The pandemic’s after-effects can be felt in several big-picture issues. You can read our feature article from top to bottom, or, the button on the right lets you jump to the issues you care about most. Thanks for reading and exploring!
As the third quarter gets underway, the social ties that bind us together are being restored: family gatherings, vacations, eating out, working in the office, client meetings, etc.
That widely-used catchphrase–a ‘return to normal’–is about a re-weaving of the social strands of our lives that were undone by stay-at-home orders.
However, other, big picture threads that affect the financial fabric of our lives–such as government fiscal responsibility, the solvency of social programs, our careers or the pressures of raising a family–are frayed by our individual and collective responses to Covid.
And there are new threads being introduced–such as Bitcoin or meme stock investing–which don’t easily fit under the idea of returning to normal.
Push your family, friends and colleagues about the deep questions on their minds, and an anxiousness emerges. It’s a recognition that there are new tensions and strains pulling us in unknown directions. As much as we would like to ‘return to normal,’ that uneasiness reflects a realization: the past year’s tumult is changing the patterns of life we were used to before the pandemic. And what those new patterns will eventually look like is difficult to predict.
The current situation harkens back to the feelings the nation experienced after the terror attacks of September 2001. The tectonic plates of society, security and traveling were shifting in a way that a return to past patterns would not be possible.
The complexity of the post-Covid reality is why the core of Horizon Investments’ asset management process is to be flexible and adaptable – to change as the world evolves and market leadership changes.
In this article, we dig into the macro themes that are on our radar–inflation, debt, Bitcoin, demographics and work–as the pattern of life is weaved into a new shape.
A new thread that’s causing heated – sometimes hyperbolic – debate in Washington, Wall Street and Main Street is the Federal Reserve’s view that it’s okay to let inflation run hotter as post-pandemic economic growth booms. Full, inclusive employment and financial well-being is the goal of keeping rates low in the face of higher inflation, says the central bank.1
The Fed’s new view departs from the last forty years, when overheating inflation was the archnemesis of central bankers. Nobel prize winning economist Milton Friedman once called inflation a hidden tax on people. Taming it meant higher standards of living as the buying power of a dollar was preserved.
The falling pace of inflation since the 1980s has been a victory for that point of view.
But what to make of American central bankers who, at this point in time, don’t view rising inflation as a concern?; who explicitly say they will do little in terms of raising interest rates even if rising prices modestly exceed their longer-run inflation objective of approximately 2%?
This can be a frightening prospect for some people on Wall Street and Main Street, who are afraid of reliving the inflation of the 1970s with its gas lines and soaring prices for a broad basket of goods.
Making the matter more sensational are predictions by some investors, including Michael Burry of “The Big Short” fame, who think the Fed’s new view will lead to hyper-inflation, and that in turn may cause a crash in the value of the U.S. dollar.2 They paint a scene that sounds like monetary and economic armageddon.
The Fed’s response to the critics is that the spike in inflation is temporary, and is simply a mismatch between still-hobbled supply lines and increasing consumer spending in a recovering economy.3 The pandemic-driven demand for single-family homes and a lack of supply is among the most glaring examples of such a mismatch.
But once supply and demand are back in balance, argues Fed Chairman Jay Powell, the pace of inflation will head back down.
Fixed-income markets appear to be siding with the Fed’s view, as evidenced by a halt in the rise of the yield on the 10-year Treasury note, after surging earlier this year on inflation worries.
Horizon Investments sees good reasons for the sanguine view that the dis-inflationary forces will reassert themselves.
The productivity of the American workforce soared during the Covid recession, averaging 3.2% from the second quarter of 2020 through the first quarter of 2021, according to Bureau of Labor Statistics data. That’s well above the average productivity rate of 2.0% over the thirty years leading up to the pandemic.4 That suggests the technological and efficiency seeds have already been sown to offset price increases in physical goods.
Other dis-inflationary forces such as globalization and an aging population were largely unscathed by the pandemic.
The average American – despite seeing the headlines about surging prices for homes, lumber and food – are not worried either. Inflation expectations for the next five to 10 years, as measured by the University of Michigan’s monthly survey, show a 1%-2% pace is seen as more likely than 3%-4%.
In Horizon’s view, the heated inflation debate often overlooks the behavioral element that can squelch inflationary pressures.
