October 19, 2020 BARRON’S M11
Market View
Hello, Helicopter Money
DB CoTD: Money From Nothing
Deutsche Bank
db.com
Oct. 15:One of the themes of our “Age of
Disorder” document was that the economic
orthodoxy was changing relative to imme-
diately after the financial crisis. Back then,
we quickly moved into the Greek (2010)
and Peripheral Europe (2012) sovereign-
debt crises. At the same time, Reinhart
and Rogoff’s seminal work showed that
government debt above a certain level
risked bad outcomes. Legendary bond in-
vestor Bill Gross said in 2010 that even
U.K. gilts rested “on a bed of nitroglycer-
ine” due to the U.K.’s rising debt levels. So
austerity and tight fiscal [policy] ruled.
We said in the AoD that this orthodoxy
was fraying before Covid and that the virus
and its aftermath were likely to turn this
180 degrees toward MMT [Modern Mone-
tary Theory]/helicopter-money policies.
Yesterday, this dramatic turnaround in
orthodoxy seemingly got rubber-stamped by
the IMF as they reversed advice from a de-
cade ago and said that most advanced econ-
omies need not cut public spending or even
raise taxes after the pandemic to restore
public finances.
Whether you think this financial alchemy
is economic heresy or not, it doesn’t mean it
won’t be the path of least resistance. With
bond yields at multicentury lows, even with
debt at (or close to) all-time highs, for now
the policy consensus is likely to encourage
structurally high deficits for years to come
or until we have an accident. The fears of
2010-12 have been consigned to the history
books for now.
[In 2020] every country has seen a dif-
ferent mix of outright spending or loans/
guarantees/equity injections, but the scale of
government money committed is extraordi-
nary. With Covid spreading and restrictions
mounting, this won’t be the end of such fis-
cal support and will maybe herald a new era
of fiscal largesse.
—JIMREID
Pricing Power Returns
Daily Insights
BCA Research
bcaresearch.com
Oct. 14:An interesting dynamic is taking
hold of consumer prices. For the first time in
eight years, the three-month annualized in-
flation rate of the core goods CPI [consumer
price index] is superior to that of the core
services CPI. This abnormality highlights
that the service sector has significantly more
slack than the goods sector because the de-
mand for goods has rebounded much quicker
than the demand for services, which suffers
more from social-distancing measures. More-
over, goods prices have a larger international
determinant than services; thus, the quick
recovery in global trade is accentuating the
upside for goods prices, especially as the dol-
lar has been soft. Meanwhile, the rapid de-
cline in shelter inflation is applying a power-
ful break on service prices.
The bifurcation between goods and ser-
vices inflation is set to continue, probably un-
til a vaccine emerges. Without more robust
service prices, it will take time for inflation to
normalize. Nonetheless, deflation risks are
declining. Monetary policy will remain ex-
tremely accommodative for the foreseeable
future because inflation will stay muted over
the next 12-24 months. However, the de-
creasing deflation risk will help corporate
pricing power, especially for manufacturers.
—MATHIEUSAVARY
Earnings-Season Predictions
Weekly Market Commentary
LPL Research
lpl.com
Oct. 12:We are watching for three things
this earnings season:
- Impact of Covid-19. The increase in
analysts’ earnings estimates reflects in-
creased confidence in the outlook, even with
the challenges Covid-19 still presents in
terms of social distancing, various safety
protocols, and shifting consumer behavior.
We have been encouraged by recent data
pointing to a continued steady reopening of
the economy, and we believe the likelihood
that additional lockdowns may meaningfully
impair business activity remains very low.
- Election front and center. As Election
Day approaches, we expect to hear more
about how potential policy changes may affect
companies, particularly those most sensitive
to regulations such as energy, financial ser-
vices, and health care. Questions about regu-
latory risk for technology companies, as well
as digital media and e-commerce, will surely
come up on conference calls, so look for up-
dates there. We think fears of large technol-
ogy-company breakups are overdone, while
health care’s solid earnings outlook is being
underappreciated by the market. We expect
earnings growth only in the health care, tech-
nology, and utilities sectors this quarter, likely
in the low single digits across the board.
- Winners will keep carrying us. Ac-
cording to Credit Suisse, 54% of the market
capitalization of the S&P 500 is on track to
grow earnings in 2020. We believe the
chances are good that the technology sector
and the digital-media and e-commerce inter-
net-industry groups will produce earnings
growth in the third quarter. As long as
those winners keep winning, and we think
they will, they provide a solid earnings
foundation for the broad market.
—JEFFREYBUCHBINDER,RYANDETRICK
Cyclicals: Too Cheap to Ignore
Third Quarter 2020 Market Commentary
Seelaus Asset Management
rseelaus.com
Oct. 6:While we continue to hold some of the
megacap tech companies, recent strong per-
formance has many of them priced for per-
fection. The mania surrounding new IPOs of
companies with leading-edge technologies is
another cause for concern about the froth in
the sector.Snowflake[ticker: SNOW], a
software solutions company with $575 million
of revenue, came public at 55 times revenue,
then proceeded to double! We’re not talking
earnings or a multiple of cash flow. Nope,
Snowflake shares are selling for over 110
times revenue. This is just one example of
speculative excess, but there are too many
stories like this to ignore the warning sign.
The lesson from history is that these fads
and manias always end badly.
So where should you be investing your
hard-earned assets? We won’t get into indi-
vidual company names, but will give you a
hint that we’re not chasing technology IPOs!
Rather, we believe the more traditional cycli-
cal stocks have become too cheap to ignore
and offer exceptional long-term risk/reward
potential. Discount clothing retailers are sell-
ing well below their all-time highs and should
benefit as more states and stores relax so-
cial-distancing requirements. Energy stocks
are so out of favor that even companies with
limited exposure to energy prices, such as
midstream and utility businesses, are trading
at bargain-basement prices...
Another industry where we have been
accumulating intriguing investments is the
automotive sector. No, we aren’t buying
Tesla[TSLA], but we find great value in
the industry, especially in companies that
will be supplying Tesla and others with
leading-edge original equipment and parts
for decades to come. Automobile sales and
production fell dramatically in the spring,
but this summer, due to stronger consumer
confidence and record-high savings from
the Cares Act, people have started buying
cars again and depleted inventories at deal-
erships. As such, prices are improving for
new cars, incentives are decreasing, mar-
gins are improving, and there is less pres-
sure on the suppliers to cut prices. With in-
credibly lean cost structures already, the
rebound in auto manufacturing will lead to
a healthy uptick in margins and earnings
for the leading suppliers. No one seems to
care about any other company than Tesla,
but we believe there is a lot of opportunity
in this undervalued group, which would get
an added boost from additional stimulus.
—JAMESP.O’MEALIA
To be considered for this section, material, with
the author’s name and address, should be sent
to [email protected].
”With bond yields at multicentury lows, even with debt at (or close to) all-time highs, for now the policy
consensus is likely to encourage structurally high deficits for years to come or until we have an accident.”
—JIMREID, Deutsche Bank
This commentary was issued recently by money managers, research firms,
and market newsletter writers and has been edited byBarron’s.