Top Picks: Resilient US Earnings? / Depression Or Recession? / COVID Blame Game

I have to say the quality of research seems to have stepped up over the COVID period and I struggled to cut back my curated list this week. On markets, we feature pieces that have a bullish take on earnings, a bearish take on EM and a revealing take on US politicians’ purchases of stocks.

On econ, we have some dire forecasts on growth including from Ray Dalio, some concerns about inflation in the UK and a discussion on the pandemic trilemma (health, economy and democracy). We also have a blog on how to define a depression and how Fed members’ dovishness depends on their earlier experience with inflation.

Finally, on politics, there’s a good piece on the COVID blame game and China’s true growth rate.

Remember to check out our latest COVID tracker here

Enjoy!

Bilal

Bullish S&P and how US senators are bad stock pickers

62% of SP 500 Market Cap Might Have Better Earnings Than You Think (Fundamentalis, 7 min read) Some of the most substantial market cap sectors, technology (25% of SP 500), healthcare (15%), financials (11%), and communication services (11%), are poised to experience less adverse EPS growth due to their fundamentals or nature of their industry.

My New Theory About Future Stock Market Returns (Wealth of Common Sense, 5 min read) Markets have become macro inefficient due to repetitive Fed’s interventions to smooth market crashes. This has made the stock market (artificially) safer and valuations to rise over time. Creating a potential trade-off – the magnitude of future crises will be lower, but the frequency will be higher

The Emerging Emerging-Markets Crisis (Advisor Perspective, 8 min read) Investors have ignored the vulnerabilities faced by emerging market (EM) countries; synchronized global slowdown, EM debt risk, falling reserves, capital flight risk and COVID cases rising in EM. Proof of investor complacency is visible in the largest emerging markets bond exchange-traded fund. Currently, this ETF yields 5%, similar to the beginning of the year.

Relief Rally: Senators As Feckless As the Rest of Us at Stock Picking (NBER, 14-page read) The study examines the stock trading behavior and returns of U.S. Senators from 2012 to 2020. Stocks purchased by senators on average underperform stocks in the same industry and size (market cap) categories by 11 basis points, 28 basis points, and 17 basis points at the 1, 3, and 6-month time horizons.

What policies can help EM and why inflation will make a comeback

The Making of Hawks and Doves  (JME, 42-page read) Personal experiences of inflation influence the hawkish or dovish leanings of all members of FOMC since 1951. The resulting experience had a statistically significant impact on FOMC voting decisions, tone of their speeches and differences in their semi-annual inflation projections. Accounting for FOMC experiences yields better predictions of the fed funds rate.

Exchange Rate Policy in the COVID-19 Pandemic (PIIE, 9 min read) Economies with significant foreign-currency debt, sharp depreciation could be more inflationary than any benefit from greater exports (amid the crisis). Policies to help these economies include: providing access to central bank swap lines, increasing lending capacity, keeping markets open for exports from these countries and coordinated direct FX intervention by reserve-currency countries.

Even As We Dive Into Recession, Some Worry About The Return Of Inflation (David Smith Economics, 6 min read) Boost in money supply growth (monetary financing of government spending and QE), rapid post-crisis rebound in the economy and supply shortages (as international borders open only gradually) could be inflationary.

The case against austerity but for higher taxes and debt

Beware of Austerity Demands Once the Immediate Crisis Passes (The American Prospect, 5 min read) Cutting spending to address the rising deficit and debt concerns will fail. Taxes are the best way to reverse this. The failure to tax those at the top—not only due to the 2017 tax cuts but also due to decades of supply-side tax policies since the 1980s—has lowered federal revenue (as % of GDP) over time and contributed to income inequality.

Putting Swiss Public Debt to Good Use (VoxEU, 8 min read) Since the adoption of a debt brake rule in the late 1990s – Switzerland has taken less than optimal debt. More appealing options right now are moderate fiscal deficits (handle the challenges of health costs and aging population) and building sovereign wealth fund (deliver a source of revenue higher than the real yield on government debt).

5 Lessons from World War II for the Coronavirus Response (Vox, 12 min read) Most important lesson – policy should focus on relief now (as long as the crisis last) and stimulus later (till the economy rebounds). Centralizing government purchases of medical equipment, repurposing existing institutions availability of materials being constraint and crisis itself creates strong incentives for manufacturing firms to produce critical equipment are other lessons to learn.

Why US consumption will squeeze and what is depression?

What Coronavirus Means for the Global Economy (TED,  53 min listen) Ray Dalio discuss in Ted Connects that the current crisis is worse than 2008 and is similar to that of the 1930s. He thinks the economy will take longer than a typical recession to recover due to the current levels of debt (not the virus ) and will require years of financial restructuring, economic reconfiguration and human innovation for the economy to get back on trend growth.

Back-of-the-envelope Estimates of Next Quarter’s US Unemployment Rate (VoxEU, 6 min read) By combining different types of statistics on industry and occupation composition. The study finds that over 52 million people could be unemployed in the US, with a 32.1% unemployment rate 2Q of 2020.

