The Green Shoots of 2020
By John Mauldin
Those who lived through the last financial crisis might may recall
the Green Shoots episode. It drew laughs on March 15, 2009, shortly after the
Federal Reserve fired its heaviest artillery and, we now know, launched the
longest bull market in history.
Appearing on 60
Minutes, Fed Chair Ben Bernanke said the recession’s end was in
sight because the Fed’s asset purchases were generating “green shoots.” They turned out to be slow-growing shoots.
The US unemployment rate kept getting worse for seven more months (peaking in
October), and needed five more years to get where it was when that recession
began
Similarly, you can look around today’s economy and see green
shoots here and there. As bad as things are—and make no mistake, they’re
bad—we’ve regained some lost ground since the March/April depths. But the
problem is in the “here and there” part Some parts of the economy are literally
booming even as others are in a deep, dark depression.
That’s kind of where we are. If you are in the right spot, you see
whole forests of green shoots. You might think they are growing everywhere. And
in due course maybe they will, but for now, a significant number of people just
have dirt.
Last June in A Recession Like No Other I described this recession’s
disproportionately hard hit on the service sector. Most lost jobs came from
industries built on personal contact, like restaurants and hotels. The outlook
for those sectors remains grim. Sadly, the industry is overrepresented in the
lower income brackets. But at the same time, some industries aren’t just
surviving; they are thriving.
I want us to notice this because it’s important. The economy is dynamic. It is constantly moving in all directions. We once talked about “cyclical” stocks that outperform when the economy is expanding, and “non-cyclical” stocks that take the lead in recessions. Now the virus has redefined what the “cycle” looks like, so we have a new set of non-cyclical players. My last few letters were generally negative. Today I want to discuss why the economy will recover, how that will happen and what it will look like. It won’t look like 2019, but the recovery will have its own flavor as we fast-forward future industries I think that’s a good thing.
As we all now know, respiratory viruses spread when people are in close proximity, sharing the same air. The best way to avoid infection is to avoid other people.
Hence the urge, and in some places the requirement, to stay
home as much as possible.
Yet even staying mostly home, people need supplies to sustain
themselves. Furthermore, they continue wanting things that, while not strictly
necessary, make life more comfortable. The problem is how to get those things
without exposing yourself to crowds. The answer: have them delivered to you.
Sounds simple, but it’s economically profound. This year consumers
suddenly and sharply increased their demand for home-delivered goods. For the
most part, these aren’t new products. They are the same things people
previously picked off store shelves. But now they want the goods brought to
them. And, as it always does, the market is responding.
Amazon is the most obvious beneficiary. Its e-commerce platform
and massive logistics network already dominated before the pandemic. Now they
are in overdrive. So are the online arms of major bricks-and-mortar retailers.
Even at the local level, stores are remodeling and reorganizing to provide
curbside pickup.
All these changes come at a cost; smaller retailers often lack the scale or technology to provide what consumers now demand. That’s bad news for those business owners and their workers. But the same economic forces are creating new warehousing and shipping jobs to handle all this new demand.
And
it’s still not enough. From WSJ:
The primary reason for this year’s
capacity shortage is that carriers already have been operating near maximum
capacity for months as consumers stayed home, avoided stores and shopped
online. The delivery surge has strained networks and led to longer processing
and delivery times. Carriers can’t quickly boost capacity with new facilities
as it often requires a multiyear planning process.
The carriers have imposed shipping
limits on customers and added fees to offset the increased costs to staff up,
secure protective equipment and other outlays during the pandemic. Pricing
power has quickly shifted to the carriers, which are raising rates and being
pickier about which shippers they want to do business with.
This is staggering to think about. In the middle of the deepest
recession in generations, consumers are ordering so much stuff, shipping
companies are raising prices and telling some retailers, “Sorry, we can’t do
it.”
