Market Q&A with Blaine: Recession, Emerging Markets and Bitcoin

Q&A with Blaine Rollins, CFA - 2020 Market OutlookWe recently asked readers of our popular market commentary, the Weekly Research Briefing, to submit market-related questions for author Blaine Rollins, CFA. We had several interesting questions come in so we thought we would use this week’s blog to share some of Blaine’s responses.

Question: Given the Fed support and the market unemployment numbers, do you think there is a chance of a depression?

Blaine: I think that with Jerome Powell as Chairman, and given the current makeup of the Fed Board, there will be continued support to do whatever is necessary to avoid a recession. This would include supporting zombie companies in the U.S. (by buying lower quality debt to support the credit markets) and taking actions that would steal from future U.S. equity returns (like further increasing the size of the Fed balance sheet to support all markets, fixed income and maybe even equity).

Given the size of the current stimulus by both the Fed and the Treasury, the U.S. economy should avoid a depression unless a more damaging future COVID wave impacts us. As it stands now, the local economies are slowly re-opening with no material new case outbreaks. If this continues, we won’t be worried about a long-lasting downturn, but instead we will be worried about the trillions of extra dollars floating around in the economy, and when and how, the Fed and Treasury will move to begin to recover their stimulus dollars for the next rainy day.

That said, there are plenty of concerns for specific industries and businesses to operate in a world where a virus pandemic is a new threat which could reoccur in the future. Restaurants, movie theaters, indoor shopping malls and commercial office space are prime examples of businesses that will need to adjust their operations or else they won’t make it. But where some businesses will not evolve, there will be other businesses who will flourish by taking all of their customers.

Question: How are investors feeling about global/international investing currently? And what about emerging markets? Are investors shying away from them for fear that COVID will greatly damage these economies or are investors using this as a buying opportunity?

Blaine: As soon as the virus worries accelerated in China in January, investors started moving quickly to the sidelines. This selling rippled from the emerging markets, to the developing markets and finally into the U.S. market in February. It was easy to assume that the emerging and frontier markets would have a difficult time dealing with the virus given many of their countries large population sizes, higher poverty rates and reduced access to health care. But while selling emerging markets early was the right thing to do from a portfolio management perspective, it didn’t correlate with the date of outbreak in cases and deaths which occurred mostly in the developed market countries. For example, in the U.S. we are only 4% of the global population, yet we have a third of the world’s deaths. I am not sure anyone predicted that to occur. But investors are still cautious on the emerging markets because we do not fully understand the virus and do have concerns that it could spread more readily as some southern hemisphere countries go into their winter months.

Currently the international markets are trading at a significant discount to the U.S. markets. Part of this is the fear of what we don’t know about the virus and how it could impact future foreign economies. And part is due to the massive financial support that the Fed and the Treasury have injected into the U.S. The long-term chart below from Bank of America shows just how extended U.S. stock prices are on a relative basis versus other International developed market stocks (so mostly Europe and Asia). A chart of U.S. versus emerging markets would show a similar extension. If we had a crystal ball which would tell us that COVID would be a non-event overseas then we should want to move many of our equity investments into lower priced foreign holdings. Unfortunately, right now there is too much uncertainty. But keep a close eye on both emerging market and developed international stock prices relative to the U.S. If they begin to significantly outperform U.S. stocks, then you will know that the markets are telling you that things will be fine. Then it will be time to bargain hunt back into your favorite foreign countries and companies.

US vs World ex-US equities

Question: What are your thoughts on Bitcoin and digital currency in general as we try to minimize touching cash because of COVID? Digital currencies are frequently used in Asia for payment, do you think this trend will spread to the U.S. now that we are trying to minimize the touching of cash as stores begin to re-open?

Blaine: I can’t remember the last time that I visited an ATM to get a handful of dirty cash. The COVID quarantine will greatly accelerate the end of our daily use of cash. For now, Visa, American Express, Mastercard, PayPal and Google Pay seem to work fine for most people. Bitcoin still has a lot of friction to its use and the daily change in its values can be mind numbing. Someday bitcoin will possibly graduate to a main street store of value and currency exchange, but for now, it is too difficult. And when the day arrives that it is frictionless to use, you can bet that companies like J.P. Morgan, Amazon and Wal-Mart will have a crypto currency app to make it very easy for you to use and trust.

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