In accepting the Democratic nomination for the presidency on July 2, 1932, President Franklin D. Roosevelt spoke of a “new deal for the American people” who had been ravaged by the Great Depression.
After winning the 1932 election by a landslide, FDR, as he came to be known during World War II, took immediate action to bring about economic relief to the unemployed through public works programs, and to undertake reforms in industry, agriculture, finance, hydroelectric power, labor and housing.
Roosevelt’s New Deal, which lasted from 1933-39, also vastly increased the scope of the federal government in the economy.
Agencies such as the Works Progress Administration and the Civilian Conservation Corps were established to provide short-term aid, as well as temporary jobs, employment on construction projects, and youth work in national forests.
A second New Deal focused on union protections, created the Social Security Act, and rolled out programs to help tenant farmers and migrant workers.
Historians debate whether the New Deal succeeded in ending the decade-long Depression – a huge boost in industrial activity to help the war effort is thought to be equally important – but there is no doubt the Keynesian-inspired economic program helped put millions of Americans back to work on hundreds of public works projects across the country.
“The reforms put in place by New Deal… essentially ensured there wouldn’t be another Great Depression after the 1930s,” says Nelson Lichtenstein, professor of history and director of the Center for the Study of Work, Labor and Democracy at the University of California, Santa Barbara.
In a previous article we pointed out the similarities between the 1930’s Depression and the coronavirus crisis/ recession.
We said what the global economy really needs, in this low-growth, spending-stalled environment brought about by the pandemic, is a push – something big that will attract huge amounts of investment, and workers. As we have suggested, this could be a massive infrastructure spending program, on the scale of President Roosevelt’s New Deal.
With the United States still firmly in the grip of covid-19, amid rising second-wave cases and failed state re-openings, the case for a global infrastructure build-out has become even more compelling.
One of the most important barometers of economic health is the personal savings rate – the percentage of people’s incomes left after they spend money and pay taxes.
Compared to other nations, US consumers have traditionally been low-savers; encouraged by low interest rates and addicted to credit cards, Americans generally prefer to spend their hard-earned shekels. That makes them a force to be reckoned with – the almighty US consumer represents two-thirds of annual economic output, or GDP.
But something different is happening during the coronavirus: paralyzed by fear and uncertainty about their futures, wage earners are delaying or canceling purchases; combined with literally hundreds of thousands of businesses closing shop during covid-19 lockdowns, the crisis has Americans hoarding more money than we’ve seen in decades.
According to the US Bureau of Economic Analysis (BEA), in April the personal savings rate hit 33%, which is the highest since the department starting tracking it in the 1960s. There is a clear correlation between the outbreak’s spread and Americans wanting to save – in February personal saving was 8.2%, in March it grew to 12.7%.
The rate of savings is critical, because an economic recovery hinges on whether consumers continue to stockpile cash, received from $1,200 checks and government hand-outs like the payroll protection program (PPP), or start to spend again.
During the depths of the virus, in April, consumer spending declined by a record 13.6%.
A disturbing trend, as far as the economic recovery, is the reluctance of higher-income individuals to return to normal spending levels. According to Harvard researchers, via NPR,
“When the stimulus checks went out, you see that spending by lower-income households went up a lot,” NPR quoted Nathan Hendren, a Harvard economist and co-founder of the Opportunity Insights research team, saying. “For higher-income individuals, that spending is still way far off from where it was prior to COVID and it has not recovered as much,” he added.
CNBC quotes Marc Odo, portfolio manager at Swan Global Investments, discussing the danger of too much saving and not enough spending:
“The paradox is that if everyone across the broad economy is hunkering down, that only makes the recession worse,” Odo said. “The paradox of thrift is a negative feedback loop. The more people save, the less they spend; the less they spend, the worse the recession gets; the worse the recession gets the more they save.”
Banks are flush
Workers may be scared, and hunkering down, but as usual, where there is misery there is opportunity.
In April, US banks reportedly took in $865 billion in cash deposits, with most of the gains going to the biggest institutions – JP Morgan Chase, Bank of America and Citigroup. For the week ending June 10, US banks reported $15.47 trillion in deposits, up $2.2 trillion since the end of February.
Key to the cash influx is all the government stimulus, such as unemployment benefits, $1,200 cash payments and funds accessed through the PPP.
According to Bank of America, at the end of May, checking accounts had 30% to 40% more money in them compared with the 12 weeks prior.
“Any way you look at it, this growth has been absolutely extraordinary,” Brian Foran, of Autonomous Research, told CNBC. “Banks are flooded with cash; they’re like Scrooge McDuck swimming in money.”
So here’s the thing: If the average American keeps receiving federal and/or state aid – whether it’s through small business relief, regular checks or unemployment insurance – savings will continue to go up and spending will be restricted, squelching any semblance of a recovery.
