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Sentiment has soured: How will governments and companies respond? (Part 2)

Sentiment has soured: How will governments and companies respond? (Part 2)

In this second part, Sam and Marko discussed possible tapering, what can the government do to help private companies, how the consumer sentiment is looking right now, what should you do with your investment in this Delta variant scare? Are vaccines really effective? And what is this thing that the Biden administration needs to do right or they’ll be dead?

 

Please go here for the first part. 

 

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This QuickHit episode was recorded on August 19, 2021.

 

The views and opinions expressed in this Sentiment has soured: How will governments and companies respond? (Part 1) QuickHit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

Show Notes

 

TN: Sounds like both of you agree that China is going to do more stimulus. I think they’re late. I think they should have started five or six months ago. But better now than never. Right. So it sounds to me like you believe that there will be the beginning of a taper, maybe a small beginning of a taper late this year. Is that fair to say?

 

SR: Yeah, I think it’s fair to say that there will be some form of taper. Okay. I don’t know, even if it’s just rhetoric, as we move into 2022, at least with what we know right now, I don’t think they should. But what I think they should do and what they’re likely to do are two wildly different things.

 

TN: So even if it say 10 billion a month, which is nothing compared to the entire kind of stimulus, monetary stimulus are doing right now, that would have a dramatic sentimental chain. Is that your view?

 

SR: Yes. So it’s all about that incremental change in Cinnamon. It’s not about the incremental change in the addition to the portfolio.

 

TN: Right. Marko, are you the same? Do you think there’s a change in the sentiment of the Fed and there’s going to be a move toward tapering late in the year?

 

MP: I mean, I think tapering happened in June at the FRC meeting. And so that’s… Because that’s when the Fed incrementally turned hawkish. The DXY dropped quite significantly after the meeting. So I think that the risk in your view is that a lot of the things that we’re talking about right now have been slowly priced in over a period of time. And while oil prices and S&P 500 haven’t really corrected to this view reality. You know, so S&P 500 is reaching a new high, except for the last two days. Oil prices have started to come down finally.

 

 

 

 

Brent Crude Oil
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Now the 10-year has actually been pretty stable through the last couple of weeks worth of volatility. And that tells me a couple of things. I think the bottom market price, a lot of the things we’re talking about already. The second issue is that fiscal policy is really tricky when we talk about it.

CBOT 10-year US Treasury Note
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And here’s what I mean. 1953 we had a fiscal cliff recession after the Korean War. But that’s because the fiscal cliff was very clean, very simple. We spend a lot of money on bullet casings and tanks and airplanes during the Korean War, and then that fiscal spend stayed on the Korean Peninsula. We couldn’t take it back with us in 1953. In other words, we got a fiscal cliff recession.

 

This time around, the 1.9 trillion, you know, fiscal stimulus we had earlier this year, that actually, in a curial mathematical terms, shows up as a huge fiscal cliff next year. But that actually lives on on household balance sheets. And so that’s where I would say that like, let’s see how the Delta variant issue resolves itself, because in one month, here’s what I know.

 

I know the savings rate in the United States, the personal savings rate is still elevated at 9.6%. I know that revolving credit is going through the roof, and the households are re-leveraging themselves in a way that they have it for ten years. The US consumer is acting in the ways they acted in the 90s and 2000s.

 

If you look at household debt, percent of GDP, you got this long period of deleveraging for the past ten years. And now it’s coming back up. And so to me, that’s where I think the fiscal cliff of next year is overstated. And the reason that even a ten year fiscal package matters is because you’re talking about a ten-year bond. If I’m going to hold a ten-year bond, that on the back end of that 10-year, there is Trump tax cut level of unnecessary fiscal stimulus.

 

Let me say that again, what this fiscal spend right now is going to produce a similar procyclical fiscal thrust that we had during the Trump administrations in the last two years, through doc cuts, this time through infrastructure spending. That’s going to create a modest fiscal thrust, positive fiscal thrust for the duration of the asset that you’re holding. And I think that the market will still have to respond to that, even though next year there’s no way to avoid mathematical fiscal flip.

