large gatherings will be limited until a vaccine is available and the majority of the population has been vaccinated.