A discussion about how much the US economy, or the immoveable object can withstand COVID 19, the unstoppable force took part with various affiliates of Legg Mason yesterday. Now that signs of a second wave of the pandemic are apparent, this is a vital topic.
The US Federal Reserve has brought in measures that while may seem extreme, have proved to be successful, so far. John Bellows, a portfolio manager at Western Asset Management, said that the Fed had to act as the US treasuries market was in effect broken in March.
“The Treasury market stopped functioning in March. The Fed started buying $75 billion of bonds a day [unprecedented] and essentially fixed the market,” he said. Adding that it was this event that led to other dislocations in the market, Mr Bellows thinks it will be a long time before the Fed exits the market.
“We’re a far way away from being well economically,” Mr Bellows declares, citing the unemployment rate as one statistic that makes it impossible for the Fed to start tightening policy. He doesn’t foresee the Fed exiting the economy until 2022 at the earliest.
Tim Wang, head of investment research at another Legg Mason affiliate Clarion Partners made a reference to one famous Wall Street axiom, namely ‘Don’t fight the Fed’ and in this case it would pointless as it is really attempting to benefit investors.
Mr Wang said although the deficit is now hitting $4 trillion dollars, given the ultra-low interest rate, additional borrowing is not too much of an issue. He did add “I feel sorry for my children,” as they may face the burden of having to pay for the huge amount of stimulus the US economy has needed.
The moderator of the discussion, Jeffrey Schulze, investment strategist at CrestBridge Investments, gave some context to what a post COVID US looked like. He stated that year-to-date 40 million jobs had been lost although some good news was that compared to other recessions, policy makers knew quite a bit about this event as it was a pandemic, allowing them to ‘short circuit a normal recessionary event’.
He added that the latest resurgence of the virus shows it’s not seasonal and it will slowdown the reopening of the economy. As the number of daily cases has risen but the number of deaths has decreased, “as long as hospitals aren’t overwhelmed we can deal with the new normal”.
Margaret Vitrano, a portfolio manager at CrestBridge, said she was ‘living with the increased volatility every day” although in reality COVID had accelerated trends that were already apparent in both the economy and the stock market.
Ms Vitrano cited that while mall traffic had been in decline for the last seven years, the virus had accelerated the trend, with online retailers being the obvious beneficiary of the decline. She added that tech holding up well was another trend COVID had accelerated, with Netflix enjoying a surge during the lockdown.
When asked which companies Ms Vitrano favoured, she picked out Booking.com which due to its variable cost structure should do well in a market with limited visibility. She also liked electric vehicles as a trend, meaning that rather than just buying Tesla stock, she was investing in chip makers and other companies supporting the burgeoning sector.
While it was clear from the discussion that COVID still represents a huge threat to the financial system, there was a consensus on how the amount of debt in the system should not be viewed as a systemic risk. Unlike the 2008, financial crisis, most of the companies becoming highly leveraged are non-financials. As Mr Bellows said, “what we know is that higher debt on corporate balance sheets slows cap ex which may lower productivity,” but does not represent a real risk to the US economy, although it may well lead to slower growth.