When prices surge, buyers may recoil while producers may get greedy and churn out more goods. The result of that two-fold response can be a plunge in prices, as witnessed in lumber futures. Prices for July futures contracts plunged 55% from May 10 to June 25, according to Chicago Mercantile Exchange data.5
As for homes and cars, Americans have soured on them as prices have skyrocketed. The University of Michigan’s June sentiment survey showed Americans thought it was the worst time to buy a home or a car in 38 years, or since the early 1980s.6
Wholesale used car price increases are quickly decelerating and are poised to peak, Bloomberg reported June 24, citing Cox Automotive, which owns the nation’s biggest vehicle auction house, Mannheim.7 Within a few weeks, consumers should see that change reflected at their local auto dealership.
Horizon is keeping close tabs on the inflation data to make sure we and the market are not being too complacent about what could force the Federal Reserve into action.
It sounds cliche, but only time will tell which way inflation is headed.
Inflation is perhaps the most hotly debated macro-economic issue. But among economists, the bedrock of their industry’s thinking is being questioned, with some wondering if the pandemic has permanently altered standard economic approaches to government taxing and spending.
It has been an accepted economics view for decades that modest government budget deficits are sustainable, but that too much debt would lead to economic stagnation and perhaps a financial crisis.8
The definitive economics study that tried to define what’s too much debt – titled “Growth in a Time of Debt,” conducted by Harvard economists Carmen Reinhart and Kenneth Rogoff9 – said that federal borrowing that’s roughly equal to 100% of a country’s gross domestic product (GDP) was flirting with the possible danger of default and a financial panic. It was best to avoid that red line.
That view would lead to restrained spending as the U.S. government tried to live within its means and to limit spending on social programs when times were good. And to be restrained in terms of spending when times were bad for fear of taking on too much debt.
The pandemic threw the standard debt- and social spending-limit ideas into doubt.
In order to rescue the shutdown economy, American government spending soared, lifting its debt-to-GDP ratio to 129% at the end of the fourth quarter of 2020, according to the Federal Reserve Bank of St. Louis.
And the envisioned spending increase by the Biden administration, if enacted, would be a “step function increase in the size of government,’’ wrote Cornerstone Macro government policy analyst Andy Laperriere in a June 4 report.10 Federal spending would equal roughly 24%-25% of U.S. gross domestic product under the proposed Biden plan, compared to the average of 20%-21% since 1975, according to the firm.
Yet there’s been no financial fallout from crossing the 100% debt-to-GDP rubicon nor from proposing trillions more in spending. No broken auctions of Treasury bonds, nor any precipitous drop in the value of the U.S. dollar versus its peers. Neither has foreign demand for U.S. assets dropped.
Does the lack of reaction mean the debt limit hypothesis was incorrect? The question being asked by economists who have access to the highest levels of government is if America can keep borrowing and spending, why shouldn’t it?
“If you can replace 100% of the lost income in a crisis like this, why don’t we replace 100% of people’s lost income in every cyclical downturn?,” says J.W. Mason, associate professor of economics at the John Jay College of Criminal Justice, in a Bloomberg article about whether the pandemic caused a permanent change in economic thinking.11
Mason is part of a new generation of economists who are questioning the old tenets. They are pushing the boundaries to see if there are limits to what governments can spend in both good times and bad.
If the pandemic proved anything, it was that trillions in debt-fueled spending could garner wide support in Congress and be absorbed by financial markets with hardly a peep of protest. It was a defining moment for advocates of a new branch of economics called Modern Monetary Theory (MMT). Stony Brook University economics professor Stephanie Kelton sees MMT as a way of breaking from the past.
Today, there is a yearning to return to normal. But what did normal, before the pandemic, look like? Several trillion dollars of needed repairs in our crumbling infrastructure. Normal was 87 million Americans who either didn’t have health insurance or were underinsured. Normal was millions of people who aren’t prepared for retirement. Normal was a great city like Flint, Michigan, not having safe water. These are the deficits that matter. Those are the kinds of shortfalls that I wish that we were all worried about.’’12
There are two obvious risks with this new way of thinking about deficit spending. One, we may not know we’ve exceeded the limit until it’s too late. Economic history has yet to reveal any way of making reliable predictions. And two – as has happened in the past – all of the new spending may not achieve the government’s goals, leaving America with similar problems yet further in debt.
