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Rekenthaler Report

This Economic Crisis Can't Be Addressed by Conventional Thinking Alone

Now is the time to be creative.

Editor's note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.

A New Problem
Over the decades, the United States has smoothed its business cycle. In only eight quarters of the past 116 has the nation's seasonally adjusted gross domestic product declined. Four of those instances were unpleasant and closely bunched, occurring from early 2008 through mid-2009. The other four were modest affairs, being slight drops that were promptly followed by multiyear expansions.

The explanation for this relative success is straightforward. The shift from manufacturing to services has eased the boom-and-bust cycle, as has increased caution from corporate executives. Today's businesses are less likely to find themselves with severe overcapacity. Meanwhile, the Federal Reserve has become more adept at nudging the economy countercyclically.

The 2008 crisis confounded the pattern because its source was different. The problem lay not with overbuilding, nor wage pressures, but instead with sinking real estate values, which threatened the financial system. This danger took longer to recognize, and the cure was less obvious. The country therefore suffered its only severe recession since the early 1980s.

If 2008 was unusual, 2020 is unprecedented. The U.S. had suffered real estate collapses before 2008, albeit locally rather than nationally. Never, however, have millions of the nation's businesses suddenly closed their doors. Never has international travel ground to a sudden halt. Never have personal interactions been so curtailed.

Conventional Responses
The Federal Reserve reacted first to the looming economic crisis. It gave its gallant best, cutting interest rates to zero while injecting cash through repurchase operations. Stocks plummeted. The Fed can defend the financial system, and encourage business growth through easy money policies, but it offers scant comfort to companies that have been shuttered. It wasn't established to solve this problem.

Then came Congress, passing a $2 trillion stimulus bill early Wednesday morning. Its key provisions:

1) $500 billion in loans to distressed companies

2) $350 billion in loans to small companies

3) $250 billion in payments to consumers

4) $250 billion for unemployment funds

5) $150 billion for state and local governments

6) $130 billion for hospitals

Unlike the Fed's actions, the Congressional decision was greeted enthusiastically by equity investors, who on Tuesday added 2,113 points to the Dow Jones Industrial Average in anticipation of the bill's completion.

All fine and good. Nobody benefits from otherwise healthy businesses being bankrupted by one-time events; or furloughed workers being unable to pay their mortgages; or local governments struggling to finance necessary services. And nobody will begrudge the money spent assisting hospitals.

However, these items are patches, not fixes. They will protect against some of the economic destruction caused by the shutdown, but they will neither prevent the bulk of the damage nor prevent future occurrences. Despite its huge price tag, the bill offers only temporary relief. If things do not change, then in a few months Congress will be forced to pass similar legislation. Bolstering a U.S. economy that has been tied to a railroad track will require far more than $2 trillion per year.

Of course, one wishes for a quick turnaround, with the coronavirus being quickly controlled. Perhaps that will happen. However, it would be rash to expect that outcome. Plan for the worst, hope for the best. Prudence requires that we consider the possibility that business shutdowns will linger. How to proceed?

The Importance of Being Creative
Clearly, passing additional multi-trillion-dollar stimulus bills is suboptimal policy. The bond market has tolerated the growth of the national deficit remarkably well, but eventually it will resist, and then the U.S. will face the burden of paying higher interest rates, even as it increases its amount of debt. That is not a fate to be tempted.

The next step, therefore, is to change our collective habits, to put idle resources back to work. Politicians commonly refer to the "war" on the coronavirus. Talk is cheap; live the word. Recognize that the U.S. currently has two priorities: 1) to prevent coronavirus infections (especially deaths) and 2) to increase economic activity. Those priorities are generally thought to be in conflict. So far, they have been. However, they can also coexist.

A happy example is a manufacturer of hockey equipment, Bauer. Located in Canada (naturally), the company has retooled its factories to produce medical shields instead of hockey helmets. So far, it has taken more than 100,000 orders for its new product. Bauer's workers remain employed, produce revenue for the firm, and help to combat the coronavirus. Win-win-win.

Or currently languishing New York hotels could serve hospital staffers. Rather than commuting home each night, or crashing on a hospital cot, healthcare workers could save time and rest better by sleeping at nearby hotel. Perhaps this proposal is unworkable because of concerns about virus spread--but if not this suggestion, then another one.

Of course, most businesses cannot be so readily adapted for direct combat with the virus. Their goal is survival. Adapt or else. I talked with my barber today. His shop is closed by state order. He currently has no income with which to support his wife and three children. He will abide by the closure--for now. After that, he will figure out a way. Perhaps he will set up a chair on his lawn (Chicago weather turning better now), serving his customers while wearing a mask and gloves.

My wife's health club is no longer operating, and its employees temporarily dismissed. If I ran that business, I would contact my wife to offer her a personal training session, using one of the sidelined employees. They could meet at a park. The employee would get a cut from her fee, as would the health club for arranging the appointment. The business receives revenue, the worker gets paid, and consumer assets get spent. As things should be.

(Another example: After I filed this draft, I received a call from a theater about a show that I would have attended on Saturday had it not been canceled. Would I donate the ticket cost to the cast and crew rather than request a refund? Of course. That was the third performance that I have missed since Illinois started canceling events, but the first such request. Others no doubt will follow suit.)

You get the idea. Of course, not every industry can successfully be revamped. I have no suggestions for those who run airlines or cruise ships. My claim is simply that, given time to react, the business community can and will devise solutions to ease this economic crisis.

The Contrarian Bell
I politely credited Congressional legislation for igniting the stock market rally, but those who read my Tuesday column know that the surge's true origin was my first and only bear-market article. As one reader wrote to me, "When even you cave, the bottom must be near."

Feel free to send me your thanks ( At any rate, although I remain concerned, I haven't yet acted on my inclination, meaning that I am a toothless bear. My portfolio profited, too. So, I haven't been too upset about looking quite wrong--at least for two days.


John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.