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The US economic recovery could take 4 years after government relief efforts come up short, Guggenheim's Scott Minerd says

Scott Minerd
  • The US economy will recover in an L-shaped trend over four years, Scott Minerd, chief investment officer at Guggenheim Investments, wrote in a Sunday note.
  • Lockdowns will be reversed gradually, and rolling periods of lockdown will likely continue into 2022, he added, citing a Harvard study.
  • The government and Federal Reserve have helped support the economy through the virus-induced havoc, but their policies will prove to be "insufficient, misdirected, and full of unintended consequences," Minerd said.
  • Even after the economy recovers, new calls for social reform threaten to take the rebound off-course, the investment chief warned.
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It will likely take four years for the US to return to its January economic output levels, Scott Minerd, chief investment officer at Guggenheim Investments, said in a Sunday note.
Believing in a V-shaped recovery is "unrealistic," the investor added. The US's gross domestic product will sink to levels last seen in 2014 and remain stifled for years to come as the coronavirus induces lasting damage. Lockdowns will be reversed gradually, and rolling periods of lockdown will likely continue into 2022, he said, citing a Harvard study.
Policymakers in Congress and at the Federal Reserve have issued unprecedented amounts of aid to dull the outbreak's economic toll, but time will prove the measures to be "insufficient, misdirected, and full of unintended consequences," the investment chief said. The Fed's move into corporate bond purchases is one such example, as the immediate boost to credit health will be offset by a change in the institution's market precedent.
"The Fed and Treasury have essentially created a new moral hazard by socializing credit risk. The United States will never be able to return to free market capitalism as we knew it before these policies were put in place," Minerd wrote.
Read more: Goldman Sachs outlines a 3-part investing strategy to profit from the economy's reopening — including 4 stocks to buy for the recovery
Widespread joblessness will also form a lasting strain on the nation's rebound. While some estimates peg the current unemployment rate at roughly 20%, Minerd sees the metric swelling to 30% before ending the year still in the double digits. The total labor market shock will be between three and five times more severe than that of the financial crisis, he added.
Even when hiring resumes and unemployment trends lower, consumer spending is unlikely to stage a quick comeback. Nearly half of all Americans held less than $500 in savings before the pandemic hit, leaving most households ill-prepared to weather its storm. When the economy reopens, it will do so unevenly and with new repercussions across industries, Minerd said.
"The damage to the household sector is so severe that it is going to impair living standards for most of the decade," Minerd wrote. "This problem is compounded by the fact that the most financially vulnerable households are experiencing the majority of layoffs."
Once the virus threat subsides and the economy stabilizes, Minerd expects a populist revolt to usher in new challenges to keeping growth on track. Washington's failure to better pad the economy before the outbreak will drive new support for social programs and government spending. Healthcare and job security will be of great concern, and serious calls for a guaranteed living wage aren't out of the question, Minerd wrote.
Such policies, while helpful in avoiding another precipitous downturn, could "be done in a way that is not productive for long-term growth," he wrote.
"Some programs will work, and some will not, but they will remain in some form or fashion forever. Now, we all need to figure out how to move forward, manage our businesses, and invest our capital in a new market regime," Minerd said.
Read more: RBC: The biggest investors are piling into 11 high-growth stocks to stay ahead of a market hammered by coronavirus fears
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