The deep-seated concern about free-wheeling spending is the damage it may inflict on America’s standard of living for future generations and the country’s standing in the world.
Horizon Investments is keeping close tabs on various financial market metrics that measure demand for U.S. Treasury bonds, the trust investors place in the country’s ability to service its debt and foreign demand for American assets. So far, there are no concerning trends. Yet we realize the issue is a known unknown and poses uncertain investment risks should it develop.
The controversial new views of inflation and federal debt come as Americans’ trust in government and experts remains at a low level. Trust in government to do the right thing always or most of the time was at 24% in April 2021, and has not exceeded 30% since 2007, according to the Pew Research Center’s long-term survey of public opinion on that question.13
In that context, it may be unsurprising that some people embraced the founding ethos of Bitcoin as a breaking away from existing, flawed systems. The pseudonymous inventor(s) of Bitcoin, Satoshi Nakamoto, emphasized in February 2009 the lack of trust in government when arguing for why computer programmers should work on a peer-to-peer money transfer system.
“The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”14
If society’s trust in major institutions is already threadbare, then it may make sense to many people to take back some measure of oversight of their finances. “Only you have control of your money and your transactions cannot be denied,” crypto exchange operator Kraken.com explains in its tutorial on how Bitcoin works.15
It’s not only the average person who senses a growing shift in how the government deals with its citizens. A May survey of CFA Institute members found that 65% of Chartered Financial Analysts in North America agree with the statement that “the share of government spending in GDP will structurally and materially rise, as will taxes, thereby transforming the dynamic of the relationship between the people, private economic agents and public authorities.’’16
While there may be benefits of increased government spending and higher levels of taxation in terms of reducing poverty and improving infrastructure, there’s also the possibility of unintended consequences, such as a higher cost of living or a devaluation of the currency. Bitcoin as digital gold, rather than as a currency, perhaps makes more sense to those who are unsatisfied with how things stand.
No discussion of Bitcoin would be complete without separating the crypto currency from its underlying blockchain technology. To some crypto observers, the true value lies in blockchain. Its peer-to-peer, cryptographically secure system holds the potential for making transactions faster and less expensive by eliminating paper trails and middlemen who process changes in ownership or transfers of money. And we should acknowledge that there are times when investors can make a lot of money without knowing why an investment is so successful. For some early adopters of Bitcoin, the returns have been astounding if they’ve been able to stomach the volatility.
This next leg of the digital transformation of the economy is chaotic at the moment, but it holds the potential of unlocking new opportunities just as the maturation of the worldwide web did two decades ago. The challenge is more than technology, though. People, businesses and institutions will have to become comfortable with trusting virtual versions of dollars, deeds or contracts.
Escape from traditional systems may be attractive to individuals embracing cryptocurrencies, but for investment managers and financial planners with fiduciary responsibilities there are serious questions about the viability of Bitcoin and its peers as an investment.
Horizon Investments does not currently invest in crypto, though it may sometime in the future. Our primary concern currently is that government regulations remain vague or unwritten, making it impossible to quantify the potential risks and rewards. In addition, the short history of Bitcoin (it was invented in 2009) means not enough is known to make any definitive conclusions about either long-term returns or how to integrate crypto when constructing a goals-based portfolio.
Returning to normal is certainly not what crypto enthusiasts want. What the pandemic revealed is that there’s a sizable contingent of people who wish to drop out of the existing financial system if they could, or they believe the existing system will disappear as technology marches on.
A different, yet similar, kind of mindset of challenging the system was revealed by the meme-stock trend, epitomized by GameStop’s wild ride. For the first time, the force of a social media crowd battled, and scored some victories, against some of Wall Street’s well-known names. The “us-versus-them-at-any-cost’’ message came as a shock to many market watchers who viewed the stock market as a force for good and as a pillar of the capitalist system, which has powered America’s economy since its founding.
The meme-stock frenzy has cooled, but it nonetheless begs important questions: can social media dilute the long-held rules of how to value a company; can it establish as an important element of valuation the mercurial wisdom of internet crowds; will stock market investing and trading cease to be dominated by a small coterie of professionals?
For now, the old rules still apply and the bedrock on which Wall Street’s machinery is built seems safe from further social earthquakes. Nonetheless, the rapid emergence of meme-stock investing was a shocking surprise, suggesting that new forces could be emerging, which may yet tip the scales towards a new order.
