Last Friday I enjoyed my first draft IPA and dinner out in months– tangible progress towards normalcy. That was nice but it pales to the satisfaction I derived from my haircut last week.
I have radio good looks but still possess a thick mane in my middle-age. However, it needs to be thinned every few weeks - just like a hayfield - and the bed head, beach bum look is not good optics for a wealth advisor. Fortunately, Delaware opened its salons before Pennsylvania, so I crossed state lines for a legal chopping and giddily over-tipped the cosmetologist. Little victories.
I have learned a new word this year: pandession. It means a recession (depression?) caused by a viral pandemic. It also means that all financial forecasts are worthless until this virus is effectively contained.
We are closely watching health (virus caseload) trends, Fed Reserve policy and government spending bills as key capital market movers.
We have also been consuming volumes of commentary, outlooks and analysis about the economy and capital markets. Now it’s high time to organize my notes and to share them below.
• The global pandemic has permanently altered our economy and culture, which has only happened a few times in US history. Like the Great Depression, younger generations will likely carry scars and it will help define their future financial behavior.
• Economists like to use symbols to project their views of a post-pandemic economic recovery. You have your V, U, L, W, even M-shaped projections. While I’m fond of the Nike swoosh-shaped recovery, my favorite is the square root: Down sharply, then a brief sharp upturn, followed by a slow march upwards.
• The pandemic will likely shift the balance of power from corporations to government. Bailouts usually bring regulation and a larger government role in the economy.
• Forget politics, higher income tax rates are coming to pay for the massive spending spree of 2020. It’s a matter of when and politics will influence the magnitude of future tax rate hikes.
• Central banking has permanently changed. Unlike 2008, the Fed Reserve moved quickly to intervene and prevent a financial market collapse last March. In the process, they have printed trillions of dollars to purchase US government debt and – for the first time – private investments. In doing so the Fed crossed a line by directly purchasing corporate bonds - investment grade and high yield - to stabilize those markets. Are direct stock purchases next?
• There’s an open question about whether the Fed is legally allowed to intervene in private capital markets this way and the move certainly complicates investment management. How do you determine the intrinsic value of an investment if the government backstops losses?
• The globalization trend of the past few decades is likely to reverse. It is unfathomable how the US permitted the supply chain for many essential industries to migrate to an unstable third-world competitor like China. The Sino-dominated global supply chain has been a major disinflationary force for the past twenty years; that too will change.
• Mexico stands to be a big economic winner from de-globalization as US businesses repatriate key industries from China to other low-labor cost countries closer to home.
• The US dollar’s status as the world’s reserve currency has been burnished during the pandemic crisis – but not forever. In fact, an open trade / currency war between Asia and the US could unfold over the next decade – and Asia could win. Expect a weaker US dollar post pandemic.
• A gamble was taken thirty-years ago that China would be an honest broker if included in the world trade economy, but that thesis proved wrong. While China’s currency will never become the world’s reserve, it and other Asian currencies will directly compete against the US dollar in world trade. Asia is an intriguing long-term investment play.
• Europe is now a full-fledged disaster and pundits are handicapping when the Euro currency will be disbanded. The EU was not designed to handle economic misery and current depression-like conditions are stressing the fragile economic union to the breaking point.
• England will eventually look smart for pulling out of the broken EU system, but will have their own troubles over the next few years post-Brexit. Do book a cheap trip to Europe in 2021 once the Euro weakens against the dollar, but tread carefully with new Euro-based investments.
• The revitalization of Microsoft means the FAANG tech stock acronym (Facebook, Apple, Amazon, Netflix and Google) should be modified to FAMANG – it’s still catchy. The FAMANG cabal now comprises a stunning 20% of the S&P500 Index market cap. The question is whether these tech companies are now utilities, as vital as electricity? If yes, that invites regulation and there’s growing talk of government regulation, even anti-trust action.
• Yield Curve Control. This is the hot new term at economist Zoom happy hours. It connected to Modern Monetary Theory, which goes something like this: the central bank print tons of fresh money to finance low fixed interest rate government debt and seek to stoke inflation to lower the debt value over time.
• YCC is an acknowledgement the US government - now $25 trillion in debt and growing - not only can’t repay the debt load but may struggle to afford future interest payments. So the Fed could intervene in the Treasury bond market to control interest rates at target fixed levels to keep debt interest payments more affordable. This portends very low US interest rates for the foreseeable future.
• Persistent, abnormally low interest rates can be good for stocks but create zombie companies (JC Penney), hurt banks and damage life insurance carriers.
• The Japanese central bank has been practicing YCC for years, but it hasn’t worked to pull Japan out of its thirty-year economic funk.
Roll up these conditions, trends and predictions and you get a recipe for a vigorous bout of future inflation. The open question how much inflation and when. If realized, it has significant consequences for future portfolio construction, but let’s save that discussion for another day.
Until next time, be well….Tim