Optimism with a big dose of realism
This is a post from Peter Boockvar’s site – The Boock Report. Peter does a great job of summarizing his thoughts on the progress of COVID-19 and how we all might start to come out of this.
Click here to visit Peter’s site – The Boock Report.
With the news flow still so difficult both on the health front and in turn for the economy, I still will try to make a point to talk about the optimistic side of where we are with this virus spread. This is not to be a Pollyanna but to be a contrarian with the mood already so dour. The news over the weekend from Abbott Labs that they can test within 15 minutes is considered a “game changer” according to Scott Gottlieb. To highlight the importance, I’ll leave it to the foreign minister of South Korea where we know they’ve been hugely successful on containing the spread. He said last week “Testing is central because that leads to early detection, it minimizes further spread and it quickly treats those found with the virus” and he cited the rampant testing as “the key behind our very low fatality rate as well.” Hopefully too we’ll get some good news in the weeks to come on the therapeutics currently being tested.
This all said, I also want to be VERY realistic about the situation we are in and for the purposes of my daily commentary, what it means for the economy and markets. While I’m hopeful that in May we will be passed the worst of the ‘curve’ and thus can begin the process of resuming our daily lives with big testing numbers a big part of this, it is obvious that until we have a vaccine and/or herd immunity and effective therapeutics, life will still be quite different. Just as we had to adjust after 9/11 in that security at the airports was beefed up, we had to go thru more metal detectors in more locations and even had to show ID to get into most places, things will change again. Restaurants will likely have less tables. Maybe for a time airlines won’t sell middle row seats and we’ll just have window and aisle. Those without the antibodies will be walking around with masks, we won’t be shaking hands, purell will be everywhere, there will be spacing on lines, ZOOM becomes the preferred choice of meeting venue, etc…
What this also means is that we won’t be seeing a V bottom economic recovery (and thus for the markets). It will be gradual as resuming life and our daily routines will be staggered in how it unfolds. There will be set backs but hopefully two steps forward. The restaurant that previously employed 20 people might only hire back 15. That easy flow of credit becomes more demanding. The household that realizes they didn’t save enough for a rainy day going into this, wants to spend less and save more. Corporate America realizes the importance of a strong balance sheet and we can say goodbye to many stock buyback plans, and there will be less hiring and capital spending until those balance sheets are restocked with cash. Going from a world awash in debt with good economic growth to one still awash in debt with much slower growth is a tough transition. That deleveraging is also why monetary policy in terms of trying to stimulate more borrowing, will be highly ineffective.
As for markets, at least for now say goodbye to an earnings multiple of 18-20 times. Say goodbye, as stated, to those debt fueled buyback plans. And with this oncoming downdraft in earnings and likely muted rebound, who knows how long it will take to see those 2019 earnings level again. And I want to repeat again that I expect higher inflation to follow due to the supply shocks that have taken place and that the demand side will come back sooner than supply. And add in all the monetary easing that we can be sure overstays its welcome. This will be a discussion I believe in the fall, an unfortunate environment of stagflation. But, at least that is an analyzable situation for portfolios that we can adjust for unlike now with the virus.
I talked a lot last week about the damage done to the mortgage market with part of that directly due to the Fed’s aggressive buying of MBS and them not realizing the huge negative side effects. Here is an article by Steve Liesman, with some quotes from my friend Barry Habib, which discusses how the industry is pleading with the Fed to dramatically slow the pace of their MBS purchases. https://www.cnbc.com/2020/03/29/mortgage-bankers-warn-fed-purchases-of-mortgages-unbalanced-market-forcing-margin-calls.html
Some March data came out of the Eurozone today. Economic confidence fell to 94.5 from 103.4 and that was actually 3 pts above the estimate though still the weakest since August 2013. While manufacturing was weak again, the main downdrafts came from services, the consumer and retail. We can only assume that this continues to weaken in the next few months until the rate of spread starts to slow. Construction softened too but is now the component with a plus sign in front of it.