Yet, given where we are, it makes sense. Driving a truck around to
drop off packages may seem like a simple job, and there are millions of workers
available. But it’s also dangerous in a new way. Drivers have to come in
contact with both packages and people. That limits the supply and raises its
price. Plus, the companies don’t have an infinite number of vehicles, and they
sometimes break.
The recession and recovery vary a lot. Some segments of the economy are in deep trouble. Others are booming at the same time. This confuses sentiment and adds to the uncertainty and apprehension so many feel.
If circumstances cause you to spend most of your time at home, you
naturally want “home” to be safe and comfortable. That may be difficult to
achieve if you live in a crowded city, where simply taking kids to the park is
now an ordeal. But staying locked inside with them probably isn’t much better.
Particularly if you also fear domestic violence.
Those simple realities are sparking a major migration. City
dwellers (at least those who can afford it) are looking for suburban homes with
yards, pools, garages and other conveniences. Some are moving further out, to
rural areas. Corporations are enabling this with more flexible work-from-home
arrangements, making it possible to live far from the office. In fact, many
people are moving to new states because they can now work from anywhere.
Like the e-commerce boom, this demand surge is overwhelming supply.
Real estate agents like to say “location is everything.” Now it’s “everything”
in a new way no one expected. An easy commute is less important than being far
enough out to be safe, but close enough to get your groceries delivered.
Existing homes in the right places with the right amenities are
selling at high prices because their supply is so limited. Real estate tells us
the supply of homes for sale is down to the lowest level since 1999. But never
fear; entrepreneurs are responding as they always do. From CNBC:
US single-family homebuilding
surged in September, cementing the housing market’s status as the star of the
economic recovery, thanks to record-low interest rates and a migration to the
suburbs and low-density areas as Americans seek more room for home offices and
schooling.
The report from the Commerce
Department on Tuesday reinforced expectations that the economy rebounded
sharply in the third quarter after suffering its deepest contraction in at
least 73 years in the second quarter. But the recovery from the Covid-19
recession has entered a period of uncertainty, with fiscal stimulus, which
spurred the burst in activity last quarter, depleted.
Single-family homebuilding, the largest share of the housing market, jumped 8.5% to a rate of 1.108 million units last month. But starts for the volatile multi-family housing segment fell 16.3% to a pace of 307,000 units.
The drop in multi-family (apartments, condominiums) reflects both
the move away from urban areas and this recession’s inequality. The
lower-income and middle-income workers who tend to live in those places are
taking the brunt of the pain. Many are behind on their rent already and in no
position to move. Developers have little incentive to build more such
properties.
That’s creating an odd dynamic, visible in this chart.
Chart: RSM
In the last two recessions, building permits and housing starts peaked before the economy turned down. And in the Great Recession they kept falling for years.
This time, though, the prior uptrend seems to have resumed
after a brief interruption, even though we are now 8 months into a confirmed
recession.
This wouldn’t be happening in a normal recession. Job losses would be affecting the people who buy single-family homes and builders would be pulling back. Note also, the commercial construction business is in deep trouble even as housing booms, and for some of the same reasons.
People want
houses that let them work from home, but that also reduces demand for office
space. New mall and hotel construction is pretty scarce, too. But it’s a boom
time for skilled workers in the building trades. They are worth their weight in
gold right now, and being paid accordingly.
I talked with demography guru Neil Howe this morning, to get his take on things. One thing that is changing is families are moving back together. He believes this is good as it gets families more involved with each other.
I would note that moving to the suburbs allows you to have more room to work from home and maybe have an extra family member. That is partly why we are seeing a remarkable boom in home remodeling, too.
The items Amazon is shipping, and the materials used to build all
those houses, don’t appear out of thin air. Someone, somewhere makes them. Yet
the pandemic is affecting factory production, too.
It started back in January when China’s massive shutdowns made
much of the world’s manufacturing capacity grind to a halt. Then the same
happened elsewhere. Even if not ordered closed, companies found the new health
precautions and staff shortages both raised costs and reduced output.