 

TN: Interesting. So. All of these things together, just going back to the reason I initially contacted you guys. I was hearing companies telling me that their Q3 revenues were really, they were downgrading them, and they’re really worried about their performance in Q3. And I think we’ve seen that or I’ve seen it anecdotally.

 

We saw tourism not necessarily be what we thought it would be. We’ve seen a lot of things happen that we didn’t really think would happen over the summer or not happen that we thought would happen. So how are you seeing these policies or how do you expect these policies to manifest at the company level? And when do you expect them to help companies to move forward?

 

MP: Well, I don’t think any policies will help companies. I think what will help companies is once Covid cases go down, and people kind of stop being afraid of the Delta wave.

 

Right now, if you look at hotel stocks. Hotel stocks are back through, like November 20th level, like they’re back to pre-Pfizer result levels. And I think that that’s a great investment opportunity. I would be long COVID place right now because, you know, the data from Israel, the data from Iceland, the data from a lot of different places that are fully, almost fully vaccinated are pretty clear, which is that vaccinated people can absolutely get Covid, and very few of them have adverse effects. The efficiency is actually at very high levels. A lot of people misinterpret, a lot of people… Sorry, the media is misinterpreting the data. And once you account for age disparities and so on, the efficiency here is like in the 90s.

 

TN: So it’s amazing.

 

MP: Yeah. Look, it’s a simple fact. Now that’s going to take some time as Sam said, I think that’s going to be articulating the data for the next month. I think that you have a great entry point into the Covid place right now. And I don’t think that any of the policies we’re really talking about are going to have much of an effect on earnings over the next quarter.

 

TN: I’ll give you a data point that I was looking at earlier today. Texas right now has the same number of cases that it had in Feb of ’21. Okay. But the daily fatalities are 60% lower than they were in Feb. Okay. So the case counts are just as high, but the fatalities are dramatically lower. And that’s good news, right.

 

Texas Covid cases and fatalities

 

MP: Look, Tony, I would study really the case of Israel, because if you study the overall numbers in Israel, you come up with a figure. I think it’s 60% effectiveness for Pfizer, which is lower than advertising, but that’s actually a mathematical concept called a Sisyphus paradox.

 

And what’s happening is that we need to segregate the different age cohorts not just average them together.

 

TN: That’s right.

 

MP: You know, because the elderly tends to be more vaccinated. You have a larger pool of older people who tend to have received a vaccine. They also tend to go to a hospital more often with a respiratory disease, even though they’re vaccinated.

 

So you can’t just average everyone together. The actual vaccine efficacy is in the 90s for all cohorts. Except in the 80s for some of the much older, over 80. It’s, like, about 80% effective. And so, yeah, I think a lot of this is… You know where I want to compare Covid to? And I think Sam will appreciate this. I compared it to the Euro area crisis.

 

You could have made a call in 2010 that this thing was over. Like once Germany like bit the bullet and bailed out Greece the first time? Like it was over, guys. But every time a new country showed up, he was like, Whoa. Here goes Portugal. Oh, my God! The world’s gonna end! And it’s like, similarly COVID, like, we know where we’re headed. Like, every wave is gonna cause sentiment issues and so on. But I would just bet against those.

 

TN: That’s a good call. I like that. I like the optimism there, and I like the perspective there. I think that’s really interesting. Sam, what do you think?

 

SR: I think there’s a combination of two things. One, I think Marco is 100%, right? That this is an awful lot like the Euro area crisis. Every single time, like Greece was the first big bang. Then you had the ripple effect to Portugal. Then it was Spain. And everybody was wondering what the next set of fall was and had the correction of 2011. That was fun. You had these longer term kind of ripples.

 

I think there’s going to continue to be ripples this time around. And the question is in my mind, it’s really difficult to predict what people sentiment around those ripples are going to be. I think we can look through them for the next five to ten years and say it’s all going to be fine. This is the way it’s going to play out.

 

The real question is, how does the American consumer mindset, how does that actually grasp this ripple to move through it? And how does China react? How does Europe react? Right. There’s a number of factors that play in here, but I think the really difficult and maybe not as priced in as they should be. To Marco’s point. I think this is a really long term, very strange kind of predicament that we’re in where vaccines are really good. They work really, really well.

