by Jim Rickards, Daily Reckoning:

A lot of the policy response to the COVID-19 pandemic was based on the belief that it would be over quickly. We saw big, multi-trillion dollar spending bills from March into May. The Fed took their balance sheet from about $3.8 trillion to around $7 trillion. (By the way, I can easily envision some scenarios where it goes to $10 trillion).

But all that was done as a sort of bridge loan to get us from April to July. The expectation in April was that when we got to July, the pandemic would be under control, we could reopen the economy, it would be a V-shaped recovery, and it would all be good before the election. That hasn’t turned out to be the case.

Here we are in mid-August. The virus has surged in several states, which have increased their restrictions in many cases. But the relief packages have largely ended.

Congress is debating another bailout package, but there’s no consensus. It may happen. But as of now, there’s no middle ground between Democrats and Republicans. And that’s important because if you go back to the bridge loan analogy, we’re going to need another to keep the economy and stock market propped up if lockdowns continue.

Now we’re facing a second wave of layoffs. A lot of people who would have been laid off in April were kept on the payroll until, say, the end of July. But there’s no more Payroll Protection Plan. So all of the layoffs that would have happened in April are going to happen in August.

Come September, when we get the August employment report, we may see a real deterioration of employment based on what I’m describing.

We also need to be aware of the real possibility of a second wave of COVID-19 infections.

We’ve heard a lot about the second wave. We’re seeing huge outbreaks in Los Angeles, for example. California has gone from about 4,000 fatalities to now over 10,000 fatalities. It’s passed Massachusetts, which was third on the list. Now Massachusetts is sixth, but Texas and Florida are coming up fast, 4th and 5th respectively.

But this isn’t a second wave. It’s just an extension of the first.

To see why, let’s get into the medical science a bit. The virus started in Wuhan, China. But it spread in two directions. It came east where there was an initial outbreak in California and Washington. But the virus also went west out of China to Italy. Why Italy?

It was Fashion Week in February and the Chinese essentially own the fashion industry. So there were tens of thousands of Chinese flying to Milan for Fashion Week. In Italy, the virus mutated and became more contagious. Not more lethal. The death rate didn’t go up, but the contagion rate went up. Deaths increased, but only because the number of infections increased. The Italian strain, let’s call it, then came to New York.

New York was the epicenter, the hotspot of the entire country, while California seemed to be doing pretty well. The assumption was that California Governor Gavin Newsom was doing everything right and Governor Andrew Cuomo must have been doing everything wrong.

Cuomo made a lot of mistakes, no question about it, but that wasn’t the difference. The difference was the initial strain in California was less contagious than the one that hit New York.

Now what has happened two months later is that the Italian strain, which hit New York, has spread to the rest of the country. This is not just a question of public policy, smart governors versus incompetent governors. It’s California getting hit with the Italian strain that hit New York in March.

That’s why the California rate is going up. But none of this is a true second wave as virologists and epidemiologists understand it. This is really the first wave with timing differences.

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