The answer to that dilemma is technology. Automation was already
growing simply because paying human workers often costs more than machines that
can do the same work. The pandemic made human workers not just more expensive
but bigger liabilities, too. This increased the incentive to automate.
Meanwhile, new tasks have emerged that are uniquely suited to automation. You can send in a robot to disinfect a room without fear it will get infected itself. But first you need to have the robot, so demand for them is off the charts.
From the Financial
Times:
The pandemic is driving a shift in
companies’ use of technology, both official statistics and business surveys
suggest, making the automation and digitalisation industry one of the few
winners from this year’s economic turbulence.
The spread of the virus “has
accelerated the use of robotics and other technologies to take on tasks that
are more fraught during the pandemic”, said Elisabeth Reynolds, executive
director of the Massachusetts Institute of Technology’s task force on the work
of the future. “It is fair to assume that some firms have learnt how to
maintain their productivity with fewer workers and they will not unlearn what
they have learnt.”
Note that last sentence. If a manufacturer can produce the same number of products with similar speed and quality but fewer human workers, then of course it will do so.
And having made that shift, it will never go back.
That’s why automation is booming and is likely to continue to grow in the
future. Not just robots, but artificial intelligence, virtual reality, and a
host of related areas. And that is reflected in stock prices.
This may be bad news for employment longer term. Employers who install automation will reduce hiring and eventually reduce headcount as well. This will come just as we have millions of unemployed human workers.
And that
is not even counting the coming automation of trucks and transportation. It was
always going to be a problem but might have developed gradually enough to let
everyone adapt. Now the process has accelerated and businesses are more willing
to put technology to work.
But for the moment, recession or not, the robotics and industrial
automation industries are booming. Together with e-commerce and homebuilding,
they are “green shoots” in an otherwise wilted economy.
Another green shoot that is not obvious but will make a very big difference:
We are seeing an increase for the first time in a long time of new business startups. I keep trying to emphasize over the last few months that the very entrepreneurs whose 100,000+ businesses had to be closed (with thousands more coming) won’t just sit on the porch.
They have an entrepreneurial gene in
their DNA that almost forces them to launch new businesses. They can’t help it.
And we are seeing it in the data.
Below I’ll talk about a new business I’m launching. We’ve been working on it for a very long time. It will start with about a dozen jobs. And hopefully grow.
My experience tells me that it will grow slower than I would
like, although I always dream about someday planning a business that would be
like Uber or Airbnb or Amazon, you know, where growth just seems to be
exponential.
Most small businesses start small and grow slow. But some succeed,
and they will create jobs that power the recovery.
Another interesting development: People are switching jobs and
careers at an unprecedented level. USA
Today has a fascinating story on people switching careers. When you realize your
job will probably not come back, you adapt. We are finally seeing more people
being willing to move outside their local areas to where the jobs are.
Source: USA
Today
Are We There Yet? A Timeline for the Recovery
The Conference Board offers us three different recovery forecasts: upside, downside, and the base forecast. Note that in the base case forecast we would be back to January 2020 by October 2021. Color me skeptical. I do think, however, that what they call their “downside forecast” is more realistic.
In that scenario we end 2021 almost back
to January 2020.
Source: The
Conference Board
Their methodology uses past performance to project future results, and I don’t think the past is relevant to this crisis. That being said, I think it would be completely unreasonable not to expect a recovery. This model gives us some idea of what we can expect. I think it will be a little slower as we really do have to completely rearrange much of our economy. That takes time.
In my conversation with Neil Howe, he said the trend is more
people are doing things for each other and spending less money. If that
continues, we will see less GDP growth. Simple illustration: If you find out
that your friend can help you with your hair color and you can help her, you
don’t visit the hair salon as much. Or neighbors helping each other with home
repairs. Since no one is paid, it doesn’t add to GDP, even though the work was
done.
