Quick thing before we get started today – if you haven't listened to our podcast with Russell Napier yet, don't miss out. Listen to it here.
The year-end is drawing closer. Lots of people are looking forward to putting 2020 behind us, seemingly oblivious to the fact that 2021 comes directly after it, carrying all of 2020's baggage. And it's on that cheery note that I want to turn to what the new year might have in store for us.
We have to get back to normal, regardless of what happens with vaccines
My inbox is overflowing with forecasts for the year ahead and I'll be sharing some of the more interesting ones with you in the lull period between Christmas and New Year. But today I want to expand on yesterday's article a little and have a think a bit beyond the short-term noise about what might lie ahead for us in 2021. The key questions for next year are pretty obvious. When do we get back to “normal” and what does normal look like by the time we get there?
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On the first question, there's not much in worrying about the timing. If you'd asked me before the weekend, I imagine my guess would have been a bit earlier than it is now that we're in Tier 4. Then again, cancelling Christmas might well mean less of a spike in January which might in turn mean we get through it quicker – I don't know. However, I don't think it's wrong to assume that 2021 will involve a process of normalisation rather than a deterioration.
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This situation can't go on forever. The vaccine is a great thing, but even if we didn't have one, governments would have to start asking some hard questions about how feasible it is to keep populations on rolling lockdown forever. I think the furlough is a good thing. If the government has effectively banned you from working, it needs to compensate you for that. But even with access to the money printer, a government can't indefinitely go on paying 80% of the wages of a significant proportion of the population. And this is before you even start on all the unintended consequences of lockdown and what being this aggressive in containment measures has cost us.
So, long story short, vaccines hopefully mean we can get back to normal rather than having to just live with the virus. But even if the vaccine didn't exist, we'd have to start thinking about how to live with the virus while simultaneously getting on with our lives. The economy has to reopen, and by more than it already has.
There's a larger question over what all of this means for civil liberties in future. I'm hoping not very much (I think you'll be amazed at how short everyone's memories prove to be when we get back to normal), but it's worth keeping an eye on. But that's a topic to park for now.
Why the recovery is likely to be much faster than usual
So onto the second question: what does “normal” look like? I suspect and I'm hoping that normal looks like an explosion of relief. Look at the picture in aggregate, rather than on an individual level. Recessions are normally driven by a collapse in demand. Often (though not always) this collapse is driven by credit blowing up somewhere. A commercial property bubble blows up, the banks stop lending to people, everyone reins in their spending. Or consumers max out their credit cards and their mortgages, something bad happens, and no one has the spare cash to shell out any more. This simply isn't the case this time around. Demand hasn't collapsed. It's been cut off artificially.
This is really important to understand. There are lots of commentators who are keen to point out that consumers might be cautious after all this. Or that the households who have saved money are the wealthiest households, who have a lower propensity to spend (in other words, they keep some of the extra pennies rather than spending them). But while all of this matters to the individual households, on a big picture scale, it's irrelevant when you are comparing to past recessions.
In a recession, savings go down because companies and individuals need to draw on them, often because their bankers aren't willing to lend them money anymore, or because they've lost their jobs. But that hasn't happened in this recession (at an aggregate level), because neither consumers nor businesses were especially overstretched before Covid-19 hit. And also because welfare systems have been far more generous than they usually are in terms of compensation for those who've lost their jobs or been laid off.
What I'm saying is this: you can quibble over various details in the statistics, but what you can't argue with is the fact that this is a very unusual recession and so the recovery is likely to be unusual and much faster than most people expect.
The human tendency is to extrapolate from the present. So it's hard to imagine a world where we're all out and about, feeling comfortable mixing again, and even contemplating getting on a plane. But it will arrive sooner or later, and when it does, we'll have had “depression” levels of stimulus pumped into the system, at a time when rather than a post-collapse recovery, we're actually looking at simply taking the “pause” button off, to restart the economy from where we left off.
All things considered, that really does sound very inflationary to me. And I think that's the most important thing to have in mind when you're planning your portfolio for the year – or even the decade – ahead. We'll be talking a lot about this in MoneyWeek (we already have – get your first six issues free here) but for an excellent primer on what it'll mean and what assets will do well, you really should just listen to that Russell Napier podcast I keep nagging you about. Here it is again.
