Takeaways from an Investment Firm's "Second Quarter 2020 Review"

Hoisington Management recently published its "Second Quarter 2020 Review" and a writer for provided his summary and takeaway.

A July 21 article is filled with sobering facts and analysis. For example, consider the estimation that a higher percentage of the world's economies are contracting than was the case during the worst period of 1931.

Indeed, let's first show a chart from the article then an excerpt from the text:

World Economy 1871-2020

The global recession has no precedent in terms of synchronization.

Deflationary Consequences

Lacy Hunt at Hoisington Management explains the deflationary consequences of the current global situation in its Second Quarter 2020 Review.

Hunt commented on the four economic challenges central bankers face as noted below.

Four Economic Challenges

1. Over 90% of the world's economies are contracting. The present global recession has no precedent in terms of synchronization.

2. A major slump in world trade volume is taking place.

3. Additional debt incurred by all countries, and many private entities, to mitigate the worst consequences of the pandemic, while humane, politically popular and in many cases essential, has moved debt to GDP ratios to uncharted territory. ...

4. 2020 global per capita GDP is in the process of registering one of the largest yearly declines in the last century and a half and the largest decline since 1945. ...

Here are key ideas condensed from the article.

Key Ideas

1. Recessions are either deeper or longer lasting when a very high percentage of the world's economies are contracting rather than when they are centered on a limited number of countries.

2. Except for the very short run, the Federal Reserve's lending operations for the corporate bond market are a negative for economic growth ...

3. The adverse consequences of an unsurpassed increase in new debt will remain for years to come. ...

5. The relationship between debt and economic growth is non-linear, just as is the law of diminishing returns. Significant research indicates that the adverse consequences start as low as a 67% gross debt to GDP ratio.

6. In the first quarter, corporate debt jumped to a record 48.7% of GDP, more than 300 basis points higher than during the Lehman crisis

7. In 1934, Irving Fisher wrote that the velocity of money falls in heavily indebted economies. We believe that Fisher's finding will be correct because his view is supported by the evidence and the rationale that the huge additional debt added this year will not generate an income stream to repay principal and interest. Accordingly, the reopening rebound in the economy underway will falter, leaving the economy with a huge output gap.

8. At the end of the three worst recessions since the 1940s, the output gap was 4.8% in 1974, 7.9% in 1982 and 6.4% in 2009. The gap that existed after the recession of 2008-09 took nine years to close. This was the longest amount of time to eliminate a deflationary gap.

9. Considering the depth of the decline in global GDP, the massive debt accumulation by all countries, the collapse in world trade and the synchronous nature of the contracting world economies the task of closing this output gap will be extremely difficult and time consuming. This situation could easily cause aggregate prices to fall. ...

This is what the June Elliott Wave Financial Forecast said:

The "Once-in-a-Century Deflationary Setup" described in Conquer the Crash is yielding to an outright deflation that will not be the glancing blow that it was in the Great Recession. As noted in CTC, "the proper models" for the current "economic experience are those that accompanied the stock market setbacks of 1835-1842 and 1929-1932," when "deflation reigned, and the contraction was an all-out depression."