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Economist: Coronavirus recession 'turning into the Great Depression II' amid jobless spike

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Chris Rupkey, MUFG managing director and chief financial economist, wrote in a note on Thursday, “at this point it would take a miracle to keep this recession from turning into the Great Depression II.” Rupkey joins Yahoo Finance’s Zack Guzman to discuss his remarks.

Video Transcript

ZACK GUZMAN: But overall, I mean, the number we continue to talk about here are historically high when you think about how many Americans are now out of work. And our next guest has been saying that that surge in unemployment claims is almost guaranteeing a depression, a Great Depression 2.0.

And I want to bring him on for his thoughts on why that is. Joining us is Chris Rupkey, MUFG chief financial economist. And Mr. Rupkey, thank you so much for joining us. First, just your take on the numbers that we're seeing on the jobless claims front and why you think that means we're approaching another depression like era.

CHRIS RUPKEY: Well, just going strictly on the numbers, we have come to believe that the Great Depression in the 1930s, the unemployment rate was 25%. So that's kind of the marker we're looking for. If one out of four of your neighbors is out of work, 25% unemployment rate, that's a Great Depression. I mean, don't forget, the Great Recession we just had a decade ago, unemployment only got to 10%. And now we're certainly going much, much higher than that.

ZACK GUZMAN: Yeah, and on a weekly basis, we never saw jobless claims really even top 700,000. And now we're constantly running in the multimillions here, too. So there are reasons there, but you kind of took it a step further and looking at the way the stock market has been reacting to all this. Of course, we're well off those late March lows here when we saw the market crash by about 35%.

What's your take on the way that we have seen this recovery gone and why you think investors might be getting a little bit ahead of themselves, thinking that the worst is over yet?

CHRIS RUPKEY: Well, if you take a look at the downturn, as frightening as it was, in stock prices, you can, you know, after the fact, we can see that most of the big down days were coronavirus count inspired, the number of new positive cases, what was going on in-- like, in Queens with the hospitals. And it was frightening. It was building week after week after week.

And then the Federal Reserve jumped in. And basically, the day they came out and said they were going to buy corporate bonds and do unlimited QE, March 23, that ended up in happenstance being the low for the market. So, you know, there's a pretty good technical uptrend here, but we lost 38%, S&P 500, as you say. We've rallied back halfway.

Now what do you do when we're back halfway? I mean, for me as an economist, although I do have a CFA many years ago, licensed to manage money, as an economist, it just seems like the economy is very, very bad here. And it's worse than I've ever seen in my career since the '70s. And I don't know if stock prices can really discount that.

I mean, maybe they're discounting a 30% drop in earnings. That's possible. And then things get back to normal, at least by late 2021. But I mean, the economy is so bad, that's all I can think about as an economist. And I don't think stock investors realize how bad it is.

ZACK GUZMAN: Yeah. I mean, it is, as we mentioned, historically bad when we look at the actual numbers, the underlying economic data. But when you look at the actual moves in the stock market, you're right in terms of discounting the pain to come. It doesn't seem to be there.

We had Tom Lee on the show a few weeks ago kind of highlighting the technicals here when we look at it. And counter intuitive as it may seem, it does look like when you go back and look at the historical downturns here, the recovery itself is a function of how quickly you came down.

So we entered a bear market quicker than ever. It was a historical first when we look at how fast it happened. So the data from what he's looking at says that we should recover just as fast, or at least, relatively quickly than what we've seen in the past. And it has played out that way so far.

So I mean, as bad as the data is, it does point to the fact that stock market recovery is due January come before we see the peak in jobless claims data. We saw that back in '03 and '09. So maybe, I guess to your point, the market's pricing in that it can't get much worse from here.

CHRIS RUPKEY: Yeah, that seems to happen all the time. Anyway, I'm very much comforted by that analysis. I'll continue to leave all my money in the stock market, so thank you for that.

ZACK GUZMAN: Brian, would you want to jump in here?

BRIAN CHEUNG: Yeah, absolutely. It's Brian Cheung. Chris, I wanted to ask you about some trying to call the bottom. I know everyone says how difficult that is, and I'm not even going to ask you to say what shape you think this recovery is going to take.

