EC Framing The Macro Scenario For The Post-COVID-19 World

  • Most market pundits take GDP and inflation statistics at face value. They shouldn’t.
  • Likely, the economic scenario is more benign than anticipated.
  • That leaves us looking for pockets of value in a market populated with overstretched valuations.

Now that there seems to be a vaccine on the way, we should make some considerations about the current market environment. There is one wrong assumption that most market pundits have about the current economic landscape. I am referring to the consideration that GDP and CPI figures are roughly correct approximations for economic growth and inflation, respectively. They aren’t. I have alluded to that assertion in prior discussions, but I believe that COVID-19 has just exacerbated this point. The growth measures rely on a methodology for the industrial age instead of the digital age. The pandemic brought even more digitalization that does not have a proper reflection in the current statistics. The inflation is likely to be even lower than the current already low figures due to unaccounted productivity gains.

The confluence of these two factors justifies a fast recovery. First, the economic figures may not be as bad as perceived in the media, and second, the low inflation will likely be a fertile ground for further stimulus, perhaps, even before the inauguration ceremony. In this scenario, we can expect a couple of thought-provoking things.

Photo credit: 5chw4r7z

There a couple of other interesting figures that seem odd, given the negativity in the financial media. First, the savings rate was very high prior to the crisis, and it has only increased after the pandemic. That is reassuring in the sense that there is available capital to deploy at a time that the economy needs it so badly.
 

(Source: FRED)
 

Additionally, we can see that, in other recessions, the unemployment rate has been a lagging indicator, only trending lower a couple of months after the recession ended. However, in the present situation, it has already started to go lower. I interpret this as a possible sign that the recession will be short-lived. Only time will tell if that’s a fair assumption.
 

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Disclosure: I am/we are long GOLD, BABA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any ...

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William K. 1 month ago Member's comment

The author sees a lot more sunshine than I do, that is certain. Some signs do look good today, but will that last? People are still getting this disease and people are still dying and death is such a downer for most folks to see happening.

This is not like the more recent recessions because the government keeps shutting much of the business down to prevent the spread of death. One thing is certainly correct, which is that the economy was in trouble before this plague arrived. The savings interest rate approaching zero is irrefutable evidence of that problem. The existence of a problem was clear even to folks like me, not a financial wizard.

And now we have the financial stimulus money being fed into the economy. Certainly a lot of folks do need assistance, and so the help was good, But ultimately the increase in available money will lead to inflation. Not today or tomorrow, but soon. So the stock market will still be making some people rich, there will be a large crowd not getting rich at all. And when that inflation does hit, that large crowd of folks may be rather angry.

Flat Broke 1 month ago Member's comment

How likely is another stimulus package at this point? It seems like our politicians have no interest in even trying to come to an agreement on the matter. Their salaries are secure, so what do they care?

Andrew Armstrong 1 month ago Member's comment

Great read!