Another important aspect of society–raising a family–became even more shaky during the pandemic.
The baby bust went into hyper-drive, suggesting a further fraying of the solvency of Social Security and other safety-net programs.
Forcing people to stay home produced a plunge in births, rather than a bonanza. In December 2020, nine months after the March closure of the economy, U.S. births fell 8% from the month before, reports Bloomberg, citing a June 23 report from the Centers for Disease Control and Prevention.17
Overall, the number of U.S. births last year fell 4% from 2019’s level, according to a May U.S. Department of Health report.18 Using that data, the Brookings Institution says there were nearly 40,000 “missing births” in the last month and a half of 2020, which the researchers attributed to Covid, the closing of the economy and job losses.19 Overall, the American birth rate is below the replacement rate, meaning more people are dying than are being born in the country.
The pandemic, reports the Wall Street Journal, caused a drop in births that demographic experts say won’t be temporary.20 Part of the reason why is the economic shutdowns, resulting layoffs and financial setbacks prompted some to decide against having children. And delayed childbirth is often not made up over time, say demographers.
Fewer children means fewer workers, consumers and taxpayers in the future.
What’s not yet clear is how the drop in births will affect social safety nets, especially those that rely mainly on young people contributing the payroll taxes that pay for retiree benefits, such as Social Security and Medicare. Some early estimates say the pandemic moves up Social Security’s depletion date–where monthly payments would be reduced rather than eliminated–by two years to 2033, according to the Center for Retirement Research at Boston College.21
A solution to this problem, as has been long advocated by many politicians and retirement researchers, is for Congress to step in and put more money in the system rather than letting benefits be eroded.
A more perplexing question to answer is what will work look like when today’s infants are old enough to start their careers?
Many workers–having tasted the freedom offered by logging into work from home–are prepared to quit their jobs if they’re forced to go back to the office.
Welcome to the emerging new world of working from anywhere.
Work from home and the current tight labor market has – for the time being – shattered the power of companies to dictate how and where employees work. Flexibility is the new buzzword.
After all, if you’ve proven you don’t need to be in the office to do your job, should you ever have to go back to one? What was a reality for just a few brave work-from-home employees before Covid is fast becoming a top demand for many cubicle warriors post-pandemic.
But it comes with a catch. There’s tension between employers and employees about what’s the right mix of working-from-home and working in the office, even as vaccines are making it possible to go back to shiny glass towers.
Executives surveyed by the accounting and consulting firm PricewaterhouseCoopers said that to keep a strong office culture, workers should be in the office three days a week. Just 13% of those executives said they were prepared to transform their business into a fully-remote workplace.22
In the same survey, 55% of workers said they would prefer to work remotely three or more days a week. And their timeline for returning to the office is slower than what executives are planning.
The gap between the workers and managers is more stark along generational lines: 49% of workers from the Millennial and Gen Z generations said they would consider quitting if a company wasn’t flexible about remote work, reports Bloomberg News, citing a survey conducted for it by Morning Consult.23
Who can blame them for being adamant about the perk given there could be enormous financial benefits of working from anywhere. It’s possible Covid will break the iron grip that just a handful of expensive cities had on being home base for high-tech companies.
Young workers and families discovered in 2020 that they can put down roots in less-dense, less-expensive suburban and rural areas that were ignored over the years as office and computer work coalesced in a handful of coastal locations.
Tulsa, Oklahoma is one medium-sized, mid-western city that’s brashly advertising to remote workers to make their new home in the Sooner state.24
Some 68% of real estate agents say they are seeing a significant or moderate shift to suburban areas, reports City Journal, citing data from Zelman and Associates.25
Another survey cited by the magazine, where real estate consultants were polled by Site Selectors Guild, said that 64% of suburban areas and 57% of mid-sized urban areas of less than one million people are “likely” or “highly likely” to be targeted for future corporate expansions versus 10% for large urban areas with more than one million people.25
Meanwhile, job seekers say they are less willing to move for work, the Wall Street Journal reported, citing data from Challenger, Gray and Christmas.26
The risk for large cities is that their loss of residents will be long lasting. How will they transform tall, empty office buildings? Ideas are already springing up, such as the 15-minute neighborhood which embodies the idea of having work, shopping and cultural needs within close proximity to where someone lives.27
That kind of reinvention was already under way before Covid in leading cities, such as the rise of New York City’s SoHo, and will likely be accelerated by the movement of workers out of densely-packed urban areas. Re-invention is nothing new for big cities, which transformed abandoned factories into lofts and studios to accommodate an influx of people to office jobs.
