3/3/2021: Market Update by Jack Ablin, Chief Investment Officer at Cresset
The COVID-19 pandemic not only turned our world upside down, but it helped to accelerate trends that were already in motion long before we knew what COVID meant. Remote working and learning were both in their infancy several years ago; now Zoom meetings and distance education are commonplace. As of last year, there were 300 million Zoom users worldwide – a 30-fold increase in users of the virtual meeting platform in less than 12 months. Online learning, which enjoyed steady growth going into 2020, witnessed a global explosion as classrooms shuttered worldwide. In 2017 online education was projected to grow at a 24 per cent annualized rate through 2023, and that was before the pandemic pushed classrooms onto the Internet.
Income and wealth disparities had been widening for decades before the pandemic. In the decades leading up to 2020, top-earning households enjoyed substantially higher income growth than lower-income households, thanks to knowledge jobs, education and intellectual property protections. COVID-19 was a wedge that widened that chasm. As a result of the lockdowns, the US economy hemorrhaged 22 million jobs between February and April 2020, and clawing back another 11 million positions from April through the end of the year, according to the Bureau of Labor Statistics. Low-paying “leisure and hospitality” jobs bore the brunt of the slide, comprising nearly 40 per cent of all pandemic job losses to date, while higher-paid workers were able to maintain their jobs, and income, by working remotely. Currently there are 3.8 million fewer leisure and hospitality jobs than existed pre-pandemic.
COVID-19 also accelerated state migration trends that were already in place thanks to a combination of tax rates and demographics. New York City lost more than a quarter of a million residents in 2018, according to US Census data, while Phoenix, Fort Worth and San Antonio expanded. U-Haul, the trailer rental company, compiles a state migration index based on the direction of one-way rentals. According to the firm’s 2020 data, Texas, Florida and Arizona benefitted at the expense of California, Illinois and New Jersey, according to the company’s calculations.
Monetary policy trends accelerated as a result of the pandemic. In a strategy popularized by Alan Greenspan in the mid-1980s, the US central bank combatted recessions by ratcheting down the “real” Fed funds rate (the overnight borrowing rate relative to inflation), bringing forward future growth through borrowing. While the success of the strategy has been widely acknowledged, the resulting continual downtrend in inflation has left the Federal Reserve with less flexibility to maintain an overnight rate substantially below it without pushing overnight rates into negative territory, a move made by some central banks. Chairman Powell hopes that increased fiscal spending, which includes the $900 billion spending package in December and the $1.9 trillion program approved this week, will boost the inflation rate, giving the Fed more wiggle room. Higher inflation would enable America’s central bank to effectively lower the real overnight rate by simply sitting on its hands.
President Biden’s COVID-19 relief bill promises to give spending money to millions of America’s households. Last year’s spring stimulus added more than $2 trillion in real disposable income, according to the Department of Energy. New programs are expected to increase real disposable income between $1 and $2 trillion, or about 10 per cent of GDP. We expect, as does the Fed, that stimulus checks, combined with economic reopening in the H2/21, will boost inflation. We wouldn’t be surprised to see transitory inflation rates reach the 4 per cent range later this year. Meanwhile, Chairman Powell has pledged to stand pat on overnight rates. The combination of higher inflation and zero per cent overnight rates means the real Fed Funds rate could approach -4 per cent later this year, which would represent an all-time low.
Negative real rates make holding cash increasingly unattractive, since a zero per cent bond yield will not keep pace with living costs that could expand at upwards of 4 per cent. This suggests real assets, like gold, would do a better job of preserving purchasing power. As long as overnight rates are near zero, the yield disadvantage of holding gold has evaporated. History has shown that gold thrives as real interest rates fall. Our gold vs real rates model suggests that gold could gain more than 40 per cent if real rates were to slide to -4% this year.
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