August 27, 2020 | DiMartino Booth on a ‘Generation of Painful Liquidations’

Thinking people know that present financial conditions are a train wreck in motion and controlling our own behaviour is the most valuable risk management available.

An excellent essay from former Fed-insider, now independent analyst, Danielle DiMartino Booth, is a helpful fact check in a mad time, see Monetary Policy Gone Wild.  A Lost Generation of US Growth?  Financial engineering, zombie companies, bankruptcies, retail speculators, urban-exodus real estate and implications, it’s all here…a few highlights:

The duct tape holding the façade together today is 2021 earnings estimates off of which markets are theoretically trading. Investors are looking past a full year of a bloodletting at the bottom line and that’s a best-case scenario.

For context, in 2008, there was no shutdown of the US economy and earnings fell 69%. In the 2015–2016 industrial recession, S&P 500 earnings slumped by 15%. All things considered, it’s fantastical to accept that full year 2020 earnings will only be down 21.5%. The absence of share buybacks, which accounted for about 40% of earnings per share in the past cycle, will introduce a separate source of pressure. For the moment, according to Citadel Securities, corporate volumes have been somewhat offset by retail traders who are estimated to account for a fifth of trading as speculation and valuations hit historic highs.

…An acceleration in bankruptcies cannot be ruled out against such a backdrop. Forecasts call for 25,000 retail stores to close in 2020 on the heels of the record 9,800 in 2019. By 2025, estimates call for the tally to hit 100,000. One-third of office space in North America is in metro areas that rely heavily on public transportation. CoreLogic has warned residential real estate prices to fall by 6.6% in the 12 months through May 2021. Once the pent-up demand for housing is exhausted and the minor exodus to the suburbs by those with the financial latitude to make that move concludes, the reality of a six-year low in mortgage availability and sellers who need to monetize the equity in their homes will settle in.

Danielle Park August 27th, 2020

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