Year Of The Gripping Hand

I talked with Richard Fisher this week, former president of the Dallas Fed, who is on the PepsiCo (PEP) board. He noted that under the urgency of COVID-19, consumer goods companies like PEP have accelerated innovation, productivity, and brand positioning over the past nine months that would otherwise have taken five or more years.

It is not just consumer goods companies. An enormous amount of innovation has been pulled forward in a wide variety of businesses and industries. Hundreds of teams of brilliant scientists singularly focused on one problem. The incredible discoveries they are making and the knowledge that they have developed will be applied in scores of different fields.

We would be in a far worse position right now if not for the hard work of millions, everyone from healthcare professionals to farmers, warehouse and delivery workers, store clerks, and others who risked their health to keep society going. Add to that list the scientists and entrepreneurs who developed the vaccines that will get us out of this, and figured out how to do business in tough conditions.

Fourth, US trade policy should change for the better this year. President Trump’s tariffs — one of his worst mistakes, in my view — won’t disappear instantly, but hopefully the Biden team will take a much more nuanced and focused approach and ditch the tariffs. They are attacks on American consumers.

The president-elect says, at least, he will continue taking a hard line against China’s unfair practices. He should. But I think he will be more conscious of minimizing the collateral damage to our own nation, and will return the US to organizations like the WTO. This will be critical as we try to get the world economy back on its feet in 2021.

Note: I am an unapologetic proponent of true free trade. But I also recognize that we need to help workers that are caught in the crossfire. The benefits of free trade cannot accrue only to a portion of the country. They must be shared widely, even if that means government assistance for some workers for a period of time.

So those are some reasons to be hopeful about 2021. But remember, we have three hands.

Four Challenges

This year will bring challenges — some we may not yet foresee. But I can already identify at least four.

First, the pandemic is permanently changing certain parts of the economy. I’ll start with the one most familiar to me: business travel. It came to a screeching halt last spring. Airlines, hotels, and so on have since recovered a little but are nowhere near normal, nor are the most profitable. They’re just holding on.

The problem is their best customers have now learned how to do business with significantly less travel. I, for one, look forward to flying again, though I doubt that many of us will do as much as we did in the past. I don’t see large conventions (that require months of planning and preparation) returning until late 2021, at best. And even beyond that, I bet they’ll be smaller. This is bad news for that industry and entire cities, like Las Vegas, that depend on it.

Second, these changes will cascade through the economy. When a restaurant or hotel closes, its workers, suppliers, and landlord suffer, too. The impact on commercial real estate has barely started, but I think will be gigantic. The post-pandemic economy will need fewer shopping malls, retail strip centers, hotels, and office buildings. At the same time, we’ll see higher demand for warehouses and shipping infrastructure. It will all sort out, but will take time. And there will be losers.

As for housing, close to 40% of rental homes and apartments in this country are owned by small investors who now have difficult choices. Are they better off working with distressed tenants, particularly when stable tenants are in short supply? As I’ve repeatedly said, the world, and by that I mean almost everything, is going to be repriced.

Third, after almost a year of radical, unprecedented Federal Reserve action, it’s not clear whether we actually have functional capital markets anymore. The bond market, at least, is totally at the Fed’s mercy. Their purchases of Treasury bonds and corporate bond ETFs have let the government and large companies borrow huge amounts on some of the best terms in recorded history. This cash isn’t necessarily being used productively, though, which is going to be a big problem at some point.

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Disclaimer: The Mauldin Economics website, Yield Shark, Thoughts from the Frontline, Patrick Cox’s Tech Digest, Outside the Box, Over My Shoulder, World Money Analyst, Street Freak, Just One ...

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