This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
Low Rates and Malinvestment
Sept. 16: Interest rates will likely remain lower for longer. We are wary of the distortive consequences of low rates, much of which will relate to sluggish growth caused by persistent malinvestment.
At the epicenter of this lower-for-longer environment is the transfer of wealth from creditors to debtors—such as sovereign borrowers—further penalizing savers and worsening income inequality. Since many people have missed expected life improvements from policy actions, populist movements have been able to flourish. These movements risk nourishing destructive policies of isolation and wealth redistribution….
Persistent malinvestment resulting from low rates will likely have several other negative consequences.
1. The list of zombie companies—kept afloat by low interest rates despite excessive borrowing—is likely to continue growing. Some banks will avoid categorizing their loans to zombies as nonperforming by simply extending more credit.
We are also wary of zombie governments in the euro-zone periphery, kept afloat by the now-explicit European Central Bank bailout guarantee. Malinvestment of this sort will create policy burdens when an inevitable slowdown occurs.
2. As long as central banks continue their stimulative policies, lower-credit debt categories will benefit relative to higher-credit counterparts. Private credit providers will benefit by stepping in where myriad distorted incentives and complex regulations preclude public financial institutions from intermediating.
3. Capital structures will shift away from equity and toward debt as companies secure long-term credit at rates below those implied by the natural interest rate. Share buybacks may not be a fleeting phenomenon of the post-global-financial-crisis period. This could accelerate if the cost of equity capital increases in a bear market.
4. Bonds are mainly overvalued [but] we are hesitant to short bonds as it will likely take a long time for their yields to reach fundamental values. An enormous obstacle to normalization is the burden that current debt levels would impose if rates were to increase. As long as the government pays less to borrow than the growth rate of the economy, it can keep the burden of debt in check. With higher rates, servicing this debt would be virtually impossible.
Meanwhile, we are seeing an unprecedented combination of company and household private-sector debt, with student and auto loans contributing much of the growth in the latter. Rising interest rates in these categories would inevitably have an economic impact….
5. Lower-for-longer dampens the prospects for carry trades in the major currencies, rendering reversion of exchange rates to equilibrium values more influential than interest differentials. High-carry currencies will benefit initially from interest-rate convergence and carry decay, but exchange-rate deviations from equilibrium will subsequently dominate the return from investing in fundamentally attractive currencies.
6. Protracted margin pressure at financial institutions will likely lead to consolidation. In the euro zone, elimination of regulatory differences…will open doors to consolidation.
A Coming Generational Conflict
Deutsche Bank Research
Sept. 16: The widening generational divide should be a key source of alarm for investors, financial markets, and society as a whole. Young people perceive themselves as the losers on issues ranging from housing to climate change to student debt. In turn, this anger is manifesting itself in political outcomes, with elections around the world increasingly fought along generational lines…
We believe this intergenerational conflict will get worse in the near-term. Aging populations are tilting the balance further against the young. Expensive house prices are continuing to create anger and resentment. And the Covid-19 pandemic, which has disproportionately hurt the young economically, risks inflaming this resentment further.
There are three paths down which this conflict may travel. The first is a natural resolution, where large falls in asset prices set against demographic change narrow the generational divide without external intervention.
The second scenario sees a political party elected with strongly redistributionist policies. Some countries have already seen strong performances from such parties, and if this becomes more widespread, investors can expect an abrupt and significant upheaval in housing and asset markets, tax systems, climate policy, and many other areas. This scenario becomes more likely towards the end of this decade as Millennial and younger voters start to exceed those in older generations.
To avoid these two scenarios and their serious consequences for asset markets, a scenario of gradual resolution may be achieved if policy makers seek to redress the balance over time. This could include policies such as higher taxes on wealth or unearned income. In the absence of this type of resolution, one of the other two scenarios appears inevitable, with serious and abrupt consequences for asset markets.
Restaurants, Bars Bounce Back
BMO Capital Markets
Sept. 16: U.S. retail sales rose 0.6% in August. Though less than expected, the gain takes sales 1.9% above February levels, and is all the more impressive given the scaling back of supplemental unemployment-insurance benefits. Perhaps most surprising is that the one sector that should have been hit hard by the resurgence in virus infections actually strengthened. Food services jumped 4.7% after rising 4.1% in July. Spending at restaurants and bars is now down 16.4% from February after getting chopped in half (-54.1%) in March and April. Take-out service and patios have tempered the impact of indoor seating restrictions, although outdoor seating is now at risk with the return of cooler temperatures across much of the country.
This Bull Market Is Just a Baby
Weekly Market Commentary
Sept. 14: Momentum breeds momentum. When the
has been up five straight months, as it was in April through August, stocks historically have kept going higher. In fact, the index was higher a year later 25 of the past 26 times that the index rose for five straight months.
We also know from history that bull markets tend to run for years, and the one that started on March 23, 2020, is very young. That doesn’t mean we won’t have corrections along the way, as we did at similar points in the early 1980s and in 2009, but it tells us more gains may be coming…
We expect the winners to continue to carry us. The so-called “work-from-home” stocks have powerful secular tailwinds that have only strengthened during the pandemic. We estimate that more than half of the S&P 500 is either unaffected by the pandemic or benefiting from it, with about 40% of the index in technology, digital media, and e-commerce. Despite the recession, the consumer staples, health-care, and technology sectors may all see earnings gains this year.
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