A day after Bill Ackman essentially instructed Donald Trump to shut down the country for 30 days and declare all payrolls, rent, mortgages and interest expenses the purview of the federal government, Ray Dalio told CNBC that corporate losses in the US during the COVID-19 crisis could total $4 trillion.
“What’s happening has not happened in our lifetime before”, Dalio said. “What we have is a crisis”.
“We estimate right now that the corporate losses in the US… would be about $4 trillion”, Ray continued. “Globally about $12 trillion”.
“Say that again”, an incredulous Andrew Ross Sorkin implored. “That’s with a ‘t'”?
“That’s right”, Dalio responded, flatly.
“There will also be individuals who have very big losses”, he added. “There’s a need for the government to spend more money, a lot more money”.
Bridgewater’s most prominent fund, the Pure Alpha II, was down around 13% in March through Thursday of last week, bringing its total loss for 2020 to around 20%. “We did not know how to navigate the virus and chose not to because we didn’t think we had an edge in trading it. So, we stayed in our positions and in retrospect we should have cut all risk”, Dalio told FT.
“Our biggest economic risk comes from the possibility that our elected officials (who are the ones who control fiscal policy) will handle it badly”, Dalio warned on Monday, the worst day for US stocks since 1987. “That is because it’s tough enough to know what to do during a big crisis and then do it boldly even when there aren’t divisive politics”, he went on lament, adding that “with the divisive politics it might be impossible [and] while some fiscal stimulation measures are being put into place, they’re not large or targeted enough to neutralize the contagion of the economic and market effects of the virus, and they are being argued about”.
Lawmakers and Steve Mnuchin are furiously working on a third stimulus package which is set to include cash handouts to individuals and families. The price tag is expected to top $1 trillion or more.
In case it’s not clear enough by now (and I certainly hope that it is), the US economy is in deep, deep trouble. As even Cliff Asness was prepared to point out in a lengthy exposition earlier this week, there is no purely libertarian solution to this. There are no atheists in foxholes, so to speak.
The US government is going to be compelled to spend previously unthinkable sums of money to backstop corporates and individuals – or risk a depression. It’s just that simple.
Earlier this week, Steve Mnuchin warned the GOP that without massive government intervention, unemployment could spike to 20%. Again, that’s not a recession – that’s a depression – with a “d”.
Michael Feroli (JPMorgan’s chief US economist) suggests the US economy will contract an annualized 4% in Q1 and could shrink as much as 14% in Q2, before rebounding sharply later this year. For illustrative purposes, here’s what that would look like (again, this is for illustrative purposes only):
The title of Feroli’s note: “The Lamps Are Going Out All Across the Economy”.