In Canada, many service workers like restaurant employees prefer to stay on the CERB program which pays out $2,000 a month, rather than risk going back to work and catching covid-19. In some cases the worker makes more on the CERB than working. The Canadian government just extended the program by eight weeks.
46 million jobless
The only way spending will increase, meaningfully, is if a broad swath of American and Canadian workers – and really, those around the world – get working again, along with their confidence to spend, spend, spend.
If, and when, this happens, there will be some major pent-up spending demand. Expect a lot of people needing to undergo some serious retail therapy.
But that isn’t likely to happen anytime soon. On June 19, weekly jobless claims stayed about 1 million for the 13th consecutive week – bringing the grand total of US unemployed to nearly 46 million.
Without paychecks, a lot of people are having trouble paying their bills. According to the Wall Street Journal, payments have been skipped on more than 100 million loans since the pandemic washed up on American shores.
On June 1, a three-month moratorium on evictions expired, exposing millions of Americans to the threat of being tossed from their homes. While some of the 43 moratoriums, like in New York, have been extended, more than a third of those moratoriums have since been lifted and more are set to expire, leaving renters to come up with months of back pay or face losing their homes,CNN Business said.
Homeowners aren’t any better off. Fully 30% of Americans didn’t make their housing payments for June, with one-third of the 30% making a partial payment and two-thirds unable to afford any payment at all. During, and shortly after, the 2008 financial crisis more then 10,000,000 mortgages were foreclosed in the US.
It is unclear whether more stimulus will be coming. Some of the measures being discussed are an extra check for up to $1,200, a $2,000 monthly payment until the pandemic ends, or tax breaks for businesses instead of direct payments.
What we do know is that these measures alone will be insufficient to kickstart the US economy. At best they will “keep the wolf from the door”, meaning high savings and low spending will be the norm until covid-19 relents and businesses start re-hiring.
Blood on his hands
Donald Trump hasn’t made the situation any easier; in fact the science-denying, conspiracy-believing US president has the blood of nearly 125,000 American dead on his hands, for failing to anticipate and properly manage the pandemic.
Last Saturday Trump held a rally in Tulsa, Oklahoma, despite the virus surging in that state. He joked about telling officials in his administration to slow down testing because of the rising number of cases, when he should have been doing the opposite – testing and contact tracing has proven to be effective in other countries of slowing the spread of the disease, by identifying the infected or exposed, and quarantining them.
He and his vice president regularly avoid wearing masks even when in hospital settings and others are wearing them. Few at the Tulsa rally donned a face covering, nor at a Phoenix. And in a true unbelievable ‘here, hold my beer’ moment at an Arizona “megachurch,” where Trump spoke to young conservatives this week, I saw just a few wearing facemasks with zero social distancing; in fact Trump has turned it into a blue versus red cultural issue. Since late May, Arizona has emerged as a hot spot for the spread of covid-19, Marketwatch said.
Despite all 50 states being in various stages of reopening their economies, the United States is nowhere near recovering from covid-19. The country this week recorded its second-largest increase in coronavirus cases since the crisis began. Reuters said, the virus is moving into rural areas and other places that it had not initially penetrated deeply. The surge in cases on Tuesday was the highest since a record of 36,426 new infections on April 24.
The virus is also renewing its surge in states that opened up early to ease the devastating effect of the restrictions on local economies.
I’ve said all along that there would be a resurgence of covid in the United States. Re-openings there are a jumble, with each state doing its own thing and the federal government offering only guidelines not rules. A failure to adequately test and contact trace have made it worse. How do you stop the virus from spreading if you don’t know where it is?
In fact I believe there will be three waves of coronavirus: The first wave that happened in mid-March, a second wave of cases returning due to states and cities reopening too soon, and a third wave in the fall, after warm weather and the sun’s UV rays give way to colder temperatures and the virus is allowed to infiltrate human hosts – a lethal mix of covid and flu.
Here’s the proof: officials told the House Energy and Commerce Committee on Tuesday there is likely to be a surge of cases in fall and winter, coinciding with flu season.
Tariffs are back
That’s Trump on the health front. As far as helping American workers get back on their feet, the Tweeter-in-chief is hindering efforts, through an ill-advised wave of protectionism, right when the US economy is most vulnerable to rising prices of imported goods.
Import duties are generally passed onto consumers in the form of higher prices.
On July 1, the fanfare of the new Canada-US-Mexico Agreement taking effect, will be muted by US plans to re-impose tariffs on aluminum imports from Canada. A Bloomberg story said 10% tariffs will be slapped on Canadian aluminum if the country does not impose export restrictions.
The United States is also weighing tariffs on a list of products coming from the European Union; the Office of the US Trade Representative said the review stems from the dispute between Europe’s Airbus and US rival Boeing.
Meanwhile Britain, which is now out of the trading block, is apparently in no hurry to strike a deal with American trade negotiators.