This is critical to understand: Consumer
behavior has changed more this year than any time since the Great Depression.
That’s why we are not going back to 2019. So much has changed that we will be
entering literally a new world.
The point is we will
recover. The airline and hospitality industries will not look the same in 2022
as they did in 2019, but they will be there in a transformed state. Commercial
real estate will be repriced as we continue to work more from home. It seems so
ancient, but just three years ago we bought more food in restaurants than we
made and ate in our homes. That certainly changed and will continue.
Entrepreneurs will adjust.
Will we travel again? Will we eat out again? Will we go to mass
sports events and concerts? Of course. It’ll just take a while (and a vaccine)
to make people feel safe. And it will look different than it did in 2019. But
that’s okay. The world has gone through numerous changes over the last few
centuries and millennia and been better for the adaptations.
I sincerely hope that Congress can figure out how to pass a “recovery package” to help those individuals that still don’t have jobs and businesses that are barely hanging on. My base case becomes more pessimistic without that. That being said, my good friend Renè Aninao, who is truly wired into the relief package negotiations, believes it will happen this next week if not this weekend.
Essentially, he tells me, the last disagreements being worked
out are that Nancy Pelosi wants more money for New York and California and
Trump wants bigger stimulus checks ($1,500 per person, $1,000 per child) than
Pelosi would like to see. Much of the legislation has been written already.
McConnell has most of the votes he needs to be comfortable (certainly not his
majority) and as many as 50 House Republicans may vote in favor. If this bill
passes, it would be fertilizer for the green shoots all over the economy. Let’s
hope so.
Where Then Should I
Invest?
Given all the volatility and uncertainty, successful investing is
harder today than ever. I have been rethinking and actually reworking the ways
that I can help you get from where we are today to the other side of The Great
Reset. I am happy to announce I have found a simple way to access my best ideas
and my network of relationships.
I have long worked with Steve Blumenthal of CMG Capital Management Group (CMG). In the last few years I closed my own investment advisory firm and moved to CMG, where I am chief economist and co-portfolio manager of the Mauldin portfolios platform.
In addition, through my broker/dealer firm, Mauldin Securities, LLC, I’ve selected a broker/dealer, Amera Securities, LLC, (member FINRA/SIPC) to which I can refer you.
The Amera representatives can
show you various offerings like private fixed income and equity and other
alternative investments. Steve Blumenthal and his CMG financial professionals
are also registered with Amera Securities and will, if appropriate, introduce
select ideas to you. So, while you are technically dealing with two firms, you
are dealing with one professional who has access to both.
We have built what we call a “kitchen” where the ingredients are the numerous strategies and managers representing a wide variety of styles and opportunities, which we can blend into a portfolio to help you get a personalized portfolio tailored to your needs.
That means we need to get to know you and your objectives. I am very comfortable with this team and their ability to help you. To find out more about what is in the Mauldin kitchen click here and find out how my network can help you achieve your goals. Do it now. (In this regard, I am president and a registered representative of Mauldin Securities, LLC, member FINRA and SIPC.)
Needing a Neurologist in Tulsa
The letter is already running on, but before I hit the send
button, a personal request. My youngest son Trey has moved to Tulsa for a new
job and to live closer to his sisters. He began to experience serious pain in
his left arm and the local doctors were not really helping. I put Trey on the
phone with Dr. Mike Roizen at the Cleveland Clinic, who upon hearing the
symptoms said Trey should see a neurologist. The problem is his insurance
company is in Texas and can’t or won’t cover it. Even paying cash, we can’t
seem to find a neurologist available. So, we got him Oklahoma insurance but he
can’t see even a primary care physician, and get a neurologist referral until
December. He is in severe pain today. If you know a neurologist in Tulsa please
write me at business@2000wave.com.
Thanks.
Have a great week!
Your hoping your personal green shoot is growing well analyst,
|
John
Mauldin |
0 comments:
Publicar un comentario