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A stimulus bill just got passed. Is it the right bill? What the heck happens with that $2T and what are the consequences? Erik and Xander take a crack.

Our Totally Unabridged Notes (enjoy)

Source: https://www.npr.org/2020/03/26/821457551/whats-inside-the-senate-s-2-trillion-coronavirus-aid-package

 

UP FRONT: NOT FINANCE/TAX/ACCOUNTING ANYTHING ADVICE. THERE’S A LOT IN HERE TALK TO YOUR ADVISOR IF YOU HAVE SPECIFIC QUESTIONS PERTAINING TO YOUR OWN SITUATION. 

 

China Covid numbers

  • Almost no way these numbers are reliable. China has a well-established history of faking statistics of all sorts for political purposes. Beyond this, China also has historical difficulty in actually collecting accurate information itself. 
    • One infamous example is during Mao’s great leap forward – no one was willing to report to him that the program wasn’t working as he intended, so local officials made up figures about how successful everything was as millions of people starved to death.
    • There are also logistical difficulties of collecting information from all over China – it’s a big place, lots of people, and a lot of poor locations where it’s difficult to track data accurately. And, a lot of Communist Party incentives still exist to make local party leaders seem like things are as peachy as possible. This all exist before Covid-19 happened.
    • So the whole “Deaths in italy higher than China now” teaspoons of salt not appropriate. Bags of salt people. Bags. Salt to preserve, not salt to make stuff taste better.
  • https://www.businessinsider.com/coronavirus-boris-johnsons-government-reportedly-furious-with-china-2020-3
  • Why would China lie?
    • Generally it’s for domestic propaganda
    • Erik’s not sure how true this is but generally speaking every China expert I talk to (so maybe I should shut up about my own opinion here) says that China needs to keep the good news train rolling or risk an insurrection
    • So of course we quickly got COVID cases under control and have few deaths, NBD
    • One of the perks of being a single-party authoritarian regime that controls all media

 

Why

We believe this more likely to not be the 2008, 2001, 1992, 1987, etc, recessions. We don’t want to make predictions here, but there are some reasons to think 2020 will be a very acute, deep recession, but shorter than 2008-09, which was extended, painful, and resulted in very slow growth for nearly a decade afterwards. There are 3 major causes of this:

  1. COVID-19 is unprecedented in that it is not an event. It is an ongoing, slow tidal wave that gets worse and worse; we don’t know how bad and we don’t know how long, and it’s so very dependent upon government action, which is unreliable, but even with that we are clueless. CDC continually under-calls how quickly it’s going to grow. This means much of the economy just sits still for 2-12 months. This is dramatically unlike Bear Stearns, Black Monday, 9/11, or even Black Friday. Nobody has any clue how bad it’s going to get, so companies are freezing up. COVID-19 is on track to get much much worse before it gets better; nobody knows how long. Remember also that this is happening to almost every Atlantic economic geo simultaneously. Typically there is some give in the global economy to spread the stress. That does not exist anymore. 
    1. https://www.cnbc.com/2020/03/24/bill-gates-us-missed-its-chance-to-avoid-coronavirus-shutdown.html
  2. Record high corporate debt : GDP ratio pre-crisis means corporations were over-leveraged in the good times and irrationally exuberant in a way that they have never previously been. A lot of that debt is low quality. More will go belly-up from a loss of income than ever before, especially due to extended inability to acquire income due to COVID lockdowns. Sources:
    1. https://fortune.com/2019/12/03/corporate-debt-easy-money-could-haunt-companies/
    2. https://www.washingtonpost.com/business/economy/corporate-debt-nears-a-record-10-trillion-and-borrowing-binge-poses-new-risks/2019/11/29/1f86ba3e-114b-11ea-bf62-eadd5d11f559_story.html
    3. https://www.cnbc.com/2020/02/19/oecd-warns-over-pileup-of-low-quality-corporate-debt.html
  3. Record-high government debt and historically-low interest rates for historically-long periods. This constrains the US gov’t’s ability to respond to the crisis. US Gov’t will spend $2.0T+ simply as relief efforts while the virus rages. At some point the gov’t can’t go further into debt without a debt servicing crisis. That servicing crisis is what killed Greece and Italy, and why they had persistently double-digit unemployment during the boom cycle. US gov’t will need to decide if it suffers short-term shattering agony or opts for long-term malaise like southern Europe given the massive debt load.
    There is no interest rate to drop so there’s very little capital the gov’t can inject. Can still play with liquidity but this is only short term.
    In 2008, even without #1 and #2, gov’t used massive spending and huge interest rate drop to help; standard Keynesian play. That is largely unavailable now due to tax cuts, more spending, and interest rate drops during the longest bull market in history. 

