The post-pandemic world is going to be different. How different? We are getting a glimpse of it now. Markets and business leaders are watching this closely.
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Over the weekend, I received the results of my youngest child’s school survey of parents and teachers and what they thought about going back to school in the fall. A decent majority of 60.5% of the 2,455 parents surveyed said they wanted their kids in school, face-to-face. About a third wanted a hybrid model. The rest don’t want in-school learning in the fall. But what was the most stark of all was the fact that her school’s teacher survey showed that they were pretty much light-years apart from parents: only 35.4% indicated they were quite comfortable or extremely comfortable returning to in-person teaching.
At-distance learning, and at-distance work is here to stay.
This got me revisiting some of the casual conversations I have every day with boutique investment research firms, private wealth managers, wealthy individual investors, and with the big institutional investors. There seems to be four things they are all looking at, and this was summed up best recently in a Barclays report by Christian Keller, their economist out of London.
In summary, they are: the EU’s new fiscal deal, U.S. stimulus, geopolitical risk of doing business with China and “leaving New York” are all going to be part of our lives immediately following the end of the pandemic. Whenever that will be.
“Remarkable Shift” In Europe
EU isn’t going to let anyone go broke so the government can have a pretty, German-sanctioned balance sheet. Those days are done.
The successful agreement on the EU recovery fund and the EU’s new seven-year budget early last week was long awaited. Austerity in Europe is officially dead.
“The deal signifies an important attitude change, especially by Germany,” says Keller.
It does. Germany has agreed to allow for looser fiscal policy nationally rather than keeping surpluses. Germany may no longer be the surplus state of Europe. This is a huge change. Angela Merkel blinked on that one.
Then there is ECB president Christine Lagarde. Direct lending at zero interest to corporations and the spontaneous coordination with fiscal policy (like the absorption of debt issuance by the central bank’s balance sheets), “is unprecedented,” Barclays analyst Akash Utsav wrote in a note published Friday.
This change in attitude was reflected in Germany, where politicians managed to prevent the German Constitutional Court from ruling to interfere with the European Central Bank’s new QE deal. This is another major change in how the EU is doing business.
U.S. Stimulus Galore
Senate leader Mitch McConnell delayed the release of the newest coronavirus stimulus package to this week after more disagreements with Democrats. There will be new negotiations this week and they can be counted on to be contentious as headlines will surely reflect.
But do not fret: the general consensus among every I’ve spoken to on this — for what that is worth — is that both sides want to claim that they are helping Americans during the pandemic. No one can walk away from this and declare that everything is alright.
The economy was crushed by SARS-CoV-2. Businesses died. Many people lost wages that will never return and are forced to look for new work. Some will be forced to “deskill”. More people were impacted by the lockdowns than the coronavirus.
Barclays is guessing the the new package will equate to another $1.5 trillion and be signed by Trump by August 7. This includes an extension to the generous Fed unemployment benefits of $600 a week, or $2,400 per month, which is actually a pay raise for many Americans who were laid off in low pay service economy jobs.
What does this mean?
It means the narrative that Washington only bails out Wall Street now has to include a footnote to the coronavirus pandemic, where Main Street was truly bailed out like never before.
From here on in, crises of this magnitude will always include a Main Street bailout that at the very least equates to the amount individuals or small businesses would have had to pay in taxes.
This week’s Open Markets Committee meeting is unlikely to be a market mover. Any upgraded assessment of incoming data won’t alter current policy guidance, particularly given the fact that the pandemic rages on in many parts of the country and some states are going back to lockdowns.
Lower for longer is the mantra.
China: The New Cold War
Just a quick aside here: I went to the dump on Sunday to recycle and throw away basic household trash. I know the managers of my local dump, or whatever the official word for it is these days. I was told that China is no longer taking plastic, or certain types of plastic, anyway. For the larger plastic containers typically used to store greens or baked goods at grocery stores, they are instructing people to throw [them] into the trash. China’s not taking it, I was told. But that’s for another time. China isn’t interested in recycling our plastic anymore. It’s actually a big deal as scraps and recyclables is quite often the number one thing states export to China.
