Economy: Mayday! Mayday! Real GDP Shrinks 4.8% Q1 2020

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%    2- q1, GDP Shrinks

#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.

Global Shutdown With US Economy Slipping into Recession

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.



USPS – Why Monetize Real Estate?

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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.

USPS – Why is it in 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.

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Protectionism for M&A Assets in U.S. to Increase in Coronacrisis

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.

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Implications of Petrodollar Flows Reversal With Low Oil Prices

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.

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COVID-19 Global Spread Slows But Fatality Rate Climbs to 7%

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.

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Labor Productivity Trends

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.

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Labor Age Population Growth To Slow and Depress Productivity

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.

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CDS Spread Better Leading Indicator Than Share Price During Market Stress

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.

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History Lesson: Banking Industry Reaction Time Lag 2008 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.

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Lax Oversight Destroys $300 Billion for Hedge Fund Investors YTD 2020

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.

HF Monitoring


Financial Adviser Served Segment to Shift to Self-Directed

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.

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Wealth Management Industry Destroys $2.4 Trillion Retail Wealth YTD, April 2020 with $400 Billion Dead-weight Loss

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.

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U.S. Treasury Real Yield is in Negative Territory

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.

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U.S. Dollar to Fall in Medium Term, Trade Balance Improvement, Interest Rate Differential Reduction

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.

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U.S. Treasury Yield Curve Shifts Down

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.

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