Uddrag fra Merril Lynch:
To plug the hole created by the pandemic shutdowns, governments around the world had
to spend massive amounts of money, creating fiscal deficits of a magnitude not seen since
World War II. This has been the first recession ever in the U.S. with disposable personal
income rising instead of falling, which helps explain why consumer confidence has not
collapsed in line with the experience of past recessions.
Income support, together with the strong understanding of the overwhelming majority of the unemployed that their job loss is temporary, has kept consumer expectations for the economy at solid levels and helped household spending come roaring back after the shutdowns were lifted. It is not a coincidence that the bear market ended the same week the biggest fiscal support package ever was signed into law. We believe this was a major step into a new era of more progrowth monetary and fiscal policy, which also appears to be the message from the fastest, strongest equity bull market recovery out of recession ever seen.
Another important force for stronger growth as a result of the pandemic is the changed
of the current view toward China. An accelerated decoupling of China from the world’s
democracies is underway as attitudes toward China all around the world have been
radically transformed by its actions over the past six months. For example, according to
July’s GaveKal Research, “…the U.K.’s U-turn, reneging on its plan to allow Huawei to supply up to a third of its 5G equipment, shows how international distrust of China is hardening along ideological lines, spurring liberal nations to prioritize national security over economic growth.
The push to expand the G-7 into a D-10, or “Democratic 10,” will gather pace as
political allies coordinate policies to contain China.” While this deepening conflict undermines the efficiencies of globalism, its shortcomings were already glaringly obvious in the supply-chain breakdowns exposed by the pandemic as well as the growing populist backlash against the negative impact of globalization on developed economies. A new, decoupled world that addresses these issues and preserves democracy is likely to take form over the next decade, requiring major new capitalspending initiatives, both in the free world, “D-10 sphere,” and in China’s sphere of influence, which largely includes countries committed to its Belt and Road Initiative (BRI).
As the first country into the pandemic and the first country out, China is about three
months ahead in this new economic expansion, and its stocks have recently broken out into
a new bull market. The quest to lead global technology is making its companies the main
successful competitors to the U.S. tech companies leading the new global bull market.
Emerging-market (EM) equities are performing well in anticipation of this new period
of stronger inconsistent global economic growth. As EMs navigate this new expansion
with separate Chinese and U.S. economic spheres evolving, their options to play one side
against the other will likely benefit their growth.
Recent events seems to have already moved India closer to the U.S. and away from China, while many African nations are bound to China’s side because of their BRI arrangements. In any event, we believe that the prospect of a more dynamic environment for EMs in a stronger world economy is part of the message from the weakening dollar and rallying EM equity markets.
Europe appears to have also stopped lagging in the wake of the pandemic as the euro has
been bolstered by the new arrangement for a fiscal union. The pandemic’s devastating effect on Southern Europe has forced Germany to finally drop its decades-long resistance to fiscal sharing. Otherwise, the euro was not expected to survive. As the biggest weight in the dollar index, a stronger euro is a major factor behind the dollar’s recent technical trend change.
Stronger world growth and increased risk taking are a traditional formula for a softer
U.S. dollar, and that is indeed what we are seeing as the trade-weighted dollar index has
made a “death cross.” The cross of the dollar’s 50-day moving average below its 200-
day moving average is a typical confirmation of a major trend change. This is significant
evidence that the greenback’s era of strength has likely ended. That strength was
directly related to subpar global growth and risk aversion as capital fled higher-risk areas
for safer harbors in the U.S.
A similar message is coming from the stealth breakout in industrial-metal stocks that
has been eclipsed by all the focus on the extraordinary outperformance of tech stocks.
From aluminum to zinc, base metals are currently all showing strength. Silver is breaking
out. Gold was first out of the chute, and the easy U.S. monetary policy that has rendered
deeply negative real interest rates should keep it on trend for $3,000/oz over the next
year, according to BofA Global Research. Less noticed is the fact that “Dr. Copper” has
been outperforming gold recently as the markets sniff out the coming synchronized
global expansion with relative growth improvements outside the U.S.
By moving the developed-market laggards to more pro-active policy, the pandemic had
catalyzed a period of stronger future world growth. This could also true for the U.S. First,
a softer dollar should help boost U.S. growth. The fundamental reason why the dollar has
started to weaken is that U.S. monetary policy has eased more than in other countries.
U.S. rates have dropped into line with the rest of the world after an extended period of relatively higher rates. The U.S. fiscal intervention has also been much greater, particularly to help the U.S. labor market through an extended period of “creative destruction” that the pandemic has catalyzed. In Europe, in contrast, short-time work schemes, furloughs and subsidies helped workers avoid actual unemployment but also helped to reduce labor-market dynamism and put sand in the gears of economic evolution.
These labor-market rigidities are part of a more general tendency to preserve the status quo in Europe in contrast to the more “Wild West” nature of the U.S. economy, where “creative destruction” is given a freer rein.
This fundamental difference helped to explain the relative outperformance of the U.S.
over the decades, as evident, for example, in much higher productivity and per-capita
income levels than those in major European countries. As the acceleration in economic
change caused by the pandemic continues, this fundamental difference is likely to widen
the gap even further, as the U.S. is much more resilient than Europe and much of the
rest of the developed world. This difference is also evident in the disproportionate role
U.S. technology companies increasingly play in the global economy and overall market
capitalization, and the desperate scramble by China to mimic their success by developing
a parallel technology infrastructure.
The pandemic has magnified this gap by helping to move the world more quickly into a
virtualized future where U.S. technology has unmatched leadership. The pandemic made
these companies more valuable. However, that does not mean more traditional value
and cyclical companies are less valuable. As is evident in the breakout in industrial-metal
equity market, a synchronized global expansion with faster growth is considered bullish
for a broader path of equities. The improved relative performance of European markets
despite a much lower proportion of tech highflyers illustrates the point.
