Q1 GDP contracts -4.8%, -$234B . Consumer -5.3%. Business -1.2%. Personal consumption -7.6%. Services -10%. Goods-1.3%. Business -8.6%. Q2 GDP estimated to contract by 40% 
#ActiveAllocator Research: Official numbers that have come in today confirm our model’s projections. U.S. Economy slips into recession during Q2. Real GDP Shrinks 4.8% Q1 2020. Mayday! Mayday! And Q2 data is going to be 10 times worse.
We modeled over twenty economic variables and all combinations point to probability of a severe recession. We hope our model is wrong. Despite unprecedented CARES life support stimulus, policy efforts, the combination of real economy shutdown and rapidly declining wealth has evoked sharply lower confidence. Total uncertainty about coronacrisis resolution, has prompted an abrupt retrenchment in consumers, corporate sectors, taxes and government finances. This threatens wide spill-over effects over the next few quarters.
President Trump has threatened to block federal aid for the U.S. Postal Service unless it raises shipping rates for online companies. We agree. And go a step further urging a monetization of USPS significant real estate assets.
The USPS has been in the spotlight in recent years due to the dramatic and ongoing changes affecting the industry and the change in way customers consume information. In other countries too, liberalization of the European postal market and other pressures from alternative means of communication are forcing operators throughout the world to consider innovative ways to raise funds and improve balance sheets by rationalizing asset bases. In many countries the postal agency is the largest owner of real estate in a country, thus requiring an effective real estate strategy – but is seldom implemented. Postal operators around the world have already publicly announced their intention to close and monetize post offices in large numbers or are developing strategies to manage their existing portfolios.
Between 2007 and 2018, the Postal Service has experienced net losses totaling $69 billion and around $9 billion in 2019. Americans are mailing fewer and fewer First Class letters and USPS generating less revenue and cannot cover its operating costs. Declines in mail volume and the costs of its pension and health care obligations will continue to rise further exacerbating costs. USPS should get out of the real estate business.
President Trump has threatened to block federal aid for the U.S. Postal Service unless it raises shipping rates for online companies. We agree. The USPS is in dire financial straits and in desperate need of reform, and should remain a government agency. Outright privatization is not a viable option. USPS has been sitting on a huge real estate portfolio that it should monetize, for its core mission is not to be a real estate owner and operator.
The United States has been open – that’s changing now. The Exon-Florio Amendment, adopted in 1988, sets forth the process for reviewing certain mergers, acquisitions and takeovers by non-U.S. persons of U.S.-located businesses. This is likely to be revised and strengthened amidst fears of foreign governments buying critical U.S. assets on the cheap. The discussions on foreign control have morphed into a debate over sovereign wealth funds activity in the United States.
Oil price collapse spreading as June WTI futures drop. Storage tanks, pipelines and tankers overwhelmed. Kuwait starts cutting oil output ahead of OPEC May 1, but OPEC action unlikely to buoy market.
Petrodollar wealth accumulation will drastically slow. Existing sovereign wealth fund (SWF) portfolios have been battered. Pressures on transfer from SWFs to meet government budgets will erode balances. Interest growing in M&A and acquiring international distressed assets, but national barriers to such investments being erected.
Both self-tender offers and open market repurchase programs have historically generated abnormal excess returns which persist for long periods.
Wirehouses, Broker-dealer platforms, RIA, Private Banks, Robo-channels Continue to Use Pre Coronacrisis Long Term Capital Market Assumptions in Strategic Asset Allocation.
Historical long-term and YTD 2020 performance. Over $3.5 trillion life support stimulus props markets.
Weekly growth rate in cumulative cases slows but mortality rate climbs to 7%, 150,000 deaths, including 34,000 in U.S. Cases approaching 2.2 million level. Fatalities 35 times outside China. Wuhan numbers jump 50% and remain suspect. Widespread testing and social distancing is critical to slowing spread.
