Summary

David argued that the disconnect between capital markets and the real economy isn’t what many people believe. HCWE’s analysis is closely aligned to classical economics, a la Adam Smith et al. This stock-market downturn was not much different from the last five. Sharp declines are followed by sharp rebounds. On average in the first 12 months following a downturn you have super normal returns, followed by good returns over next 12 months and it’s only in the third 12 months that you get sub-normal returns. This downturn has seen a much more rapid recovery - the ‘half-life’ has moved from 8 months to just two and a half weeks. Whilst we are seeing a complete rebound in the US, Japan, and Switzerland, the Emerging Markets have only seen a 50% rebound._ _Capitalist economies driven by free markets have the best conditions for resilience. The US economy was actually accelerating in Q1 at 3% growth which not many people realised. So at least in terms of the US, David does not believe we are in a recession, he calls it an interruption, although history will claim a recession due to the superficial definition of a fall in GDP over two quarters in succession. He doesn’t believe the IMF, OECD, World Bank and many other bodies prediction of a great depression situation is likely at all and David sides with Ben Bernanke who has described the recent crisis as akin to a snowstorm which once over will see GDP bounce back._ _David believes the dark side of the situation is unemployment. The labour market was not in good shape as we headed in to 2020 despite the supposed three and a half percent unemployment rate. This rate is not well measured; David proposes a different way of measuring labour-market health by dividing the amount of employment by the population of working age. **The labour-market side of the economy doesn’t have resilience, as it’s shown over and over again, so this is where the disconnect lies with the stock markets. Take the recession of 2008; at the beginning of this year it had taken 12 years to get only halfway back to pre-2008 labour-market health. The stock market is not pricing in unemployment levels, the un-resilient side of the economy.** Its job is not to be a labour-market indicator; its job is to price earnings, which are a function of output. David is predicting that real GDP will outperform its average in the medium term whilst employment will underperform. That actually creates favourable conditions for stock market returns as growth in employment is not positive for earnings._ _He doesn’t believe that we have inflation round the corner; he uses the Consumer Price Index for the goods sector of the economy for his inflation forecasts as he finds other indicators slow-moving and inaccurate. In a crisis, credit spreads are no longer an accurate way of measuring the health of the economy. Corporate bond markets are very illiquid and are distorted by the Fed’s buying of corporate bonds.

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