 

How do people’s minds begin to grasp it? And do they begin to look through? We get the higher vaccine rates? Do we really power through this in a meaningful way, very, very quickly, or does it continue to be highly volatile on the consumer sentiment front? Because if consumer sentiment continues to fall, it’s going to be a big problem for the back half of this year. And that I mean. It’s kind of…

 

TN: We’re right there at the back there in the back half of the year, right? That. This is a terrible time for consumer sentiment to fall because we’re at the precipice of kind of holiday season buying. Not quite there yet, but if it stays for two more months, it gets pretty bad.

 

SR: It does get pretty bad. But I think this is also one of those points that I think could really be a tailwind to Marko’s earlier comments about fiscal stimulus and fiscal stimulus being higher than anticipated. You continue to have consumer sentiment fall. You continue to have people fearful of Delta, you have a couple of bad job prints, and all of a sudden you’re going to have much higher fiscal spend. You’re going to have a very dovish Fed.

 

TN: Right.

 

SR: I think that’s the risk to call it “the market.” That’s the risk to kind of my side of Marko and I’s bet is if all of a sudden this fear actually really ingrains itself within individuals, it’s going to be a huge, huge issue as we move into the Christmas buying season for companies, Christmas buying season for consumers, and you’re going to get big checks written out of Washington, regardless of the geopolitical situation, regardless of whether or not people want to say Biden might be lame duck because of Afghanistan, etc.

 

All of a sudden you’re going to have a Fed that’s very concerned, thinking it was a ripping economy with incredible inflation that wasn’t going anywhere. You’re going to have them reverse very, very quickly. You’re going to have senators on both sides of the aisle very concerned that they just, they might get blamed for a recession.

 

It’s going to be a really interesting queue for.

 

TN: It is.

 

MP: That’s why it’s a dynamic environment. Right. And and what I would say is like, look, I have certainty on the Delta wave. Certainty. Every wave we’ve had has crested, other than in emerging markets because their testing is poor. So it’s actually a mega wave that we constantly think is over, but it isn’t.

 

In the US we know how the story plays up. We know it. It’s a four to six week wave. The challenge here Tony, is that we’re talking in the middle of this wave. We have probably another two to three weeks of upswing, and then we’re going to have a down swing in cases. And by the way, I know this with a science, like, a hundred percent certainty because we had waves collapse even before we had vaccines.

 

So this is a really important point, because if the Fed reacts to something that is extremely impermanent, something that’s over in three weeks, if the Fed at Jacksonhole and subsequently in September waivers, you know, I mean, that will just set, I think the market alight, in my view. I think that will collapse the dollar and they will sell the bond, because it will have been using this, you know, temporary blip in sentiments to justify a changing course.

 

The other thing I would say is, like, so Sam mention Afghanistan. I think he’s right to mention it. I think it’s really significant, and it’s significant because of this. I think… I’ve always expected that during the summer, the fiscal policy would get much more challenging. And now, because of the Republicans, I think moderate Democrats in the Senate versus progressive Democrats in the House were always going to try to eat each other alive.

 

But now, with this utter failure in Afghanistan, that looks really, really bad, they are going to circle the wagons on fiscal calls because the last remaining, the last remaining lever of the Biden administration is this fiscal package. If they don’t get it through, guys. Yeah. The Biden administration is done. And I mean, I’m not talking about midterms either. So they have to do something on fiscal. Right.

 

So this is why the stakes have now become much higher. They’re gonna pay Mansion. They’re gonna pay Cinema. They’re gonna get deep water ports in Arizona and West Virginia to get their compliant with a fiscal deal. You know what I mean? Like, there’s gonna be so much more. I wish I was living in West Virginia. I mean, they’re gonna have ice rinks in every little town. It’s gonna be amazing.

 

And so this is something to keep in mind, I think on that front, too. So I agree with Sam. I think it’s a really good point of how these things are very dynamic and they reinforce each other. And I just think that the political pack of lease resistance in every single issue we’re talking about here leads to more profligacy.

 

TN: Yeah, I think you’re right. I think at least for the near term, that’s the bias, is exactly in that direction.

 

Okay. Guys. Thank you so much. Again, I think we could go on for hours with this, and I love this discussion, but I really appreciate your time.

