Summary

Chris outlined the fiscal policy response from Congress which has been aggressive and rapid. The global response equates to about 7% of GDP (and rising) and is far larger than at the time of the GFC, but of course the economic hole is far larger. That said, Chris is forecasting a V-shaped recovery in the US driven by household spending, as cash not spent due to the lockdown, plus payments received from the government, exceed household income lost. The caveat being the re-emergence of the virus. In the short term he noted that complacency is back as the markets have rallied so has removed his tactical overweight due to the expectation (seen historically) that markets revisit lows. This could throw up interesting opportunities particularly in value where the underperformance vs growth has reached extremes not seen since the peak of the TMT bubble. Generally speaking inflation (more below) helps value as operational leverage works, bad debts erode faster and nominal credit growth is higher. Chris’s medium term view is for the emergence of inflation driven by wartime financing. Austerity is unlikely due to the rise of populism therefore we can expect monetary financing of deficits and yield curve control which in turn will result in negative real rates and dollar debasement. In this environment gold and commodities in general, which are at all time relative lows versus equities, should do well. Other inflationary pressures will come from pent up demand and constraints on supply as inevitably some companies fall into bankruptcy and the effects of deglobalisation are felt. Risks – EM country risks not fully priced in. Rising cases of the virus in countries such as Russia, Turkey, Brazil and India where they cannot afford large fiscal stimulus mean they have less ability to contend with the problem economically. In addition external debt is high and there is capital flight risk with widening of spreads leading to refinancing difficulties. A vicious cycle may ensue. Chris would rather be overweight DM than EM here. The second major risk is the Euro break-up. The fragility of Italy is well known as is the fact the ECB is buying Italian bonds to prevent widening spreads. However, once inflation seeps into the system, this may no longer be sustainable.

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