Once Covid-19 is over, we’re going to see an economic boom
After the dust from the pandemic has settled, we’re in for a consumer boom and a huge bout of government spending, says John Stepek. Here’s how to take advantage.
The cards are falling into place for a massive economic boom. I know – that sounds weird. Headlines are full of Covid-19, Brexit, and enough tiers to shame your average Kardashian’s wedding cake. And yet – looking through the short-term gloom, it looks to me as though there’s a good chance that we will indeed be lined up for a “roaring 20s” when we come out of all this.
Let’s take a step back here. I’m keenly aware that Covid is still around. However, we now have a vaccine. In fact, we have lots of vaccines. Come this time next year, we’ll probably have a glut of vaccines and the papers will be full of stories complaining about how public money was wasted securing supplies of the same things that they were clamouring for earlier in the year.
Anyway at some point next year – quite likely within the first half – we'll have managed to get ahead of the virus. Governments will have varying approaches to further lockdowns, but however confused those strategies are, they will be less strict than they were.
A very, very weird recession
Now, I don’t buy the idea that this period has changed people permanently in some way. I’m more of a believer in the “pent-up demand” argument. The biggest risk to consumption is unemployment, not some sort of mass psychological ailment. On that front, this recession has undoubtedly been grim. But it also has the potential to be a lot less damaging than the aftermath of the 2008 financial crisis.
Richard de Chazal of wealth manager William Blair put out an interesting report last week. He made the point that Covid has been a very unusual recession, with some very odd effects: “It has been very short and very sharp, and many households will be exiting the crisis with balance sheets that are in even better shape than when they entered the crisis.”
How so? De Chazal looks at the US specifically, but a lot of the lessons could be applied to the UK experience too. If you look at US households in aggregate, then they’ve used the time in lockdown and the money received from the government to pay off their debts. “Debt as a percentage of disposable personal income fell to its lowest level in a quarter of a century in the second quarter”.
Meanwhile, the rebound in markets means that households now have a higher net worth, relative to their disposable income, than they did before the Covid-19 crash. That’s an extraordinary statistic, when you think about it. And it does show just how much power the Federal Reserve (America’s central bank) has. In some ways, this shouldn’t be surprising. If you kept your job (the government tried to help with this), and your options for spending money were hugely restricted (which was a direct result of government efforts), then of course you saved more.
To be very clear, this is not to say that everything has been sunshine and roses behind closed doors for everyone. Some people have had an utterly awful time and will be struggling for years to come – particularly in the small business sector. And de Chazal does make this point: there will “be some serious scarring, which is disproportionately impacting several demographic cohorts.” He adds that governments need to make "sure that support is in place… otherwise the growth resurgence we look forward to tomorrow won’t be as positive as it potentially looks today.”
So the point is not to ignore anyone’s pain – the point is that, on average, a surprising number of people have done a lot better than they or anyone else might have expected could be possible at the start of this crisis.
The US shows us where government spending is going next
So that takes us to the next point – government help. In the UK, we’ve got Rishi Sunak and – staggeringly – his Labour counterpart, warning about our high levels of debt. However, if you think we’re going back to “austerity” or anything that could be described as “austerity”, I have a bridge to flog you.
The US is a more realistic roadmap, I reckon. We’ve just heard who’s going to be Joe Biden’s new Treasury Secretary. It’s Janet Yellen, the former Federal Reserve boss. If Yellen knows anything, it’s where the money comes from. She put in place the conditions for the Fed to print to fund the Treasury. If anyone’s going to take advantage of it, it’s her.
So what will the money go on? The easiest political excuse in the world is: we’re doing this for a good cause. And what better cause than addressing climate change? This is why everyone from Boris Johnson to the European Central Bank to the Chinese Communist Party is talking up the “green industrial revolution”. If you’re an investor then you have to pay attention to that. To be clear, whether you think it’s a great thing or a lot of hot air is entirely irrelevant – governments need an excuse to spend. And this is a great excuse. Watch the money flow, direct from the central bank via the government.
And the thing is, right now, you can have your climate cake and eat it. On the one hand, green investments have come a long way but still look as though they may well have long-term steam in them. Because also in their favour is the fact that they are getting cheaper, and there is consumer demand for them. So while it’s easy to get caught up in what governments are doing, this new sector has legs.
Meanwhile, on the other hand, the oil price has started to go up sharply since the good news about the vaccines started to roll out. In fact, it looks as though the AstraZeneca one – while producing a less excitable reaction in the rest of the market – has been enough to drive a bit of a break-out in the oil price.
So you can benefit both from a longer-term punt on some of the green stuff, and you can also benefit from a shorter-term turnaround for the fossil fuel sector too. And that one could be pretty punchy given that we’re looking at oil and oil producers bouncing back from one of their weakest points in recent history.
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Finally, don’t forget to own some gold. It is being left in the dust by bitcoin, and it had a tough time yesterday as US economic data came in better than expected. But if central banks do directly finance government spending in all but name – well, I’d just note that gold is at the very least, a tried and tested partner to the shiny youthful charms of the cryptocurrency.