 

For everyone who’s watching. Please subscribe to our YouTube channel, where we need a few more subscribers to bring you a few more capabilities on our channel. If you don’t mind, please subscribe.

 

And Sam and Marko. Really appreciate your time. Thanks very much.

 

MP: Thank you. Thank you.

 

TN: Let’s do it again, and I want to come back in January and see who wins.

 

MP: Yeah, sure. We should definitely do that. We didn’t tell people when we been into, but it’s like a really nice steak dinner, I think was the… If the 10-year is at like between one point 49 and one point 51, I think we just…

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QuickHit

Sentiment has soured: How will governments and companies respond? (Part 1)

Sentiment has soured: How will governments and companies respond? (Part 1)

Companies are saying that the Q3 revenues will be down a bit. What’s really happening and how long will this last? Chief Economist for Avalon Advisors, Sam Rines, and a returning guest answers that with our first-time guest Marko Papic, the chief strategist for Clocktower Group.

 

In addition, both the Michigan Consumer Sentiment and the NY Manufacturing survey down as well. Watch what the experts are seeing and what they think might happen early in 2022.

 

Watch Part 2 here. 

 

Subscribe to our Youtube Channel.

💌 Subscribe to CI Newsletter and gain AI-driven intelligence.

📊 Forward-looking companies become more profitable with Complete Intelligence. The only fully automated and globally integrated AI platform for smarter cost and revenue planning. Book a demo here.

📈 Check out the CI Futures platform to forecast currencies, commodities, and equity indices

 

This QuickHit episode was recorded on August 19, 2021.

 

The views and opinions expressed in this Sentiment has soured: How will governments and companies respond? (Part 1) QuickHit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

Show Notes

 

TN: So I guess we’ve started to see some negative news come in with the Michigan Consumer Sentiment with the New York Manufacturing Survey and other things. Most recently, we had some of the housing sentiment information come in. And I’ve heard companies talk about their revenues for Q3 will be down a bit. And so I wanted to talk to you guys to say, are we at a turning point? What’s really happening and how long do you expect it to last? Marko, why don’t you let us know what your observation is, kind of what you’re seeing?

 

MP: Well, I think that, you know, the bull market has been telling us that we were going to have an intra cyclical blip, hiccup, interregnum, however you want to call it since really March. And there’s, like, really three reasons for this. One, the expectations of fiscal policy peaked in March. Since then, the market has been pricing it less and less expansion of fiscal deficits. Two Chinese have been engaged in deleveraging, really, since the end of Q4 last year, and that started showing up in the data also on March, April, May.

 

And then the final issue is that the big topic right now is something we’ve been focused on for a while, too, which is this handover from goods to services, which is really problematic for the economy. We had the surge of spending on goods, and now we all expected a YOLO summer where everybody got to YOLO. It really happened.

 

I mean, it kind of did. Things were okay but, that handoff from good services was always gonna be complicated, anyways. And so I’m going to stop there because then I can tell you where I stand and going forward. But I think that’s what’s happening now and what I would be worried about. And I really want to know what Sam thinks about this is that the bull market been telling you this since March. There’s some assets that were kind of front load. The one asset that hasn’t really is S&P 500, as kind of ignored these issues.

This chart of S&P 500 Stock Market (SPX) is generated from CI Futures, an app forecasting nearly a thousand assets across currencies, commodities, market indices, and economics using artificial intelligence and machine learning technologies. Curious how it can you and your business? Book a time with our expert and get free trial.

 

TN: Right. Sam, what are you seeing and what do you think?

 

SR: Yeah, I’ll jump in on the third point that Marko made, which is that handoff from services or from goods to services. That did not go as smoothly as was planned or as thought by many. And I don’t think it’s going to get a whole lot better here. You have two things kind of smacking you in the face at the moment. That is University of Michigan Consumer Sentiment and the expectations. Neither of those came in fantastically. Today isn’t great. Tomorrow isn’t expected to be great.

 

Part of that is probably the Delta variant, depending on what part of the country you’re in, that is really beginning to become an issue. Not necessarily, I mean, it’s nowhere near as big of an issue as COVID was for death and mortality in call it 2020. But it’s a significant hit to the consumer’s mindset. Right?