The dynamism and attraction of city living likely assures that this time will be no different in terms of transformation, though it could take years to work out the details of a new urban reality.
The promising, but by no means guaranteed, aspects of the new world of work is that the economic benefits of high-paying jobs may be spread more evenly across the country. People may be able to enjoy a better work-life balance that wasn’t possible with long commutes. And lastly, the long-term trend of soaring housing costs in urban cores may finally be slowing.
That would be a welcome rebalancing of the economic haves and the have nots, an issue that otherwise seemed impossible to solve before the pandemic.
Rather than calling it a ‘return to normal,’ the economic resurgence and redefining of how we work, live and play may be better described as returning to a different normal, with life’s rhythms beating out a new pattern.
Will this normalization see the world convulse with change all at once or will it be more smooth in the months and years ahead? No one can say. But there should be little doubt that the many pieces of our lives put in motion by the pandemic ensure that the process will be complex for countries, societal institutions, financial markets, companies and individuals.
Horizon Investments has emphasized that a return to normal in some sense will take place as economic restrictions are lifted. And indeed that is playing out with restaurant reservations rising, airline travel rebounding and other service-oriented parts of the American economy experiencing a resurgence. Yet we also recognize that macro trends are shifting in this post-pandemic world, and those changes will likely be long-lasting with unpredictable results. Horizon remains committed to being flexible in both its analysis of markets and how we invest in them.
We believe financial planners can play an important role in helping clients navigate through the twists and turns that lead the nation and the globe into a new equilibrium. Embracing uncertainty and keeping a cool head amid times of trouble and perplexing questions–skills that were honed by the crucible of rapid change in 2020 and 2021–will likely be vital tools in an advisor’s toolkit.
The well-worn saying is that the only constant is change. There is another constant, however. No matter what comes, people find a way to adapt. And as they do, they get that much closer to settling into what will become a new pattern of life.
1 New Economic Challenges and the Fed’s Monetary Policy Review, August 27, 2020
2 Business Insider, “Big Short’ investor Michael Burry says ‘prepare for inflation”
3 Fed’s Powell Plays Down Inflation Threat, WSJ, June 22, 2021
4 Productivity data from Bureau of Labor Statistics via Bloomberg, calculations by Horizon Investments
5 Lumber prices courtesy of CME group
6 Univ. of Michigan, Surveys of Consumers
7 Used-Car Prices Are Poised to Peak in U.S. After Covid Surge, Bloomberg News, June 24, 2021
8 World Bank, “Finding The Tipping Point — When Sovereign Debt Turns Bad”
9 Carmen M. Reinhart and Kenneth S. Rogoff. “Growth in a Time of Debt”
10 “Biden Has Proposed Step Function Increase in Size of Government,” Cornerstone Macro report, June 4, 2021
11 The Covid Trauma Has Changed Economics – Maybe Forever,” Bloomberg, June 1, 2021
12 “Monetary Myth-Busting,” Dissent Magazine, August 11, 2020
16 CFA Institute
17 “Nine Months After Lockdowns, U.S. Births Plummeted 8%,” Bloomberg, June 23, 2021
18 Births: Provisional Data for 2020,” U.S. Department of Health
19 “The Coming COVID-19 Baby Bust Is Here,” Brooking Institution, May 5, 2021
20 The Pandemic is Prompting Many to Delay or Abandon Plans to Have Children,’’ WSJ, March 8, 2021
21 Social Security’s Financial Outlook: The 2020 Update in Perspective,’’ Center for Retirement Research at Boston College, April 2020
22 PwC U.S. Remote Work Survey, January 12, 2021
23 Employees Are Quitting Instead of Giving Up Working From Home,’’ Bloomberg, June 1, 2021
24 Tulsa Remote
25 America’s Post-Pandemic Geography, City Journal, Spring 2021
26 How the `15-Minute City’ Could Help Post-Pandemic Recovery, Bloomberg CityLab, July 2020
27 The Death and Life of the Central Business District,’’ Bloomberg CityLab May 2021
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