It All Burns Down.

On Monday evening, in the course of documenting the surreal scene in Washington D.C., where Donald Trump discussed imposing martial law in order to quell protests and root out “terror organizers”, I attempted to put the social unrest sweeping America in the broader context.

The US economy, I wrote, has all but collapsed. The unemployment rate is the highest since the Great Depression (the official update, which will accompany the May jobs report on Friday, is expected to print near 20%). 40 million Americans have lost their jobs over the past ten weeks alone. More than 105,000 Americans have died in the pandemic.

On the economy, I wrote that it’s “possible the protests will make the second quarter even worse than it was already destined to be”. I went on to remark that “it isn’t totally out of the question that America could witness a 50% contraction (seasonally adjusted annual rate)” this quarter.

In light of those comments, I wanted to point out that the Atlanta Fed’s GDPNow model shows a further deterioration from the last update on May 29. Following yesterday’s ISM numbers, the model estimate now shows a second quarter contraction of -52.8% for the US economy (SAAR).

As a reminder, this is a running estimate of real GDP growth based on available data for the current measured quarter. There are no subjective adjustments. It is purely mathematical, although that assumes you don’t count any inputs which themselves incorporate elements of subjectivity.

To be clear (and as most readers will be aware), there’s nothing “secret” about this model, and it’s widely parroted by the mainstream financial media, especially when it’s bad. In fact, it’s become ubiquitous enough that I don’t generally bother covering it.

I point it out Tuesday because it underscores the extent to which using the word “collapse” accompanied by adjectives like “complete” isn’t really hyperbole anymore for America.

While I appreciate that things could improve in the back-half of the quarter, and while fully acknowledging that past instances of social unrest in the country have not precipitated stock market collapses, the current situation, when viewed in its entirety, is a disaster. Full stop. It could easily serve as the screenplay for a Hollywood film:

• Unemployment at 20% (and possibly higher);
• 50%+ GDP contraction;
• Six-figure death toll from an epidemic;
• Protests, demonstrations and/or outright rioting in nearly every major city;
• Police on horseback riding into crowds in the nation’s capital, where protesters were gassed and fired on with rubber bullets;
• Mass looting in New York City;
• And calls by the occupant of the Oval Office for governors to request the imposition of martial law, enforced by the US military

This is, in many respects, an across-the-board catastrophe for the world’s largest economy and foremost democracy.

“The unrest is now creating new challenges regarding the hope of quickly normalizing and re-opening the economy, both directly from curfews and indirectly through the risk of new virus outbreaks amongst the large crowds of recent days”, SEB said, in a note.

On Tuesday, the president escalated already inflammatory rhetoric.

“New York [City] was lost to the looters, thugs, Radical Left, and all other forms of Lowlife & Scum”, he said, during a series of tweets, adding that the state should “accept my offer of a dominating National Guard”.

Not long after, Trump continued to lambast the city. “The lowlifes and losers are ripping you apart”, the president said. “Don’t make the same horrible and deadly mistake you made with the Nursing Homes!!!”

I encourage readers to note that those are verbatim quotes. I offer them as is. Simply quoting the president is not partisan. Those are his words, not mine, and not anyone else’s.

When placed in the broader macroeconomic context, it has been a mistake to suggest that Trump’s words can be written off as mere bombast. The trade war with China, for example, lopped $1.7 trillion from the market value of American companies, a new study by the New York Fed shows. To wit:

Using a new methodology, we consider two channels through which the U.S.-China trade war may have caused these movements. First, trade war announcements may have affected expected profits by affecting “common” factors that affect stock market returns in general: greater policy uncertainty, changes in expected economic conditions, etcetera. Second, trade war announcements are likely to have had “differential” effects on firms that were exposed to China in some way relative to firms that did not transact substantially with China.

We estimate that, jointly, these two channels depressed equity prices by 6 percent, translating into a $1.7 trillion loss in market capitalization for the firms in our sample. Of that 6 percent drop, we attribute 3.4 percentage points to the impact of trade war announcements on common factors and 2.6 percentage points to the differential impact of those announcements on U.S. firms with direct exposure to China.

By the end of this year, the same study projects the trade war will lower US firms’ investment growth rate by 1.9 percentage points.