 

And I think that’s the part, what really matters is how people are thinking about it. And if people are thinking about it in a fear mode, that is going to constrain their switch from goods to services and the switch from goods to services over time is necessary for the economy to begin growing again at a place that is both sustainable and is somewhat elevated. But at this point, it’s really difficult to see exactly where that catalyst is going to come come from, how it’s going to actually materialize in a way that we can get somewhat excited about and begin to actually become a driver of employment. We do need that hand off to services to drive employment numbers higher.

 

And what we really need is a combination of employment numbers going higher, GDP being sustainably elevated to get bond rates higher. So I think Marko’s point on what the treasury market is telling us should not be discounted in any way whatsoever.

 

The treasury market is telling us we’re not exactly going to a 4% growth rate with elevated inflation.

 

United States GDP Annual Growth Rate
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TN: Right.

 

SR: It’s telling us we’re going to something between Japan and Germany at this point.

 

TN: Yeah. That’s what I’m a bit worried about. And with the consumer sentiment especially, I’m a bit worried about sticky sentiment where we have this Delta variant or other expectations, and they remain on the downside, even if there are good things happening.

 

Do you guys share those worries, or do you think maybe the Michigan survey was a blip?

 

SR: Oh, I’ll just jump in for 1 minute. I don’t think it was a blip at all. I think what people should be very concerned about at this point is what the next reading is. That reading did not include the collapse of Afghanistan. It did not include any sort of significant geopolitical risk that is going to be significant for a number of Americans.

 

Again, it’s kind of like Covid. It might not affect the economy much. It’s going to affect the psyche of America significantly as we move forward. And if consumer sentiment were to pick up in the face of what we’ve seen over the last few days, I would be pretty shocked.

 

TN: It would be remarkable. Marko, what do you think about that?

 

MP: So I’m going to take the other side of this because I have a bet on with Sam, and the bet is, by the end of the year, I’m betting the 10-year is going to be closer to 2%. He’s betting it’s going to be closer to 1%. So he’s been winning for a long time, but we settled the bet January 1, 2022.

CBOT 10-year US Treasury Note
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Here’s why I think I would take the other side of a lot of the things, like when we think about where we’re headed. So first, I think there’s three things I’m looking at. There’s really four things. But the fourth is the Fed. And I’m going to like Sam talk about that because he knows a lot more than I do. The first three things I’m looking at is, as I said, there are reasons that the bond market has rallied. And I think a lot of these reasons were baked in the cake for the past six months, or at least since March.

 

The first and foremost is China. And China is no longer deleveraged. The July 30th Politburo meeting clearly had a policy shift, but I would argue that that been the case since April 30. They’ve been telling us they are going to step off the break. And, quite frankly, I don’t need them to search infrastructure spending a lot. I don’t need them to do a lot of LGFB. I just need them to stop the leverage. And so they’re doing that.

 

And the reason they’re doing that is fundamentally the same reason they crack down on tech. And it has to do with the fact that Xi Jinping has to win an election next year. Yeah. And an election. It’s not a clear cut deal. He’s going to extend his term for another five years. CCP, The Chinese Communist Party is a multi sort of variant entity, and he has to sell his peers in the communist party that the economy is going to be stable.

 

And so we expect there to be a significant policy shift in China. So one of the sort of bond bullish economic bearish variables is shifting. The second is fiscal policy. Remember I mentioned that in March, investors basically started, like the expectations of further deficit increases, basically whittle down. This was also expected.

 

The summer period was also going to be one during which the negotiations over the next fiscal package were going to get very difficult. I would use the analog of 2017. Throughout the summer of 2017, everybody lost faith in tax cuts by the Trump administration. And that’s because fundamentally, investors are very poor at forecasting fiscal policy. And I think it has to do with the fact that we’re overly focused on monetary policy. We’re very comfortable with the way that monetary policy uses forward guidance.

 

I mean, think about it. Central bankers bend over backwards to tell us what you’re going to do in 2023. Fiscal policy is a product of game theory, its product of backstabbing, its product of using the media to increase the cost of collaboration, of cooperation. And so I think that by the end of the year, we will get more physical spending. I think the net deficit contribution will be about $2 trillion, the net contribution to deficit, which is on the high end. If you look at Wall Street, most people think 500 billion to a trillion, I would take double of that.

