The analysis by Alessandro Fugnoli, chief strategist of the Kairos funds , on the American economy and beyond …
There has been a lot of discussion in recent months about recovery from V, U, W or L. The different letters have expressed different degrees of optimism, maximum in V, which implies a quick return to trend growth, and minimum in L, which implies permanent loss of growth due to the pandemic.
The reality, in the light of the macro data, for now seems to confirm the U in Europe and the V in America. The difference reflects two factors. The first, in health policy, is the different speed with which we returned to normal life, gradually in Europe, with forced stages in most of the United States. The second, of labor policy, reflects on one hand the European choice to freeze employment in small and medium-sized enterprises, while on the other America has chosen to lay off massively (reaching almost 50 million unemployed) and then aggressively summarize in the past few weeks.
Neil Dutta, an economist at Renaissance Macro, now proposes a slightly more complex model for America for the ongoing recovery, that of scale. Abrupt acceleration phases, followed by flat phases and then by new moments of recovery.
In our view, this pattern probably captures the two-stage evolution of the epidemic in the United States better. In the first phase, which mainly affected the north of the country, the lockdown was European, produced the collapse of the GDP (which however fell less than in Europe) and, once finished, a first phase of rapid recovery. In the second phase, the one we are experiencing, the virus has affected the rest of the country, especially the south, which however is reacting differently than in the north and is trying to minimize the impact on its economy.
Tourists never visit Houston, the immense metropolis that in 15 years will surpass Chicago as America's third urban hub. Unlike New York, which in the dark days of the epidemic was a spooky city, Houston is still quite open despite having now saturated the intensive care units in its hospitals. It's a matter of mentality (Texans feel like real Americans, bold and machos) but it's also a political issue. The southern states, almost all Republicans, want to get to the presidential elections with the economy booming. The democratic northern states are in no hurry to give Trump the theme of the flourishing economy and the boom in the stock market.
So everyone has their good reasons, health, economic and political, and time will determine who has more. The practical effect, for the moment, is that this southern phase of Covid will bring about a halt to the recovery for a few weeks, but not a reversal.
The recent flow of macro American data, the latest excellent data on employment, photographs the situation a moment before the southern phase of Covid (it is incorrect to speak of a second wave). To use the metaphor of the stair step, we are at the highest point of the riser, at the corner. In the coming weeks, the shelf data will arrive, which will highlight the loss of momentum of the recovery.
Markets will have two ways of reacting. They can go down (we will never get rid of Covid and the more we move forward the more pieces of the economy we will lose forever). Or they can stop and move sideways, looking ahead. Various elements play in favor of the second hypothesis.
The first is that Covid, wherever he went, raged with particular intensity for two months and then went down. The type of reaction (contrast or indifference) influenced the extent of the damage but not the duration of the epidemic. Pending empirical confirmation, the markets will therefore tend to be patient. The second is that the portfolios, even after the purchases at the end of the half year, are not particularly fraught with risk. The third is that the prolongation of the pandemic will lead to further expansionary fiscal and monetary measures.
This last point deserves a brief discussion. The many who think that he is exaggerating himself with the stimuli do not take into account two elements. The first is that the measures launched so far have been calculated roughly to fill the void created by Covid, not to create growth but to contain the recession. The second is that an important part of the stimuli is spent less than expected, both by the families that turn them into savings (which in some cases play on the stock exchange) and by the companies that take advantage of it to pay off debts. The experience of the last decade is somehow repeating itself, when the liquidity created by Quantitative easing turned less than expected into a stimulus to the economy because the banks redeposited it with the Fed.
If this time the savings explode but not the investments (the productive ones, not the financial ones), the economy will tend to implode anyway. To avoid this, only public spending will remain, as Japanese history of the last thirty years has taught. So far, among the monstrous measures launched almost everywhere, public spending on infrastructure is limited (one trillion in America and a half in Europe) and still all on paper. Let us therefore expect other interventions.
We reiterate that the long-term negative effects (inflation due to excess monetary stimuli, loss of efficiency due to the increase in the public component of GDP) will not be produced by the measures taken now, but by the fact that these will be maintained (possibly) for too long after the end of the emergency. The risk that the patient develops a morphine addiction is not a good reason not to sedate him and operate him today if the alternative is the loss of life.
Coming to the short term, it still seems premature to speak of structural yield hikes on the long part of the curve. As for stock exchanges, in a second lateral semester which will consolidate the recoveries of the second quarter, the underlying theme will not be directional but sectoral. If there is a pause in the healing process of the global economy, growth and rate sensitive sectors will be preferable again.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/mondo/come-reagira-leconomia-americana-alla-pandemia-analisi/ on Sun, 05 Jul 2020 05:20:21 +0000.