The message: Partly due to the necessity of living up to expectations he sets for himself in the minds of his base, the president is inclined to follow through on threats, whether that means imposing tariffs on virtually everything the US imports from China, contributing to a government shutdown in order to secure funding for a physical barrier along the nation’s southern border or, in this case, resorting to extremely contentious rhetoric in the face of one of the most combustible domestic crises the country has seen in a generation.

Analyst after analyst, trader after trader, has suggested that stocks will look through all of this and that the unrest won’t delay reopenings. Indeed, on Tuesday, Chicago indicated that it will go ahead with a plan to reopen this week. (Police will apparently protect grocery stores and pharmacies.)

Perhaps all of these folks will be correct, and I’ve been among the most vocal when it comes to suggesting that betting against central banks’ capacity to inflate asset prices isn’t just a bad idea, it’s madness.

But the variable that no one can truly account for in this equation is the most important input: Donald Trump.

There are no guarantees as to what he will or won’t do, or as to how far he will or won’t push the proverbial “envelope”. Nobody is prouder of that unpredictability than the president himself, who has touted the purported benefits of his own mercurial approach to domestic and foreign policy on too many occasions to count.

This is all made immeasurably more perilous by the commingling of the inequality debate, which I discussed at length (again) over the weekend in “Yes, Fed Policy Exacerbates Inequality. But It Doesn’t Have To Be That Way“.

All of this societal unrest (all of the pent-up anger over racial injustice and discrimination against minorities) is set against a wealth divide that looks like this:

1% of the population now owns as much in total assets as the entire American middle class. There are obviously countless statistics one can use (and innumerable charts one can draw) to make the same point.

While voters were (more than) willing to suspend disbelief in 2016 on the way to accepting a narrative that said the solution to the middle class’s problems was embodied in a billionaire real estate developer whose entire life has been spent reveling in luxury, many of the president’s supporters may run out of patience in the event the economy doesn’t recover and troops are stationed around America’s cities, while stocks continue to rise in seeming perpetuity.

“Escalating unrest across major US cities may not be sparking a downbeat tone across markets, but COVID-19 is shining a light on income inequality that can challenge assumptions of any V-shape, stimulus-led recovery”, Bloomberg’s Laura Cooper wrote Tuesday afternoon. She added the following:

Conditions were dire heading into the pandemic with US income inequality at the highest level in at least five decades, according to the Census Bureau. And IMF analysis points to regional disparities within the U.S. climbing over the past thirty years. The 90th percentile region based on income now has a per capita GDP 1.7 times that of the poorest 10th percentile, and inequities within regions are even starker. Recessions tend to have differing effects on income distributions, with financial crises having a disproportionate effect on high-income earners. But with COVID-19, those losing their jobs are more likely in lower-paying industries. A recent N.Y. Fed study found that the jobs least conducive to working from home are in lower-paying industries, for those with no college degree, no employer health care and those who rent their home. The challenge is that stock markets pumped up by stimulus efforts aggravate the growing disparities. Research from the St. Louis Fed found that the correlation between stock prices and the Gini coefficient —- a common measure of income inequality —-is strongly positive over the past seven decades. And fewer than 20% of households own stocks directly, and are concentrated among the wealthy. 

It’s true that fiscal policy has been activated. That means Main Street is finally getting direct assistance, with the help of the Fed, which is enabling fiscal spending and leveraging capital from Treasury to extend loans via a hodgepodge of liquidity facilities.

But at this point, it may be too late. For a decade, fiscal policy was dormant, leaving monetary policy alone to support growth. The result: Financial asset inflation, starkly illustrated by a simple overlay of equities and central bank balance sheet expansion.

Look over there on the right-hand side. If history is any guide, stocks will follow central banks’ recent buying spree higher, exacerbating the wealth divide further still.

If Trump’s fervent support base ever gets on the same page politically as those with whom they share an economic destiny, America is going to be in for unrest “the likes of which nobody has ever seen before”, to employ a Trump-ism.

Remember: The term “disenfranchisement” doesn’t just apply to voting and race relations.

“There is an emergent view… that at least one common denominator to both the Hong Kong protests and those in the US is a feeling of bitter disenfranchisement as glittering designer shops and media extolling them spring up next to unsung millions struggling to make ends meet”, Rabobank’s Michael Every said, in a Tuesday note.

“In that regard, the more QE we get from here, the worse things get in social and political terms”, he went on to write, adding that “it will be a red flag to a bull, even if it is bullish for assets”.

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