ActiveAllocator Research: Large Cap equities now valued at 18.5x P/E, slightly over long-term average of 16x P/E.
Rising government debt to 110 percent of GDP in 2020 will pressure ability to make future payments, to increase borrowing costs, and government bond yields. Investment grade corporate downgrades to increase and duration changes expected.
Amount of goods and services produced (output) compared with the number of labor hours used in producing varies with stage of economic development of country. Our simulation results suggest convergence around 2050.
With temporary unemployment in the U.S. at 20 million during April 2020 examining labor productivity is instructive. Amount of goods and services produced (output) compared with the number of labor hours used in producing those goods and services highest in China and declining in OECD. Real output per labor hour declining in the United States.
Share of working age population in total population to reduce. Labor force will continue to age, with the average annual growth rate of the 55-years-and-older cohort to grow at multiples of rate of growth of the overall labor force. Immigration unfriendly policies to further depress labor productivity, an important factor input.
Over long periods inflation has been positive. In past decades bonds have received a premium over cash which has varied considerably. Equity returns have compensated for higher risk over bonds. Long term anchoring of risk premium has held.
European bank shares were significantly downgraded from “pre-Lehman Brothers collapse” levels in 2008. However, better news was provided by CDS spreads, which narrowed for most banks (indicating higher creditworthiness) mostly due to government actions. This forward view captures underlying value better than traded shares prices.
#ActiveAllocator.com Research: Even though the U.S. banking sector is sound at the moment I find that banks usually are slow to write down distressed assets and raise new capital during previous crisis– whether from government, government agencies, or the market. When banks get stressed their stock price falls and capital buffer reduces, a negative feedback loop which adds to the problem of raising capital. The Global Financial Crisis of 2008 offers valuable lessons – more so for countries such as India.
During coronacrisis, inadequate proactive investment monitoring, weak tactical calls with redemption restrictions, lockups, and LP inertia responsible for U/HNW and institutional LP investor wealth destruction. Confusing routine GP reporting, with LP fiduciary responsibility for active monitoring, exacerbates losses.
Financial planning fees linked to size of account no longer tenable proposition and move to flat fee imminent. Blended human and digital channels have delivered less worse performance than human financial advisers. Online collaborative financial advice and execution to dis-intermediate traditional channels initially, and progressively also full-service wealth management firms. Behavioral changes and learnt attitudinal shifts during coronacrisis to increase self directness, reduce role of financial adviser, and drive online remote interactions more akin to face-to-face exchanges.
300,000 financial advisers in captive, independent, RIA and private bank channels destroy retail client wealth through incompetent strategic asset allocation, wrong tactical calls and bad manager selection. Hug markets passively and continue to charge $260 bn fees.
Rising government debt to 110 percent of GDP will pressure ability to make future payments, to increase borrowing costs, and government bond yields. Investment grade corporate downgrades to increase and duration changes expected.
Safe investments decline in purchasing power. Surging bond prices reduce nominal yields and darkening consensus for growth prospects, reflects in negative real yields. Traditional fixed income relationship with other asset classes breaks down. Challenges for investment and spending policies and strategic asset allocation revision. Expectations of reduced inflation, but not outright stagflation.
Coronacrisis resolution, positive news, slowdown in infections to reduce safe-haven asset demand and reduce US$ valuation. Federal Reserve’s stimulus to debase currency. US trade deficit narrows to $40 bn. Feb imports fall 2.5 percent to USD 247.5 billion and exports edge down 0.4 percent to USD 207.5 billion. Goods deficit with China narrows. Developed markets rates difference narrows as yields fall.
ActiveAllocator Research: Surging bond demand drives up price of U.S. Treasuries, diminishing yields to less than 1% until 10 Year maturity. Strong signal of recession, global slowdown, worsening outlook, rise in risk aversion, aggressive monetary policy. Fed to boost purchases to inject liquidity, further driving up bond prices, and reducing yield.
