As the economy starts to re-open, the markets begin to plan its recovery and actions for the next 6 to 9 months. The Federal Reserve is monitoring and ready to increase inflation if necessary.
Leslie Cliff: [00:00:00] Welcome to the 13th COVID weekly video with Wayne Wachell and Leslie Cliff, Genus Capital Management. Wayne, I’m not going to waste any time. Let’s get right into it. What happened this. The market was down this week. But how did you see it?
Wayne Wachell: [00:00:14] Well, the market really did well since the economic news broke last week. And a lot of us, the beat up areas like the cruise lines and the airlines, were doing very well. Come back big time. And I think there are a lot of equestrians in that train, riding that train all the way up here. And the market, you know, it gets to a level. It hears what it wants to hear. And I don’t think the news from Jay Powell was that bad, actually, as expected. I thought I was just it was bang on.
Leslie Cliff: [00:00:42] What was the news from Jay Powell?
Wayne Wachell: [00:00:43] That they’re going to have to keep on going, keep rates low to 2022. That the economy is going to take about two years to come back. I think the market expects that.
Leslie Cliff: [00:00:53] Right. And do you think he was really talking to the government to say you guys have to do more?
Wayne Wachell: [00:00:57] That was that was part of it. But I think he was just expressing the fact that in many ways, the message to the market don’t get too crazy here. We still have some work to do. And the good news here is that he’s saying, I’m going to be there with lower interest rates until we get a recovery going. So it was all good news as expected, that I expected the least. Yeah, I think most market participants have expected and what the market had gone a long ways was due for a bit of a breather and it got one.
Leslie Cliff: [00:01:23] Just to remind people, the top of the market was about thirty three hundred. It went down to twenty three hundred. We came back to twenty eight hundred, but a 50 percent retrenchment. We said it round 20, headed for quite a while and then we bumped up almost a third of three hundred and we back down now to thirty one hundred. So probably be surprising Wayne in my mind that we stuck around the twenty eight hundred level for a while.
Wayne Wachell: [00:01:46] We have, we have some work to do. It’s not going to be a straight line up here. There’s still work to do. Also this week, COVID-19. There are some someplace like Arizona. There was a bit of an outbreak. I went back and checked the overall numbers. Look at the U.S overall numbers. They’re still coming down. New York is dropping probably faster than Arizona is going up. So overall, there’s no issues here, but people are just nervous about any kind of outbreak of of COVID-19. It’s going to keep happening, I think, as they open the economy, if there’s going to be pockets of it and everybody has to be vigilant. And I think the market understands that is discounting that. And that’s why you’re seeing economic forecast taking two years to recover where we were back in back in 2019.
Leslie Cliff: [00:02:26] Well, I don’t want to beat a dead horse because we probably have covered this before. But the Genus stock signals went positive in April, and they were positive again in May, and the positive again beginning in June. So maybe just give us two or three reasons why they’re positive.
Wayne Wachell: [00:02:41] Well, the big reason I’ll give me one reason is the Fed. The Fed has basically pushed money supply up the global monetary basis, jumped like six trillion in three months. It’s it’s amazing the money supply in shopping and probably around 90 percent annualized over the past three months. They’re flooding the system with money and that’s having an impact on all the risk parameters, the risk gauges we look at like corporate spreads. That’s hammering those down as well. So the Fed is a big part of it. Also, the U.S government’s coming in with 44 percent of GDP spending over the next six months, which is helping mitigate some of the risk as well. So risk is not the risk alarms are going down and the money supply is going up. And that’s kind of what’s keeping things buoyant here. And just one one comment from Jay Powell said he was saying, we’re not even thinking about thinking about raising interest rates. So that’s it’s way off.
Leslie Cliff: [00:03:30] It. I also find interesting that there’s been a trillion dollars of investment grade debt being raised since he announced that he’s buyers of credit. He’s going to do what it takes to create liquidity through this downturn. The asset managers kind of got in front of them and started buying the high yield and corporations got in front of them, too, and started issuing debt. It’s actually been kind of a clever communication tool that reaches the market. I’m going to be buying corporate debt so the market goes, let’s get there before them and issues the debt and asset managers buy the debt and then he comes along. So he’s created another trillion dollars of liquidity by just his message.
Wayne Wachell: [00:04:09] Well Central banker. Central bankers can do a lot by just job and talking about what they’re going to do and get the markets, the markets to move in their favor. And the market knows the front runner. So we saw that happen again.
Leslie Cliff: [00:04:19] You’ve got to think that Paul is doing a good job here.
Wayne Wachell: [00:04:22] Yes, he is. He’s he’s got it down. His communication skills have definitely improved this first. This first couple of months.
