Jerome Powell, the chair of the US Federal Reserve, delivered some straight talk to the American people on last night’s episode of “60 Minutes.”
The Fed chief said he was optimistic that the US economy will start to heal in the second half of this year. But the road to recovery could be very long. And a second wave of coronavirus cases would be devastating.
“This economy will recover. And that means people will go back to work. Unemployment will get back down. We’ll get through this. It may take a while. It may take a period of time. It could stretch through the end of next year. We really don’t know,” Powell said.
“60 Minutes” is a big stage that’s rarely utilized by the central bank. When Ben Bernanke appeared on the program in 2009 during the global financial crisis, it was the first on-air TV interview with a Fed chief in two decades.
Powell did his best to strike an optimistic tone. But he also delivered some hard truths. He said the US economy could “easily” shrink at an annual pace of 30% in the second quarter and unemployment could peak at 25%.
He said certain parts of the economy will recovery more quickly than others, with travel and entertainment among the laggards. But the bounce back is predicated on the United States avoiding a second wave of the coronavirus. And a complete recovery may require a vaccine, something that is far from guaranteed.
“For the economy to fully recover, people will have to be fully confident. And that may have to await the arrival of a vaccine,” he said.
Carmen Reinhart and Kenneth Rogoff are Harvard economists and authorities on financial crises. In an interview with Bloomberg News, they make a compelling argument for why a quick recovery is unlikely.
“Expectations are that we’re going to have this nice V-shaped recovery and life is going to return to normal as we knew it before the pandemic. And my own view is that neither of those are likely to be true,” said Reinhart.
Why? The coronavirus has devastated trade and supply chains, and it will take a long time for companies to piece their production back together, according to Reinhart.
The services sector is another problem area. “How do we know which retailers are going to come back? Which restaurants are going to come back? Cinemas?” she asked.
Rogoff sees huge problems across social, political and economic systems, and worries that the pandemic could roll back globalization.
“There are going to be phenomenal frictions coming out of this wave of bankruptcies, defaults. It’s probably going to be, at best, a U-shaped recovery. And I don’t know how long it’s going to take us to get back to the 2019 per capita GDP. I would say, looking at it now, five years would seem like a good outcome out of this,” said Rogoff.
Will dividends ever come back?
Dividend payouts could tumble by nearly $500 billion this year, a steeper drop than during the global financial crisis, as the worst global recession in decades is forcing companies to preserve cash.
And the damage to dividends could endure well beyond the coronavirus pandemic, my CNN Business colleague Hanna Ziady writes.
After hitting a record $1.43 trillion in 2019, global dividend payouts could plummet by as much as 35% this year, or some $497 billion, according to a report released Monday by asset manager Janus Henderson.
That would outstrip the 30% drop observed during the 2008 global financial crisis, said investment director for global equity income, Jane Shoemake.
If dividends are cut by only those companies that have already announced withdrawals, or are very likely to, dividend payouts will decline 15% this year to $1.2 trillion, the report finds.
“Dividend suspensions are inevitable due to the sudden, unprecedented halt in economic activity in many countries,” Ben Lofthouse, co-manager of global equity income at Janus Henderson said in a research note. “Some of the impact will spread into 2021, which is now likely to see lower payouts than we might have expected before the pandemic.”
Long term impact: Even once economies have rebooted, dividend payments, typically a reliable income stream for investors, could take a lot longer to recover than earnings, as companies adopt a more cautious approach to capital allocation.
“We believe most boards will not merely seek to bring leverage levels back to pre-crisis levels, but will decide to build up greater cash reserves than carried previously in order to help protect against future ‘black swan’ events,” analysts at Morgan Stanley said in a May 12 research note.
SoftBank and Jack Ma part ways
SoftBank announced Monday that Jack Ma has resigned from its board.
Ma, the co-founder and director of Chinese e-commerce company Alibaba, is the latest noteworthy member to leave SoftBank’s board. Billionaire and Fast Retailing founder Tadashi Yanai left at the end of last year.
Ma, who had been on the board for nearly 13 years, is close with Masayoshi Son, SoftBank’s founder and CEO. Son invested $20 million in Alibaba in 2000 — a bet that turned into $60 billion when Alibaba went public in 2014.
SoftBank has since sold some shares, but its 25.1% stake in Alibaba is still worth more than $133 billion.
Son revealed later Monday that his company has raised $11.5 billion by doing deals that allow SoftBank to sell Alibaba stock in the future.
Ma’s departure comes at a tumultuous time for SoftBank. Son’s investment portfolio has been walloped by sweeping, worldwide restrictions on work and travel caused by the coronavirus pandemic.
Even before the outbreak, some of Son’s major tech bets were turning sour. Two of the biggest investments — Uber and WeWork — both faced rough receptions on Wall Street due to concerns about their steep losses.