Last week’s consulate closures in Houston (China’s) and Chengdu (U.S.) mark another example of “decoupling.”
Secretary of State Mike Pompeo called China a “hegemon” last week in another jab at Beijing.
Over the last couple of decades, China, with the blessing and support of American multinationals, became the go-to manufacturer for everything — cranes, air conditioners, electronics, solar panels, windmill turbines, chemical inputs for cleaning agents like Lysol, you name it. Oh, and of course the ubiquitous surgical masks everyone is wearing these days. And the equipment used to make them all comes from China or Taiwan.
China is an industrial hegemon, especially in Asia.
The U.S. is the tech hegemon. Quick, name a tech brand and its backend and it’s probably American: Facebook, Google, YouTube, Twitter, Amazon, Apple, Microsoft, Oracle. The world uses these products.
But China is gaining.
Huawei is a 5G leader, not Cisco Systems, which focuses on enterprise clients instead. TikTok is the world’s most downloaded app. There will be many more TikToks. There will be many more Huaweis and when that happens American tech hegemony will erode. China is next to be a tech hegemon, not the Brits, not the Russians, not the Indians. All they need are the semiconductors and the nanotech and they have money to burn that never has to be paid back. Bet, they’ll get there before any other emerging market.
Trump told Barstool Sports founder David Portnoy last week that he was no longer as excited about the phase one trade deal, something he once called a “great deal”. The public health crisis caused by the new SARS birthplace — somewhere in Wuhan, China — did him in.
If Trump is re-elected, and at the moment it does not look like the case, the phase one trade deal could collapse. Markets seem to be pricing in a Joe Biden victory, as he is expected to end the trade war with China. If he does not abolish existing tariffs, he will unlikely raise them.
Some investors think that tensions remain, even under Biden.
“Tensions are broadening into something akin to a Cold War, creating a permanent fault line along which other economies may have to align themselves,” Keller says.
Pandemics & Protests Change Urban Patterns
It costs a fortune to live there, and in times of grief, you’re cooped up at home in a 900-square foot apartment that costs $2,500 a month and you now have to pay even more for food delivery because the only grocer near you on foot (cuz, no car and you don’t dare take the subway!) is out of toilet paper, paper towels, and no egg substitutes! What are you doing there? It’s surely not for the nightlife. It’s closed.
The recent pandemic and ongoing social unrest in cities like New York, Portland and Seattle, primarily, are turning people off to costly, crowded urban centers. This is especially true for families who are often stuck paying for private education in those cities, adding to the cost of living.
When you can work from home, why rent in Soho?
This is going to be an interesting trend to watch unfold. It’s happening now, with various ramifications too long to list for our macro-economic purposes here.
But recent data seems to have confirmed some of these broader trends during the pandemic, especially out of New York. Those New Yorkers who were fortunate enough to have property elsewhere left Manhattan to wait out the crisis. Others bought homes up and down the East Coast. Are they second homes? Or are they moving? We don’t know for sure yet.
Last week’s National Association of Home Builders report showed new home demand was rising in smaller metro areas and in rural markets farther away from cities as people look for a combination of larger living spaces, leave current (and potentially future) urban chaos to the younger crowd, and are able to work from home and commute into the city when needed.
The final look into the post-pandemic crystal ball shows people jetting from costly urban centers with greater frequency. This time it won’t be just because of the exorbitant rent and taxes. This time it will be because being in Manhattan during a crisis with no end in sight is unappealing.
“The trend towards reduced spatial concentration, together with a potential halt in past trends of ever-increasing frictionless cross-border mobility are among those we consider the new developments caused by the pandemic,” Keller writes. “That could more permanently affect the structure of the global economy.”