Summary

Barry Knapp gave a bullish presentation on the US economy and markets, focusing on how this has been a short, sharp recession; comparing it with that of the credit control recession of 1980 when Jimmy Carter was President, when the economy also ground to a standstill. Interestingly, the Carter credit controls cost him the election as an 18-point lead on Ronald Reagan in March ended in a 9-point loss in November. Trump appears on the same trajectory, though the velocity of the recovery offers him a path forward, though he has a steep hill to climb at present. Barry views the March low as the beginning of the next business cycle, while most economists and strategists continued to describe conditions as recessionary and positioned themselves defensively. Barry noted the strongest returns occur at the beginning of a new cycle and recommended overweight in cyclicals. It has been a classic recovery with small caps and early stage cyclicals outperforming, the only exception is financials. Ironsides Macro take a differentiated approach when looking at the labour markets. Each month most economists and market participants focus on net job creation; however, 150,000 increase in payrolls represents 10bp of total employment. Ironsides analyse labour market flows, each month there are 6m hires and 6m separations, the majority voluntary. The focus on flows in the weekly jobless claims reports led Ironsides to conclude that a much larger number of workers were returning to work than consensus forecasts implied. On Fed policy, Barry believes the primary effect of QE is that it suppresses volatility due to the Fed purchases of mortgage-backed securities and assumption of mortgage prepayment risk. The vol suppression channel is the driver of search for yield and excessive fixed income valuations, this also impacts stocks with bond-like characteristics. QE is inefficacious with respect to the equity risk premium for economically sensitive cyclical sectors. In other words, QE effects utilities, REITs and defensive sectors, it does not have much impact on cyclicals or equity volatility. Barry believes the COVID crisis differs from the ’08-’09 recession in that it is not a financial cycle. Reinhart & Rogoff taught that the most persistent post-financial crisis macroeconomic effect is a decade of disinflation, even when massive currency devaluations occurred. Given decade-long declines in household and financial sector debt to GDP ratios, whilst government debt has shot up, we should expect to see big tax increases and governments trying to inflate their way out of debt. Additionally, as supply chains move away from China, we will see upward pressure on headline inflation as goods deflation dissipates. Schumpeter’s Gale is another term for creative destruction which accelerates during recessions. Profit margins in the US are the highest in the developed world because of the technology sector, as technology is diffused into additional sectors it is likely the three decade increase in S&P 500 margins will extend to another higher high. Three deadweight sectors in the US have been a major drag on productivity for last four decades; education, healthcare and housing. The COVID crisis is forcing technology innovation adoption and this should persist throughout the 2020's. Very bullish Financials - the sector has seen assets increase by $2tn with a $700bn increase in loans, so expect to see strong returns in the banking sector. Barry likes Industrials as well, as he believes there is going to be a very strong counter cyclical rally in global exports and global trade.

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