Is the Economy Worse Than it Appears?

by JDH on June 5, 2021

Interesting question.  The optimists will tell you that the world is getting vaccinated, the economy is re-opening, the worst is over, and all is good.  On that basis, the stock market is a screaming “buy”.  The pessimists will explain that, as of today, 6.1% of residents of Ontario are fully vaccinated, schools will remain closed until at least September, we are still in lockdown (you can’t get a haircut) so it will be six months to a year before there is any return to “normal”.

I fall into the latter camp.

We are currently surviving on government stimulus.

Businesses are supported by the Wage Subsidy, and the Rent Subsidy, and other government programs that are winding down, and due to end at the end of the summer.  That will likely lead to a wave of layoffs and business closings.  If your creditors are not actively collecting you can live to fight another day, but as soon as government funding stops and your creditors demand payment, you are done.

Individuals continue to benefit indirectly from the Wage Subsidy, and benefit directly from enhanced Employment Insurance and many other government programs.  But again, those programs are scheduled to end.  CRB – EI started on September 27, 2020, and the maximum eligibility period is 38 weeks, so if you started on September 27, 2020 your elibigility ends on June 20, 2021.  If you started later, the program ends September 25, 2021.  Those dates are fast approaching.  Eligibility is ending.  The government has proposed extending CRB for 12 weeks, but the benefit will be scaled back from $500 per week to $300 per week for the last 8 weeks.

Ontario continues to have just under 1,000 new cases a day, the same levels we were experiencing in March, and back in November 2020, and far less than we had during the initial months of the pandemic.  Hospitalization levels today are exactly the same as they were on April 11, 2020, near the peak of the first wave.

So what have we accomplished?

One conclusion is definitive: the real economy is in very bad shape.

The Globe & Mail reported yesterday that 20% of hair salons have closed permanently, and will not re-open.  We’ve returned to the 1950s and 1960s where you get someone to cut your hair, at home.  Personal services have gone “underground”.  Once you become used to having someone cut your hair at home, how quickly will you return to a salon?

If you work at a salon, what’s better: to pay occupancy costs, and insurance, and taxes, or to go to someone’s house, charge the same amount, and get paid in cash?  Yes you have travel time, but the savings are significant.

How quickly will you return to the gym?

Do you want to ride in an elevator to go to your office in a skyscraper?

No, and that’s why work from home, and cook meals at home, will continue for many months to come.

How will this impact the stock market?

The markets will continue to do great if the government keeps printing money.  But as the subsidies end, the inevitable correction will be here.

The time to shift to cash (or Bitcoin, or gold, or whatever) is now.  Not 100% today, but that’s the direction to be moving, selling a bit each week, to be ready for the inevitable.

Sorry, that’s just the way it is.

More next week.