Monumental Shift: How the US government manages taxes, spending and debt will forever be changed in the wake of the Covid response. As Bloomberg reported this week, “Forced into record spending by the threat of another Great Depression, policy makers are blurring the lines between borrowing the money they need and simply creating it.” This transaction, known as “monetary financing” is the process by which the Federal Reserve buys the bonds sold by the government to cover its fiscal deficit spending.
As a result, “We’ve had a merger of monetary and fiscal policy,” says Paul McCulley, the former chief economist at Pacific Investment Management Co. “We’ve broken down the church-and-state separation between the two.”
Found the ‘V’: Latest Redfin data shows home buying demand has now fully recovered after being down 34%:
Auto Nation CEO Mike Jackson echoed the positive sentiment. “Families are planning to drive on their next vacation & they want personal space. There’s obviously pent up demand.” As we look for signs on how the reopening is progressing, analyst Bill McBride outlined two notable high frequency metrics: TSA checkpoint travel numbers and year-on-year change in diners (via OpenTable).
On the Recovery: In an interview this week, Economic Cycle Research Institute’s COO Lakshman Achuthan outlined his analysis pertaining to the prospects for economic recovery (assuming no incremental Covid fallout). ECRI characterizes recessions by three characteristics: diffusion, depth and duration. Given the recession was initiated by a sudden stop, it had far reaching and substantial impacts (the first two D’s). Mr. Achuthan thinks the third ‘D’ -that of the recession’s duration- could be substantially shorter, possibly ending this summer. After the recession ends, however, a vibrant economic revival would still be TBD, “you can force a recession, but you can’t force a recovery.”
Stretched Valuations: The S&P 500 closed the week at 2,863. According to Factset, the current P/E multiple on the S&P 500 is 22.1x based on 2020 estimates ($129.16) and 17.4x based on estimates for 2021 ($164.68). At these valuations, given the additional risks around Covid impacts and further earnings erosion, risk premiums (the excess potential return investors demand today) are quite low by historical standards.
Fed Follow Through: Consistent with the establishment of the Secondary Market Corporate Credit Facility, the Fed waded into the risk pool for the first time *since its inception* this week by purchasing credit ETFs. The stated purpose of such purchases is to smooth out market functioning.
Meaningful Escalation: US/China tensions increased this week. MNI reported China wants easier US trade terms, saying China would be unlikely to meet import commitments, and wants an extension of the timeline or reduced commitments. The FBI issued a warning that China is likely launching cyberattacks to steal coronavirus data. In a largely symbolic gesture, the US Thrift Savings Plan (TSP) halted a plan to shift some of its investments into Chinese companies. On Friday, the Trump Administration moved to block shipments of semiconductors to Huawei Technologies from global chipmakers.
Investment Wisdom: Howard Marks is an astute analyst and insightful market observer. He has been writing and publishing monthly memos (which are archived here) since 1990. CFA Institute will be broadcasting an interview with Howard Marks as part of the now-virtual annual conference next week. You can sign up for the free event here.
I will close it here for the week. Have a great weekend.