 

And then the final issue is the Delta. Delta is going to be like any other wave that we’ve had is going to dissipate in a couple of weeks. And also on top of that, the data is very, very robust. If you’re vaccinated, you’re good. Now, I agree with everything Sam has said. Delta has been relevant. It has, you know, made it difficult to transition from goods to services, but it will dissipate. Vaccines work. People with just behavior. So.

 

TN: Let me go back to the first thing you mentioned, Marko, is you mentioned China will have a new policy environment. What does that look like to you?

 

MP: There’s going to be more monetary policy support, for sure. So they’ve already, the PBOC has basically already told us they’re going to do an interest rate cut and another RRR cut by the end of the year. Also, they are going to make it easier for infrastructure spending to happen. Only about 20-30% of all bonds, local government bonds have been issued relative to where we should be in the year. I don’t think we’re going to get to 100%. But they could very well double what they issued thus far in eight months over the next four months.

 

So does this mean that you should necessarily be like long copper? No, I don’t think so. They’re not going to stimulate like crazy. The analogy I’m using is that the Chinese policy makers have been pressing on a break, really, since the recovery of Covid in second half of 2020. They’ve been pressing on the breaks for a number of reasons, political, leverage reasons, blah, blah, blah. They’re not going to ease off of that break. That’s an important condition for global economy to stabilize.

 

Thus far, China has actually been a head wind to global growth. They’ve been benefiting from exports, you know, because we’ve been basically buying too many goods. They know the handoff from goods to services is going to happen. Goods consumption is going to go down. That’s going to hurt their exports. On top of that, they have this political catalyst where Xi Jinping wants to ease into next year with economy stable.

 

Plus, they’ve just cracked down on their tech sector. They’re doing regulatory policy. They have problems in the infrastructure and real estate sectors. And so we expect that they will stimulate the economy. Think about it that way. Much more actively than they have thus far.

 

TN: Great. Okay. That’s good news. It’s very good news. Sam?

 

SR: Yeah. So the only push back that I would give to Marko and it’s not really pushback, given his assessment, because I agree with 99% of what he’s saying. But the one place that I think is being overlooked is, one thing is the fiscal policy with 2 trillion is great, but that’s probably spread over five to ten years, and therefore it’s cool. But it’s not that big of a deal when it comes to the treasury market or to the economic growth rate on a one-year basis. It’s not going to move the needle as much as the middle of COVID.

 

TN: Let me ask. Sorry to interrupt you. But when you say that’s going to take five to ten years, when we think about things like the PPP program isn’t even fully utilized. A lot of this fiscal that’s been approved over the last year isn’t fully utilized. So when these things pass and you say it’s going to take five to ten years, there’s the sentiment of the bill passing. But then there’s the reality of the spend. Right. And so you just take a random infrastructure multiplier of 1.6 and apply it.

 

There’s an expectation that that three and a half trillion or whatever number happens, two trillion, whatever will materialize in the next year. But it’s not. It’s a partial of it over the next, say, at least half a decade. Is that fair to say?

 

SR: Correct? Yeah. Which is great. It’s better than nothing in terms of a catalyst to the economy. The key for me is it’s not being borrowed all at once. It’s not being spent all at once. Right.

 

If it was a $2 trillion infrastructure package to be spent in 2022, I would lose my bet to Marko in a heartbeat. It would be a huge lose for me, and I would just pay up. But I would caution to a certain degree, it’s $200 billion a year isn’t that big of a deal to the US economy, right. That’s a very de minimis. Sounds like a big number, but it’s rather de minimis to the overall scale of what the US economy is.

