Less Than Sign

The last newsletter of 2020 is brought to you by the less-than-sign.  We are, of course, referring to the shape of the economic recovery post-COVID.  Earlier in the year, it was posited that the letter V would be the winner, but it turns out V was already spoken for.  Ditto L.

W was popular for a hot second amongst the non-V-believers, but at that point you're getting dangerously close to tautology and Elliott Waves, unless you want to get into semantics about whether the middle peak of the W comes up even with the start and end peaks (as with typeface), or gets short-changed a bit (as with handwriting).  

As far as letters go, K is now far and away the dominant narrative for economic recovery, despite itself already being spoken for as well.

And really, K is a bit of a misnomer, since you can't graph a vertical line (valid functions, people!).  But we suppose that "less-than-sign" doesn't have the same easy memefication potential (or strong lobby presence in DC perhaps?) despite being more descriptively accurate, so K wins.  For the sake of truth and trying to avoid the memefication curse that is currently plaguing our society, we will make a valiant Alamo-like stand and refer to it as the "less-than-sign" recovery.  Which, while a mouthful, is still less burdensome than the also accurate "the-right-side-of-the-letter-K" recovery.

In any case, the point is that the economic COVID recovery is completely bifurcated.  There's one group of people doing fantastically well, and there's one that is suffering massively.  By and large, the upper arm of the less-than-sign was already the "upper" part of society.  And the lower arm was already the lower arm.  The COVID response has mainly served to exacerbate the already-growing wealth disparity in this country.  And for that, you can and should rightly blame the Fed, Congress, and many state governors.  Let's recap:

If you were a large corporation, the Fed actively bought your debt in the secondary market.  Yes, even large corporations that went bankrupt.  Hertz issued a bond in November of last year that was part of the main high yield bond ETFs.  The Fed bought those ETFs, thereby effectively owning that particular Hertz bond (along with others).  The November 2019 bond is notable because Hertz declared bankruptcy before making even a single interest payment.  You also, as a large corporation, have access to basically interest-free money once the Fed cut rates back to zero.  Which leads to things like record corporate debt issuance at record-low rates.

If, however, you were a small business, the Fed didn't buy your debt.  Instead, Congress made you take on additional debt via the PPP program that may or may not be forgivable and that you may or may not have been able to even access in the first place.  On top of that, your local state governments likely made you shut down...unless you happened to have certain prominent government figures as clients.

Here's California governor Gavin Newsome and members of the California Medical Association eating indoors, in a group of more than 6 people, none of whom are of the same household.  The occasion?  A prominent lobbyist's 50th birthday.

Here's a picture of a California hair salon that got raided a couple days ago by armed and body-armored cops.  Their crime?  Being open...and not having Nancy Pelosi as a client.

​No snappy picture of this, but also in California, gyms in government buildings were allowed to operate while private gyms were shut down.  What is it with that state?  (Actually, we'd posit that California exemplifies a very typical "us/them" mentality common to populist leaders...they're just of the liberal populism variety as opposed to Trump's conservative populism.  But that's a piece for a different and yet-to-be-developed political newsletter.) 

We're not going to dive into the various individual experiences of the COVID response other than to note that broadly, the industries most affected by layoffs (mainly the service sector) tend to be of the more minimum-wage, financially-insecure, no-401k variety.  So you get things like home prices (blue line below) at all-time highs while unemployment (U6 - red line below) still sits at 12% and 30-40 million people are at risk for eviction (not graphed).

Things like food bank lines unseen since the Great Depression all across the country.

Things like both the number of people dependent on food banks and the number of people in the centibillionaire club both doubling this year.

In terms of Congressional response on an individual level, unemployment assistance was expanded (if you were able to access it - see 'issues with PPP disbursements'), and a one-time $1,200 check was sent out back in May.  Any additional assistance was held up over political posturing ahead of the election, and a further $600 was just authorized this week.

Bear that in mind the next time you may be tempted to think your government cares about you - their election was more important than supporting the (then) 23 million unemployed people (now more like 11 million) and the anticipated 50 million who are/will be experiencing food insecurity next year.  "For the people", yeah right.  

Here's Larry Summers - Clinton-era Treasury Secretary, Obama-era Director of the National Economic Council, and likely experiencer of complete food security on why "$2,000 checks would be a pretty serious mistake." (Yes, that's a direct quote).  Why is that, Larry?  Well, it's because "[w]hen I see...Bernie Sanders and Donald Trump getting behind an idea, I think it's time to run for cover." (Another direct quote).  Gee, thanks Larry, very insightful.

​Larry's actual argument is basically that stupid - he argues that total household income relative to the economy's potential is above normal levels, so even the $600 forthcoming elevates total household income to "abnormally high levels", and therefore no further stimulus is needed.  

Which is completely asinine in a less-than-sign recovery.  It's like..if a teacher had half the class fail and half the class get A's and then said, "well, the total score across the entire class relative to the total possible score on the test is roughly in line with a historical C average, so all good here!".  Or Marie Kondo going, "well, half these clothes you hate but half bring you a lot of joy, so on the whole, and relative to the average amount of joy you're used to, I'd say your closet looks great!"  

The $600 stimulus checks make up about $160B of the $900B stimulus package.  Bumping that up to $2,000 per check à la Larry's Trump/Sanders nightmare would bring the total spend to $533B.   For context, that additional $373B is just slightly over 10% of the $3T that the Fed pumped into the markets over the course of three months back in March-May.

See, Larry is the economic equivalent of a California politician.  You can't give $500B directly to the people, you have to give ten times that much to the top of the economy and watch it trickle down!  (Trickle, because so much gets siphoned off by the Larrys of the economic world).  We wonder if Larry would be more amenable to $2,000 if the income limits didn't preclude him from getting a check himself?

(At this point, it is perhaps necessary to reiterate that while we are not proponents in general of UBI, we strongly believe that government and those in leadership positions have a responsibility to the people under them, and if the government response to COVID is an un-nuanced, ham-handed restriction of peoples' right to earn a living, there is a corresponding fiscal responsibility to replace it for as long as the restriction persists.)

So where does that leave us for 2021?  We would argue that our thesis presented earlier about modifying the traditional P/E ratio with a liquidity variable has been borne out this year.  We expect markets to continue to move higher into next year as the doubling of the Fed balance sheet seen this year remains on the books and earnings move higher thanks to a vaccine-enabled removal of the grossly inappropriate blanket shutdown policies that are still in force nearly 12 months on.  In fact, we wouldn't be surprised to see markets up low double digits on the year regardless of the underlying economic picture, regardless of the Senate runoff elections in Georgia, and even regardless of whether Biden or Harris is President at the end of the year.

Of course, there are risks to that view, notably around inflation, taxes, and a fabricated war with China/Russia/Iran/whoever we're told is the bad guy du jour now that the hawks are back in power.  But for now we'll end on the optimistic note of an up market again next year and raise a glass to wishing you all health and happiness in the New Year.  Cheers!