    1. Now UNLIKE Greece the US can just inflate the heck out of the currency which is an option it can hang onto, but it now needs to make some very unpleasant short term and long-term balancing decisions

 

Here are the signals we’re seeing that there is going to be a hardcore reckoning that we will need to weather with runway:

  1. Goldman Sachs (before stimulus bill) said that Q2 GDP growth will be annualized -24%. A quarter of the US GDP is going to evaporate. For context, great depression contraction rates were -8.5%, -6.4%, then -12.9% over 3 years. The “great recession” was -2.5% GDP in 2009. Q2 will be 10x worse than 2009 was, and who knows after that. 
  2. Secretary of the Treasury Steve Mnuchin, who works for Trump and probably isn’t allowed to be too dire, is warning of 20% unemployment if the right action is not taken on COVID, and we don’t see the right action being taken at all. US has not seen 20% unemployment since the great depression.
    1. US cases accelerating; to surpass Italian density:
      https://www.vox.com/future-perfect/2020/3/20/21179040/coronavirus-us-italy-not-overreacting
      https://www.reddit.com/r/dataisbeautiful/comments/fnitgs/oc_trajectory_tracker_of_selected_countries_with/
    2. NY area accelerating especially radically and reaction has been frustratingly slow: https://www.reddit.com/r/dataisbeautiful/comments/fnw2wn/oc_covid19_positive_case_trajectory_for/
    3. UK on Italy’s path: https://www.reddit.com/r/dataisbeautiful/comments/fmy53y/united_kingdom_is_exactly_two_weeks_behind_italy/
    4. WHO says US could become next epicenter: https://www.vox.com/2020/3/24/21192352/new-coronavirus-cases-worldwide-united-states-who
    5. Generally gross executive mismanagement in DC: https://www.nbcnews.com/think/opinion/trump-s-pivots-coronavirus-are-no-longer-just-dizzying-now-ncna1167621
  3. Previously-unimaginable record of unemployment insurance claims: https://preview.redd.it/jl0mlnlnk0p41.jpg?width=960&crop=smart&auto=webp&s=9f6a47bb0c236a741fa1f63c9b262564c41dc622
  4. DJIA is tracking to 1929 surprisingly closely; and remember in 1929 the only bad news was the economy itself; downward trend will continue to be pushed by growing COVID problems; Erik predicts stock market crash will be worse than 1929, and even if it’s slightly better it’s still back-breaking:
    1. https://www.marketwatch.com/story/scary-1929-market-chart-gains-traction-2014-02-11
    2. https://www.usatoday.com/story/money/2020/03/21/stock-market-collapse-how-does-todays-compare-others/2890885001/

 

Real estate

  • Lifts $500,000/couple restriction of depreciation right-offs against other profits for 3 years (Yahoo)
  • Accelerates depreciation for Qualified Improvement Property.
    • 2017 tax cuts bill contained an error that “resulted in a 39-year depreciation error”. Now, can be immediately expensed.
    • Non-residential property only (planetmoran)
    • “Qualified Improvement property’ = ‘any improvement to a building’s interior’ (IRS)
    • This was advocated for by the Commercial Real Estate Development Association (NAIOP)
  • Fannie/Freddie announced some sort of deal for multifamily landlords if they don’t evict anyone [read more here: https://www.wsj.com/articles/fed-government-moves-to-protect-apartment-owners-tenants-11584991787]
    • Offering mortgage forbearance in exchange for not evicting tenants (WSJ)
    • Only a 30 day forbearance, with the ability to request 2 additional 30-day extensions. (Bisnow)

 

Small businesses

  • $500bn business loan program, $367bn of which is intended for small businesses. (Source)
  • 5-year NOL carryback for non-REIT business –> amounts to automatic refunds (Law360)
    • Certain carryback claims (such as for the 2018 tax year) must be filed no later than 120 days after the enactment of the act (RSMUS)
    • This was a change in law advocated for by the National Retail Federation
  • Deferral of 80% income limitation on post-2017 NOLs to 2021 
    • Complicated (RSMUS), but lets some businesses write off more in 2020 and 2021
  • Can write off a greater % of interest on business loans (IINTOO)
  • SBA can guarantee loans toa  broader array of business entities, including sole proprietors, independent contractors and self-employed individuals” (bisnow)
  • “Importantly for the hotel and restaurant industry, the law specifically states that “any business concern that employs not more than 500 employees per physical location of the business concern and that is assigned a North American Industry Classification System code beginning with 72 … shall be eligible to receive a covered loan.” (Bisnow)
  • “Borrowers can receive a loan totaling no more than tow and a half times what they paid each month (on average) for payrolls over the last year…The loans…may be used for payrolls or continued healthcare coverage for workers, but also for rent or the payment of interest on any mortgage obligation – but not payment of any principal.” (Bisnow)

 

Big business

 

Individuals

  • $1,200 direct payment for people making up to $75,000 ($2,400 for married couples) (iintoo)
    • These are phased out as income goes up. Not clear to me if this is 2020 income or 2019 income.
      • “Do I need to apply?”
  • Homeowners & mortgages [fannie freddy here + forbearance]
  • Filing delay – taxes not due APril 15th this month. Passed to July 15
  • Unemployment benefits – I think these all vary by state. There is federal support…but also a lot of states and local governments are providing their own forms of stimulus at state-level institutions

 

State & local governments

  • “State and local governments will receive $399.8 billion of this funding, and $150 billion of that will be allocated to states, territories, local and tribal governments to make up coronavirus-related costs in what is known as the Coronavirus Relief Fund, according to the Center on Budget and Policy Priorities. Each state will receive at least $1.25 billion, the Center notes, except the District of Columbia, which will receive $500 million.” (US News)
  • $150 bn in stimulus money is supposed to go to states and local governments (Politico)
    • California is set to receive the biggest chunk of this pot, ~$15bn.,
    • Florida: $8.9 bn
    • New York: $7.5bn
    • Illinois: $4.9bn
    • New Jersey at $3.4bn
  • Public transit agencies getting $25bn
  • Education: $30bn
  • Disaster relief fund: $45bn

 

Sources

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