Leslie Cliff: [00:04:28] Of. So I thought what’s going on in the bond market? We mustn’t ever forget that it’s the plumbing of what’s going on. Just in terms of, though, the Fed issuing more and more debt. And I saw a great chart from a competitor, actually, that showed the last time we had this kind of debt after World War Two debt to GDP of over one hundred percent, 110 percent. If you look at what 10 year real return government bonds did post that event, they went down to like negative four, negative five percent. So, that doesn’t mean the coupons negative four, negative 5, but the real return after inflation for 10 year bonds. So that’s the way we get out of this. Well, the way we got out of this world after World War Two was to inflate our way out of that, make this debt in absolute terms, can’t shrink, but in relative terms shrink. You think that will happen?
Wayne Wachell: [00:05:19] I think there’s they have to generate some inflation and they have to keep rates low. And, you know, they’ve been trying to get two percent inflation going here and they haven’t been able to do that. And to get two percent, you really have to get to three percent inflation to keep it going. So I can see potentially inflation being three percent and TBR still being at zero percent at some point time. So you can happen to get to get things going. And that’s happened in the past. It could happen again in the future.
Leslie Cliff: [00:05:46] The other big thing that’s happening that’s I think, weighing on everybody is the unemployment, about. Yes, it was better May than April that came out this week, but it’s still 30 million Americans unemployed. And the disconnect to me and I think to a lot of investors is the there’s a lot of those unemployed people don’t work for public companies. They work for private companies. And the percentage of the unemployment of public companies is way lower. And so the public companies just aren’t in the same mess that Main Street is Wall Street is doing way better than Main Street and that’s hard for people to understand where this market go up when the newspaper news is so poor.
Wayne Wachell: [00:06:25] That’s a good point, because companies like Facebook, you look at their revenue per employee. It’s massive and it’s it’s it’s all technology. Right. And it’s they generate cash flow and it’s it’s having a big impact on their value. And they’re not being impacted right now. Everybody’s on Facebook because of the COVID. So, you know, I again, I’ll just say that the market looks six to nine months forward. And the recession has bottomed. It’s starting to improve. And the market’s looking forward six to nine months in advance and trying to find the inflection point and that inflection point going to beat expectations. Will the economy beat expectations? And so the market’s probably focusing on some sort of a trajectory, like Powell said, two years to recover fully. And if we beat that, we can probably go higher. But remember, there have been some big, big winners in this marketplace. We talked in the past of technology and health care, consumer staples. Those areas are about 60 percent of the overall S&P 500. And this scenario couldn’t be better for them. Financials are around 10 percent in the US. More in Canada here, obviously. What the real losers, the airlines, the car rentals, restaurants. That’s only 10 percent of the overall market. And so really net net here for the overall U.S. market, the markets, the news has been pretty good.
Leslie Cliff: [00:07:43] So bottom line, I think that our clients should know,is that we’re positive on the markets. We wouldn’t be surprised if they pause here. But we don’t see any big air anymore. Any big air pockets in front of us.
Wayne Wachell: [00:07:54] Yeah. You know, the whole point here is we turn the corner in terms of the economy. We’ll start seeing the numbers improve. The Fed is behind us big time. Don’t fight the Fed. And there’s gonna be a bunch of money spent by the administration and both Canada and U.S and around the world. So. Forty four percent of GDP in the U.S, the coming six months. And there are some big winners in this space as well. And also, I do have some faith in entrepreneurs and businesses. And you’re seeing a lot of these resources being shifted in the economy from from restaurants going to delivering their own their cooked meals to homes. These kinds of things, you’re seeing it happen in front of you where the economy is, is restructuring, reforming two different way and cruise lines and airlines are still going to have an impact restaurant. If you look at Open Table, for example, restaurants are still down 50 percent from where they were. Airlines are probably the same thing. Still down 50 percent. It’s gonna take a long time for them to come back. And people’s habits are also changing in terms of we’re doing more Zoom meetings, less traveling. So we’re accelerating to that digital economy. And because of that, there have been winners, but also big losers.
Leslie Cliff: [00:08:58] Yeah, well, I think that’s enough for one week. I think what we need to remind ourselves is this is a marathon. It feels like we all wanted to end now it’s getting better. So it’s like all of us have this emotion to leave it behind. Now it’s over. Well, on the weekend in British Columbia, there was a family gathering of 30 people and fifteen of them got COVID from a family gathering. So we need to use, as Dr Henry says, our common sense. We’re in this for the long haul and it’s not over yet, but the markets seem to have recovered. Please call your portfolio managers. We’d love to talk to you. We’re afraid to call you because we’re afraid. We make you nervous if we just call you out of the blue. So please call us and we’ll talk to you next week. Thank you.