But you had Neil Dutta over at Renaissance saying maybe we haven't reached the bottom if you look at a number of indicators on a dashboard. I mean, what do you see on that front? It seems like home sales is something, mortgages is something that could have a lag effect, and we might not see bottom out quite yet. But it seems like on a number of other fronts, especially if you're looking at equities, maybe we've hit the bottom. What do you think?

CHRIS RUPKEY: Well, I don't know if we've hit bottom maybe in the second quarter. We are in the second quarter, but we don't even have any April economic data yet for that. Yeah, I mean, what always tells the bottom for the economy is industrial production, how far is industrial production going to fall.

In the Great Depression, industrial production fell, like, 40%. In the Great Recession a decade ago, industrial production fell 20%. So far right now, we've only fallen, like, 5%. And that was reported out for the month of March.

So to your point, yeah, it is possible that, say, production levels fall, and we have March data that continues falling March-- in April, May, June. Somewhere in the second quarter, it's not impossible that that reaches bottom. But in every economic cycle, I always tell people, look, isn't that great? Industrial production has hit bottom and turned back up. I think the recession is over. And they go, oh, no, no, no. It's really bad out there.

So I mean, the first signal would be for production to bottom. That would be one thing that's possible. But I mean, we're not out of the woods. This is going to take a good year to get over, and that's being optimistic.

ZACK GUZMAN: Yeah, I can only assume that that was sarcasm there when you were saying you feel more comforted that you can keep your money in stocks.

But I mean, there are a lot of indicators. I'm not sure if there's one that you're watching specifically that does kind of, outside of jobless claims and what we saw, you know, in terms of oil prices dipping into negative territory here earlier in the week, that just kind of, to you, indicate that this is record uncertainty that we're dealing with here. Is there anything that you're watching that particularly stands out to kind of document that as well?

CHRIS RUPKEY: Yeah, I wish I could be more optimistic. I mean, I'm just looking back over the last-- I mean, you never know. Each new event is different. Each new recession is different. But the last two recessions, stocks fell somewhere 50% from the highs, eventually. I'm just a little bit worried there's another shoe to drop here.

I think as well, what's missing in this recession that we've had over basically five weeks of unemployment claims going up, what's missing so far is major bankruptcies on the part of any corporation. Don't forget the Lehman. Bear Stearns went out of business in the last recession. Then six months later, Lehman went under. AIG was taken over.

We haven't had any major bankruptcies. And given the downturn in the economy so far, it doesn't look to me like a lot of these companies are making money, or will they? So I'm just wondering if that's the other shoe to drop. That would be a drag on any economic recovery, financial losses, and bankruptcies out there.

BRIAN CHEUNG: And Chris, that brings up a good point, which is about earnings season, people forget that we're in the midst of it right now. So I mean, it seemed like a lot of those on the Street were having difficulty hazarding estimates in the first place. You have all these companies pulling guidance.

So I mean, does that tell you to what degree this recovery could be drawn out? Because there's really just-- everyone seems like they're kind of walking around the dark. You're just trying to feel for any sort of direction.

CHRIS RUPKEY: Yeah, I mean, as this has gone on-- I mean, don't forget, as this evolves-- I mean, I was still at work in New York City on March 11th. This has been a very rapid deterioration in expectations. So I don't know if we're really measuring or guessing properly at how bad the earnings season is going to be not just this quarter, but the quarters ahead. That's what kind of worries me.

That's why in all these recessions, we had shock events. Like, we had 911 happen during the 2001 recession. We had the Lehman Brothers bankruptcy in the last 2007, 2009 recession. And after those shock events-- like coronavirus right now is another shock event-- things just got worse for a good, what, year after that. Well, nine months, at least.

You know, stocks took a long time to lift coming out of the 2001 recession. So I'm a little bit concerned that we're not reading properly what's going to happen to corporate earnings, both financials and non-financials here. It looks like it's going to be pretty bad.

ZACK GUZMAN: Yeah, and hopefully, I mean, as drastic as your call is here for a Great Depression 2.0, based on the data that we're seeing so far, hopefully, it won't be as prolonged as what we saw back then. But for now, Chris Rupkey, thank you so much for joining us. Appreciate you taking the time.

CHRIS RUPKEY: Thank you.