“The U.S. talk a good game about free trade and low tariffs. But the reality is that many UK products have been kept unfairly out of their markets,” UK Trade Minister Liz Truss told a parliamentary committee.
Her terse tone is being echoed in European capitals. In a blow to American prestige, the EU is including the United States on a list of nations whose citizens will be banned from entering the block when it reopens its borders, due to concerns over countries still wracked with covid-19.
The global economy was already struggling with growth before the pandemic hit. Recall that central banks were all dropping their rates to near 0%, with some even “going negative”, because they were worried about deflation (falling prices).
The Trump administration opening up new fronts in the trade war, will do the exact opposite of goosing international trade. The IMF reportedly forecasts a 4.9% contraction across the global economy this year, “because it envisions far more severe economic damage from the coronavirus than it did just two months ago.”
The pandemic continues to roil markets. On June 21, the World Health Organization reported a record jump in infections, with the biggest increases seen in North and South America. The prospect of continued lockdowns and global fiscal and monetary stimulus, which reached an astronomical US$18.4 trillion, have lit a fire under gold prices, which react favorably to monetary policies that involve money-printing and the prospect of inflation.
On June 22 gold futures hit their highest since February 2012, @ $1,779 per ounce, on massive inflows of gold-backed ETFs into the United States. The precious metal slipped back to $1,764 on Wednesday but it is still up 16%, year to date.
Commodities are in play
Failed re-openings, lots of states experiencing second waves of covid-19. A record-high US savings rate matched by double-digit declines in consumer spending, among rich and poor. 46 million jobless and counting, with hundreds of thousands of Americans vulnerable to evictions and many unlikely to have jobs when government aid programs expire. A resumption of trade wars and protectionism. Global growth expected to fall nearly 5%.
It’s all more ammunition for the argument that we need an international infrastructure buildout to free ourselves from the clutches of coronavirus.
We are not alone in this assertion.
The Trump administration is said to be preparing a nearly $1 trillion infrastructure proposal – some of the dollars are geared toward 5G/ broadband – as a way of spurring the world’s largest economy back to life. House Democrats have weighed in with a $1.5 trillion infrastructure bill of their own.
If elected president, Democrat Joe Biden has promised a $1.7 trillion climate policy to roll back greenhouse gas emissions, and a $1.3 trillion infrastructure improvement plan.
His “Clean Energy Revolution” calls for installation of 500,000 electric vehicle charging stations by 2030, and would provide $400 billion for R&D in clean technology.
Key to Biden’s $1.3 trillion infrastructure improvement plan is a $50 billion investment in repairs to roads and bridges; $10 billion for transit construction in poor areas of the country; a doubling of BUILD and INFRA grants, and more funding for the US Army Corps of Engineers.
The European Commission released a €1.85 trillion recovery plan focusing on “EU Green Deal” initiatives aimed at reaching the eurozone’s net emissions by 2050 target.
And Beijing recently kicked off a $700 billion program focused on “new infrastructure” and “new urbanization”.
In Canada, the federal government is offering cities $2.2 billion in infrastructure money to help cover budget shortfalls caused by coronavirus. CTV News reported the funds are to be directed towards 18 categories including wastewater infrastructure, roads & bridges, disaster mitigation, and broadband.
A global infrastructure spending push would mean a lot more metals will need to be mined.
Two big copper drivers are the global 5G buildout and the continued movement towards electric vehicles – including cars, trucks, vans, construction equipment and trains.
Even though 5G is wireless, its deployment involves a lot more fiber and copper cable to connect equipment. 5G is set to become a major new driver of silver, used in the platform’s electronic components.
There will also be increased requirements for energy metals including lithium, nickel, cobalt and manganese for EV batteries; and rare earths for permanent magnets that go into EV motors and wind turbines.
Pierre Vaillancourt of Haywood Securities recently lifted his price forecasts for copper and nickel “to reflect the improving economic conditions.” The mining analyst predicts the copper price will rise to $2.60 a pound, from his previous $2.45/lb, climbing to $2.80 in 2021, and hitting $3.00 in 2023.
A major US bank agrees with us that commodities, including metals, are the place to be. In its mid-year report, Wells Fargo suggests investors stay away from real estate, due to the difficulties retailers and other businesses may have making rent, and instead should look at commodities.
“Commodities have been hit hard in 2020 too, but if history is any guide, this could be an opportunity. In past instances when commodity prices had been hit this hard, dramatic supply reductions often have followed. When demand eventually does return, and it always has, supply can be slow to return,” wrote Wells Fargo head of real asset strategy John LaForge.
“Commodities remain one of our favorite asset classes as we head toward year-end 2020,” LaForge added, with the report projecting a solid US recovery in the third quarter, and moderate growth expected in 2021.
The bank also expects the US dollar to be weak going forward, which would be bullish for metals.
Fueled by infrastructure, mined commodities are back in fashion. Call it Roosevelt 2.0.
Richard (Rick) Mills
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