 

And you incorporate that on top of a Federal Reserve that’s likely to begin pulling back, or at least intimate heavily that they’re going to begin pulling back incremental stimulus or incremental stimulus by the end of 2021 and 2022. And all of a sudden you have a pretty hawkish kind of outlook for the US economy as we enter that 2022 phase. And it’s difficult for me, at least, to see the longer term, short term rates, I think, could move higher, particularly that call it one to three year frame. But the ten to 30-year frame, for me is very difficult to see those rates moving higher. With that type of hawkish policy in coming to fruition, it’s kind of a push and pull to me. So I’m not obviously, I don’t disagree with the view that China is going to stimulate and begin to actually accelerate growth there. I just don’t know how much that’s actually going to push back on America and begin to push rates higher here.

 

I think we’ve had max dovishness. And strictly Max dovishness is when you see max rates and when you begin to have incremental hawkishness on the monetary policy side and fiscal side. And 2 trillion would be slightly hawkish versus 2020 and early 2021. When you begin to have that pivot, that it’s hard for me to see longer term interest rates moving materially higher for longer than call it a month or two.

 

TN: Okay, so a couple of things that you said, it sounds like both you agree that China is going to do more stimulus. I think they’re late. I think they should have started five or six months ago, but better now than never. Right. So it sounds to me like you believe that there will be the beginning of a taper, maybe a small beginning of a taper late this year. Is that fair to say.

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QuickHit: “LUV in the Time of COVID”

Avalon Advisor’s chief economist and author of “After Normal: Making Sense of the Global Economy”, Sam Rines joins Tony Nash for the 14th episode of QuickHit, where we discussed the L, U, and V recoveries in different states and industries. He also shares some interesting data on traffic congestion, CPIs, car sales, and food prices — and what these data mean for investors, businesses, and people. And what trend is he seeing to pop back up in travel and leisure?

 

Don’t miss out some of our relevant QuickHit episodes:

Proactive companies use data to COVID-proof their supply chains

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We’re not going to normalize

How do we use up all the corn now?

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

TN: I’m trying to figure out when and how do we come out of this? We have our models, we have our views on things. But I read your stuff every day and what are you thinking? Where are we right now? Are we early, mid, late? Where are we now and where do you think will go in the next few weeks or months?

 

SR: So I think the answer is all three. We call it LUV in the Time of COVID. There will be an L-shaped recovery, a U-shaped recovery, and a V-shaped recovery depending on whether you look at Texas or Florida or Kentucky. Whether its manufacturing or services. Everything has its own shape. So we’re early on some, middle on some, and late on others.

 

On the overall employment side, we’re probably past peak pain. At this point, you’re mostly having unemployment benefits a hindrance to bringing people back to work, not help people keep afloat. That’s not true everywhere. Certainly, there are places that are still shut down and those people still need those unemployment benefits. But places like Texas that are reopening to a certain degree like Florida and Georgia. It’s difficult to bring people back to jobs that pay less than the enhanced unemployment benefits.

 

One interesting piece of the puzzle though is the continuing unemployment claims and you’ve begun to see the states that open actually begin to roll those down. So people are coming off those unemployment slowly. It’s not happening quickly. Florida is one of the exceptions that Florida came off extremely fast. I think that’s going to be one of the stories that’ll pick up pace over the next three to four weeks. There’s a decent chance that if we’ll continue to have these types of numbers for continuing claims. There’s a decent chance that the May unemployment number will be the worst number we see this year. You begin to improve pretty quickly. The June number, we don’t take that survey for another few weeks. That’s more than likely going to be better than May in terms of unemployment beginning to come down. So we think it’s a mixed bag. But employments probably going to improve from here.

TN: That’s good news, I hope. There are a lot of service jobs and blue-collar jobs that were laid off in the first waves. Is that right?

SR: Yeah most of them. The interesting thing is it’s fairly easy to social distance within most manufacturing facilities. So manufacturing, theoretically, can snap back a little bit faster than the services side of the economy. The services industry is going to be the laggard here. But the service industry is also the majority employer, far more important on the employment side of manufacturing.

TN: You keep an eye on things like traffic patterns and restaurant usage. What are you seeing as the rate at coming back and then what does that say about things like food prices or gasoline consumption?

 

SR: It’s snapping back very quickly on the driving side of things. That’s snapping back much faster than public transit, airlines, etc. You have the U for airlines and mass transit. But you have what appears to be a pretty sharp V in driving. Congestion is almost back to normal levels in places like Houston during rush hour. Texas generally is back towards its baseline according to most of the metrics.

