Today’s Macro Briefing brings together critical thinking that challenges some of the received wisdom currently circulating in the markets and beyond. Ollari Consulting argues that record high stock prices are actually a reflection of fears over the health of the global economy, rather than faith in the speed of the global recovery, and Deutsche Bank explains why evidence suggests lockdowns may actually be positive for markets. Cornerstone Macro, meanwhile busts the myth of the silent Trump majority, while HSBC cautions against blindly chasing the rally in EMFX. Elsewhere, Inferential Focus takes a wider look at the long-term implications of the “three-crises-at-once” reality currently hitting the US, concluding that it may cause a fundamental shift in what constitutes success and hence a potential watershed for the economy.
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1. A virus, a killing and America – reassessing society and life while thinking about fundamental change
A thoughtful piece from Inferential Focus examines the potential long-term effects on US society as it deals with the coronavirus pandemic, an economic downturn and the social tensions brought to the fore by the shooting of George Floyd. The firm seeks to address what has changed so much that much of American society has recently opened itself to the possibility of making significant social and political changes, and examines how the issue of inequality has moved to the forefront of society’s concerns, and what that means for those perceived as having taken advantage of such inequality. Inferential says the three-crises-at-once reality could well be pushing Americans into a kind of ritualised process of discovery, a rite of passage, from youth to adulthood and from physicality to spirituality. Indeed, the firm says an irony surrounding the impact of the virus lockdown is that it has provided many Americans time to think about how they are living their lives, and that those Americans may have discovered jobs might not be the best place to locate their personal identity. As Inferential puts it: the pandemic, economic stresses and police killings as well as an unequal distribution of the negative effects of all three have prompted many Americans to decide to put down the burdens associated with just increasing their standards of living and focus on making a better life.
2. EM FX -the Rorschach test; what do you see?
HSBC’s Paul Mackel says the recent dramatic fall and recovery by EM currencies reminds him of a Rorschach test, with the latter nearly the mirror opposite of the former with many arguing that this is fully justified. Although his baseline scenario from a few months ago expected a better backdrop for a number of EM currencies, particularly in Asia where fundamentals score relatively better, and good FX carry recovering, he says this has happened very fast. The common question being asked, according to Mackel, is whether more upside can be sustained and whether he sees a more optimistic outlook for EM FX. To answer this question, he believes it is prudent to conduct a stress test for EM FX and to examine if others are seeing things that he is not. Relying on his pre-COVID framework that assesses the outlooks for US-China tensions, USD policy, and EM growth, Mackel finds it is not conclusive that all conditions are being met for a further broad-based EM FX rally. On the contrary, he believes a more eclectic approach is best as other factors start to play a bigger role. Click here to contact the provider for the full report and a full assessment of the state of play for EM FX.
3. US Presidential elections; The silent majority myth
The investor consensus and betting markets have shifted and now project Donald Trump will lose the US presidential election in November, but a lot of people, including many of his clients, are very confident that Trump will pull out a win in 2020, says Andy Laperriere at Cornerstone Macro. He says they believe he is a political genius who continues to defy gravity and can dominate the news coverage anytime he wants, while many further believe the polls are garbage and there is a silent majority for Trump. But there is no evidence for the notion there is a pro-Trump silent majority, argues Laperriere. He says there was no such thing in 2016, and there isn’t one now. According to Laperriere, Trump is not a magician but rather a deeply unpopular president who barely defeated a similarly loathed opponent in 2016. This year, he says, Trump is running against someone who is considerably more popular than his 2016 opponent and he is probably going to lose. Things can change, concedes Laperriere, but Trump is the underdog in this race.
4. Lockdowns will be a market positive
Deutsche Bank’s George Saravelos has been sounding the alarm on the virus spread in the US for a few weeks now, and has also argued that the trade-off between economic and human cost is a false one. It is, he says, the virus itself that causes economic harm, and without putting a strategy in place to contain it, growth will be hit lockdown or no lockdown. As evidence, he points to a paper from Chicago economists , who used mobile phone records of more than 2 million US businesses and showed that lockdowns were only responsible for 20% of the decline in activity sparked by the pandemic, with the rest caused by shifts in consumer behaviour. Furthermore, Saravelos says Deutsche’s US economists show that the US economy is already starting to slow in places where the virus is accelerating. The key takeaway , he says, is that the market should now reward measures that bring the virus back in control, so any state action that reduces diseases transmission - including lockdowns - are likely to be a market positive, not negative.
5. Is this divergence sustainable?; Something’s gotta give
Christophe Ollari at Ollari Consulting has issued a couple of fascinating notes explaining the changing nature of big-tech stocks and the implications for the wider economy and markets. In “Is this divergence sustainable? (June 24)” and “Something’s gotta give (June 24)” he explains why it is curious that the equity rally sparked by talk of more fiscal expansion in the US didn’t trigger an even short-lived outperformance of small cap and cyclical stocks and that Russell/Nasdaq relative performance is back to levels where macro anxiety and fears were sky-rocketing. Indeed, Ollari notes markets are being led by the growth stocks – such as big tech - that have always outperformed when it has been all doom and gloom and when everyone was talking about an unprecedented deflationary and growth shock. Prevailing fear in the market and across the economy, according to Ollari, is reflected in the fact that despite recent fiscal largesse from Washington, US private savings are largely outstripping public spending, reflecting a “Ricardian Equivalence” effect in which consumers fear that eventually, they will be taxed in order to pay for increased government spending. That means, he says, that in order to reflate the economy, the US is going to have to move towards proper debt monetisation, making abundantly clear to the public that the Fed is overtly enabling government spending. That way, says Ollari, consumers might be more likely to spend now, either because they don’t fear being taxed at a higher rate later, or, on a less benign take, because they think prices will be rising in the future. Certainly, he says, the ongoing outperformance of big tech stocks is not a sign that all is “good and safe” in the economy. On the contrary, says Ollari, big tech stocks are increasingly seen as the ultimate deflationary hedge and safe havens against a more impaired economy for longer, implying that many fear a second wave of Covid-19, renewed shutdowns and a potential W-shaped economic recovery.