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Editor's Note: Hamish Risk | August 12, 2020
For those prone to the odd vice or two, lockdown may have proved to be particularly challenging, June and July was the opportunity to unleash! As it turns out spending on vices is a pretty good leading economic indicator, Andy Zatlin from SouthBay Research (AKA the Moneyball Economist), has a vice index (captures alcohol, marijuana, prostitution and gambling), which he says historically leads retail sales by around 5-months. COVID has compressed the lag, and now he reckons it’s about 1-month. The latest reading of the index indicates retail sales in July will show a marked pickup, building on June’s slower start. But, adds Zatlin, consumers are being cautious still. That chimes with the latest analysis from Julian Brigden at MI2 Partners. While acknowledging the rebound in recent data, Brigden questions whether a meaningful recovery can develop in the near term, adding that it is in the interests of the ruling classes to overestimate the deadly effects of the virus. Across the Atlantic, the UK has continued to bumble along with it COVID crisis management amid a dire economic outlook. Today’s GDP numbers tell you all you need to know (GDP fell 20.4 per cent q-on-q), the worst for any major European developed economy. Citi provide some sobering context in a report (published in conjunction with the Institute for Fiscal Studies) that sets out three scenarios for growth over the next five years and describes what in turn these might mean for government borrowing and government debt. The crux of it being, that public borrowing will reach levels not seen since WWII. Add Brexit into the mix, and you have a quite a bit of risk to contend with. Then again, Brexit politics may play second fiddle to US politics come November. With Biden selecting Kamala Harris as his running mate, he now has a safe pair of hands. It’s unlikely to be a game changer for Biden’s chances of winning, says Cornerstone Macro, but it probably broadens out the base. Who knows, if Biden wins the election, we could be looking at the first woman President of the United States in 2024.
Leading indicators US consumer SouthBay Research
1. Vice as a leading indicator on US consumerBack in January, we highlighted an interesting note from SouthBay Research explaining the benefits of following the Vice Index, which tracks US consumer spending on alcohol, marijuana, prostitution and gambling. Vices, said the firm, are a special form of discretionary spending that are highly sensitive to near-term economic conditions and are the first thing to be affected by changes in household finance. Back then, SouthBay explained, spending on vices predicted retail spending with a 5-month lead. Now, everything has changed says the firm thanks to Covid-19, with vice spending now shifting to lead consumer spending by just one month thanks to the sudden and severe uncertainty introduced by the pandemic. As SouthBay explains rapid cash injections from the authorities pushed disposable income and savings up to record levels at the start of the pandemic, but the cash had nowhere to go, with the money sitting on the sidelines until June when businesses reopened as part of phased exits from lockdown. At which point, says the firm, retail spending surged, with money heading towards non-essential spending such as vices, and disposable income and savings both slowed. Expect that trend to continue in July’s retail numbers, says SouthBay, providing a continued, albeit slowing boost for retail.
Economic recovery market narratives MI2 Partners
2. Q4 roadmap – The great rotation and project fearThere has been a significant rebound in economic data according to Julian Brigden at MI2 Partners, but unfortunately, despite an encouraging rate of change, the global economy is still mired at low levels of activity and faces a herculean task to drag itself out of the current hole. The good news, he says, is that if his hunch is correct and the coronavirus’s lethality is waning, the task will get a lot easier. In theory, says Brigden, this should be supremely bullish, but, right, or wrong, he doubts this narrative will get the time of day from the media or more importantly, the ruling classes. They have, says Brigden, invested far too much into “project fear” and reversing course would damage political agendas and coffers. Indeed, he suspects that even if hospitalisations or death rates remain low, the focus will remain on infection rates to justify alarmist responses from authorities. Together with a weak underlying macro backdrop, says Brigden, this will more than justify further fiscal and monetary stimulus, which should support current market trends. However, he says next spring things could start to change. By then, the US will be through the election, says Brigden, which will naturally lend itself to a change in narrative, while the possibility that infection rates will be falling (historically, most pandemics have burnt themselves out in 18 months) will set the stage for a massive growth/value rotation in all its various forms. Indeed, he says, given the massive monetary and fiscal stimulus, which will have been deployed by then, the stage really could be set for fireworks.
fiscal policy UK economy Citibank
3. UK economy: The long shadow of Covid-19Benjamin Nabarro at Citi has released a report in conjunction with the UK-based research institute, the Institute of Fiscal Studies, setting out the impact of the Covid-19 outbreak – and the public health response to it – on the UK’s public finances. The report sets out three scenarios for growth over the next five years and describes what in turn these might mean for government borrowing and government debt. While there is considerable uncertainty over the path of the economy and the resulting impact on the public finances, says Nabarro, it is clear that government borrowing will be substantially increased in 2020–21 and about as certain as it is possible to be with the public finances that it will reach levels not seen since during the Second World War. Even once Covid-19 has passed — and the public health measures put in place to combat it have been largely lifted — it is likely to be the case that the economy will remain impaired for some time, he says. It is important to note, says Nabarro, that under all three scenarios, most of the increase in public sector net debt occurs in the current financial year. Given the low cost of borrowing, however, he adds further borrowing in 2020–21 which leads to a stronger subsequent economic recovery would most likely be worth doing. Nabarro says it also means that any new policy action that is taken to reduce borrowing need not — and indeed should not — be implemented until the economy is back to a more normal performance level.
US presidential elections
4. Joe and KamalaSen. Kamala Harris was the safe choice for Biden for a host of reasons, so we would not read too much into the decision, writes Andy Laperriere from Cornerstone Macro Nevertheless, he says, personnel is policy, especially when the would-be president is 77, and Laperriere examines how Harris could influence the current election and public policy in the future. In the more immediate term, will Harris help Biden win November? Probably not a lot, says Laperriere, as few voters cast their ballots based on the bottom of the ticket, he adds. The objective of a vice presidential candidate is to do no harm. Harris won’t hurt Biden and may help for several reasons (the support she has from minorities and her perceived readiness to step up to President in four-years time should Biden win this election, but not run for a second-term). Perhaps the biggest downside of her selection, says Laperriere, is that she is far enough to the left that she risks scaring off some swing voters.
real estate The new normal Inferential Focus
5. Rethinking spaces; the repurposing of real estateAs the world continues to adapt to the effects of the coronavirus pandemic, countries, cities, organisations and companies are rethinking how to best utilise the spaces available to them in order to keep citizens, employees and customers safe today and to create viability in both the short-and long-terms, according to the latest report from Inferential Focus. This rethinking of real estate and space is in the early stages but could create long-term changes and liveability improvements in both urban and suburban areas, says the firm. Indoor enterprises without access to outdoor space, says Inferential, could be at a disadvantage as companies re-examine how they value real estate. Indeed, taking advantage of what is available can expand what is feasible, says the firm, which adds just as retailers had to introduce experiences in their stores in order to attract consumers and remain viable, businesses, schools, cities and institutions are now rethinking how to survive in a world of a potentially deadly virus risk and mitigation guidelines.