 

The RV sales are through the roof. People still want to go on vacation. And if you can’t and don’t want to get on a plane and go to Cabo, you get in an RV and go to the Grand Canyon. It’s just another way to get out of the house. I got to a little bit of trouble for saying it. But I’ll say it again, if you keep boomers off of cruise ships, they’ll find a way to still go places and still have fun in retirement. They’re not just gonna stay up. They’re not just going to stay cooped up in their house. And the interesting thing about that is an RV is not a small investment for most people. So I think that travel might have more legs than people are really giving credit for. Camping might actually make a come back here versus your more crowded areas, particularly within that boomer crowd.

 

TN: Back to the 70s for camping. We hear about food shortages with meat and we also hear about storage for crude oil. With more activity, are you seeing faster drawdown with crude oil? Are you seeing anything happening there in terms of food?

 

SR: So with crude, we’re beginning to see drawdowns and I’m not sure that it’s faster than we anticipated. But gasoline particularly has picked up much faster than people anticipated. That drawdown will be much faster, much stronger and have longer legs than was anticipated. On the overall demand side for oil, it’s a harder picture to paint. Aviation fuel is a significant driver on the margin of usage within the US. A lack of that is offsetting any bullishness on the gasoline side. Those will probably balance each other out for the most part as we move forward and you have a drawdown that’s relatively in line with what we were anticipating a few months ago.

 

On the food side, you’ve seen a snapback in restaurants for Texas in particular. We are back to, give or take 55 percent usage for restaurants. We have 50% occupancy allowed in Texas. That appears to be pretty close to maxed out. At least restaurants, we get reservations. We’ve seen some interesting things on the eat-at-home food side. We dug through the CPI, the inflation data pretty carefully and found that the food at home was getting increasingly expensive in a way that we hadn’t seen in a long time. Eggs were getting expensive. Meat was getting expensive. Fresh fruits and vegetables are getting expensive and they were accelerating at a pretty rapid pace.

 

It does look like we’re going to have some pretty good crops. It doesn’t look like we’re going to have trouble on that front. So we shouldn’t have the pricing pressure emanating from that side, which is good.

 

The critical aspect is going to be how do we get the beef demand back up to the point where you actually have cattle ranchers wanting to not cull their herds and therefore drive state prices higher. I think that’s going to take more states opening restaurants like New York, California, and other big steak consuming areas of the country reopening and really beginning to drive that incremental demand.

 

Another fun note is I grew up in New Hampshire. Lobster is an important part of eating there. And lobster prices plummeted to the point where lobstermen decided they probably shouldn’t even go out and they were selling for two to four dollars a pound on the side of the road.

 

TN: Let’s just take a minute and we’re sitting in October 1st. We’ve gone through Q2. It was carnage. We’ve gone through Q3 and we’re looking back on Q3 versus Q2. What are you thinking at that point, October 1st of this year? Help me understand a little bit of that based on your perspective today.

 

SR: Based on my perspective today, I’ll probably be sitting in Boston, hopefully having a client meeting at a lobster that’s more expensive than three bucks, looking back and wondering how we missed the pickup that was happening in June and July and how the pockets of things that were doing much better than anticipated.

 

It’s worth noting according to one of the data sources I used, auto sales are actually picking back up rapidly from down, north of 60% for new cars and used cars. New autos only down, I’d call it the high 20% range from a year ago. Used cars down single digits from a year ago, on a volume basis. That kind of snapback in different pockets of the economy is going to be what I’m looking back and wondering how I missed whatever it might be whether it was people wanting to get back on cruises. I don’t think they’re going to want to give back on cruises. I don’t think people are gonna jump back on planes very quickly.

 

I think we have a 911 type of recovery. Three years, give or take there. I think that’s the mindset to use. But there will be something that just completely catches me off guard in terms of the speed and rapidity that it comes back, or with the L-shaped, it’s just never coming back. One thing I think we’ll catch a lot of people off-guard is the pivot on the margin from hotels to homes. Renting at home instead of renting a hotel. Being spaced away from people, having the pool to yourself. I think there will be trends like that that have become pretty clear whether or not they have legs by October and I think that’s probably one of them.