The Coronavirus Pandemic and US Consumption (VoxEU, 20 min read) In the US, consumption is less volatile than income. But this column argues, it is now likely to fall even more than household income. Reasons include:  negative shock originates from consumption itself, jump in income insecurity as the unemployment rate rises, fall in asset prices and a contraction in credit availability. It estimates consumer spending in 2Q could fall by 20%, for every 16% fall in household income.

The Human-Capital Costs of the Crisis (Project Syndicate, 6 min read) Unlike natural disasters, the pandemic causes no damage to physical capital stock (economy’s productive capacity). But firm-specific skills of labor loses value when the firm that uses them goes bankrupt. This loss of human capital is why productivity, wages, and economic growth are likely to be affected for years to come.

What is a Recession? What is Depression? (CalculatedRisk, 2 min read) Depression is a prolonged slump with a 10% or more decline in real GDP. The market can only expect a depression if the economic slump in Q2 is prolonged years ahead without recovery. If we try to open the economy too soon without the proper preparedness (testing, masks, guidance) – then the economic damage will be more prolonged.

Why 2020 US elections will be Polarised and rise of Pandenomics

The COVID-19 Blame Game Is Going To Get Uglier (FiveThirtyEight, 7 min read) The 2020 election will be the COVID-19 election. Voters are polarized on how President Trump’s handled the pandemic. Not only the US Health care system and the economy will be tested, but its democracy too.

Pandenomics – Policymaking in a Post-pandemic World (VoxEu, 6 min read) Divisive nationalism, increased risk aversion and the need to build resilience will weigh on economic growth years ahead. But resilience will also call for accelerated use of digital technology and harnessing societal pressure which will present opportunities for smarter and more far-sighted governments.

Fresh Tests for ECB after Easter Accord (OMFIF, 4 min read) Pressure on Italian bonds may intensify the take-up of the ECB’s emergency €750bn bond-buying facility. This could become increasingly targeted on Italian purchases, leading to political and legal controversy ahead of the next EU leaders’ meeting on 23 April.

Economist criticism of epidemiologist models and why pandemic trilemma doesn’t exist in reality

A New Indicator of Bank Funding Cost (BIS, 24-page read) Rollover risk is usually measured by the spot IBOR-OIS spread, to estimate expected funding stress- forward IBOR-OIS spreads (FFS) can be constructed. FFS are better predictors of economic and banking activity than alternative spreads on rollover risk and credit risk.

Navigating the Pandemic Trilemma (Project Syndicate, 6 min read) Pandemic has revealed a trilemma: it is impossible to have a medically healthy society, a healthy economy, and a healthy democracy at the same time. In the real world (unlike theory), these trade-offs are not absolute; rather negotiable. For example, widespread testing and contact tracing entails a partial loss of privacy but would be acceptable to save lives.

What Does this Economist Think of Epidemiologists? (Marginal Revolution,4 min read) Epidemiologists fail to account for: long-run elasticities of adjustment ( in the long run you learn which methods of social distance protect you the most), public choice considerations (policy moves from impatient politicians), Lucas critique (agents within a model, knowing the model, will change their behavior) and selection bias (early models were calibrated from Italy data hence more pessimistic).

Tesla gains momentum in China and Chinese space data shows weaker recovery

China Issues Coupons to Stimulate Consumption  (China Daily, 2 min read) Fifty cities have issued coupons with a cumulative value ranging from millions to hundreds of millions of yuan via WeChat and Alipay platforms. Over 80% of coupons are related to the catering industry, and 42.5% are related to the tourism industry.

Tesla’s China Shipments Surge as Shanghai Plant Ramps Up (CX TECH, 1 min read) Wholesale shipments by Tesla climbed to 10,160 units in China last month, more than doubling February figure. Suggesting, Tesla has been gaining momentum at the new Shanghai facility, its first vehicle-assembly plant outside the U.S.

The View From Space: China Hasn’t Started to Rebound (Barrons, 5 min read) Alternative data from space such as pollution, infrared data across supply and night light from the city – shows deep, ongoing contraction in business activity. Raising doubts about optimism and accuracy of recent PMI data.

Why companies will fail to fulfill their ESG goals and how ESG funds got lucky

Putting the Me in ESG (Politico, 2 min read) As we head deeper into the pandemic, companies will not be able to keep up with their ESG goals (primarily environmental commitments). Companies may ditch their sustainable investment plan altogether or reallocate capital for these strategies due to liquidity concerns and reduced profitability.

How Sustainable Investing Really Did in This Bear Market (24/7 Wall ST, 4 min read) ESG outperformance is due to luck. The exclusion of the oil sector and tilt towards the large-cap and value stocks helped generate better returns. But over the last ten years, these factors have underperformed. There is no free lunch, can funds be both highly rated in sustainability rankings and outperform the market consistently going into the future?

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)