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1/ A Thread on the Real Economy
News of reopenings, positive vaccine developments, and Fed intervention have all contributed to a continued run-up in financial markets.
Beyond the headlines, the reality is different.
The Market ≠ The Economy
Here’s a simple story of why...
News of reopenings, positive vaccine developments, and Fed intervention have all contributed to a continued run-up in financial markets.
Beyond the headlines, the reality is different.
The Market ≠ The Economy
Here’s a simple story of why...
2/ Take a family of 4. They own a home and 2 cars. Like many Americans, they have fixed expenses - mortgage, food, swimming lessons, etc.
That’s ok, because they have stable jobs, totaling $10K per month after tax.
After expenses, they save $1K per month. This is good.
That’s ok, because they have stable jobs, totaling $10K per month after tax.
After expenses, they save $1K per month. This is good.
3/ But then, a shock. Murder Hornets sweep the country and force mass furloughs and layoffs as the nation is locked down.
Now the stable household is anything but, as both parents have lost their jobs. Unemployment programs help, but are temporary and don’t plug the hole.
Now the stable household is anything but, as both parents have lost their jobs. Unemployment programs help, but are temporary and don’t plug the hole.
4/ The household now makes $5K per month after tax, but $9K of monthly expense remains, hanging over their heads.
The banks, auto lenders, and credit card companies are understanding at first. Murder Hornets caught everyone by surprise, after all. But eventually, they aren’t.
The banks, auto lenders, and credit card companies are understanding at first. Murder Hornets caught everyone by surprise, after all. But eventually, they aren’t.
5/ The country reopens, but not all the jobs come back. Even some temporary furloughs become permanent.
Expense forgiveness plans expire. Banks, credit cards, and auto lenders expect to be paid.
So our family of 4 now has a $4K monthly net loss. They eat into their savings...
Expense forgiveness plans expire. Banks, credit cards, and auto lenders expect to be paid.
So our family of 4 now has a $4K monthly net loss. They eat into their savings...
6/ Seems manageable, until you consider the math on the impact to their household.
They had been saving $1K per month, but are now losing $4K per month. If this lasts 6 months, it will take 2 years to make up the difference.
Fixed costs amplify the pain (by 4x in this case).
They had been saving $1K per month, but are now losing $4K per month. If this lasts 6 months, it will take 2 years to make up the difference.
Fixed costs amplify the pain (by 4x in this case).
7/ This is a simplified example, but the point is: short-term shocks create long-term pain.
So while the Fed focuses on markets, I’m more focused on what Congress does to support families, small businesses, etc.
Because remember, THAT is the real economy, and it is hurting.
So while the Fed focuses on markets, I’m more focused on what Congress does to support families, small businesses, etc.
Because remember, THAT is the real economy, and it is hurting.
8/ I post this in part because I worry that, by conflating the market with the economy, Congress and our leaders will fail to do what is necessary to support the real economy.
In my opinion, the narrative is important for mitigating that risk.
In my opinion, the narrative is important for mitigating that risk.
