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by  Eric Lascelles Aug 25, 2020

As kids prepare to go back to school, RBC GAM Chief Economist Eric Lascelles notes that certain regions (such as the U.S.) seem to be doing a little better than previously whereas others (such as Europe) are struggling with a second wave of the pandemic. As for the economy, the recovery continues apace. The historically rapid losses and gains seem to be a Q2 story. And why is gold glittering?

Watch time: 11 minutes 55 seconds

View transcript

Hello. My name is Eric Lascelles.

I’m the Chief Economist for RBC Global Asset Management, and welcome to our latest MacroMemo video.

And of course COVID-19 featuring centrally, though not the only subject at hand. We will talk a little bit about U.S. politics and also about gold as well. But let’s start nevertheless with that obvious subject.

And so here we are—I would say still with some fairly familiar, broad contours to the COVID-19 situation. For the last month or so, we’ve been able to say that the global daily infection rate seems to be ebbing slightly. And the global number of fatalities as well now starting to go down, though very high. And in some cases, like India, still actively rising. So hardly completely solved, but nevertheless globally a declining trend.

The U.S. seemingly still on its own declining trend. And so that’s a welcome one, because they have been the global hotspot. There has been some concern that maybe the U.S. decline isn’t quite as legitimate as it first seems. And it is fair to concede the U.S. is now testing less than it did say a month ago. In fact, significantly less. About a quarter less.

However, when we dig into the details, that doesn’t seem to be the reason that the U.S. numbers are looking better. It’s not just undercounting. We can see, for instance, the decline in infections has outpaced the decline in testing. And actually the fraction of tests coming back positive is flat to slightly lower, and you wouldn’t expect that if there was a secret underbelly of uncaptured positives. At least more than before. And so we think the U.S. is genuinely getting better.

And I should say the Canadian numbers still looking quite good. They’re low. Fairly steady as well. The one part of the world—or maybe the one continent of the world that is most obviously still having significant problems is Europe. And so that’s a bit of a surprise in the sense that they had so nicely tamed the virus back in March and April. We’ve known for some time they’ve been encountering a somewhat increase in the number of infections, but initially we thought they would be able to handle that fairly tidily.

They had the U.S. example in terms of the U.S. failings first, and now some more recent U.S. successes. Europe had tamed the virus the first time round. Not as much political dysfunction there. And yet, in the end we’re still seeing rising virus counts there.

In Spain, four weeks ago they were clicking along at around 2,000 cases per day. Two weeks ago it was up to 4,000. As we record this it’s up to about 8,000. So they haven’t tamed it at all. And in fact the numbers are now looking quite similar to how they did in late March or early April, though likely with much less undercounting. So we think the situation isn’t as bad as then, but it’s still rising.

It’s proving trickier to deal with than we’d first envisioned. And so at this juncture it looks like it will take a month or two for Europe to tame this latest outbreak, as opposed to the couple of weeks that we’d initially been assuming. And so there is a little bit of an economic loss that comes with that.

And as we parsed our way through the European situation, one stat in particular has really surprised us. And it is a survey of various office workers across Europe. And France leads the way here. And so France, 83% of office workers are now working in their offices again. That’s quite a high number. It’s more than double the equivalent for the UK. This was a European survey. I don’t know what the number is for North America, but I suspect it’s well above anything the U.S. and Canada can claim. And maybe it is just a little bit too high at this point in time. And so we’re seeing Europe pivot, but we haven’t yet I guess reaped the fruit from that in the sense that the numbers are still rising from a virus perspective.

Turning to the economic data, we can start by saying we can see mobility data starting to fall in several European countries, which makes sense. It’s actually desirable to the extent it probably helps to control the virus, though of course it also comes with some economic costs.

Conversely, we can see the mobility data in the U.S. inching a little bit higher, having retreated itself somewhat across the months of July and August. It does look as though the U.S. economic recovery is now back on, having idled through July and again part of August. Though the recovery is proceeding at a slower pace than before, and may even be actively slowing, we’re just not getting PMI indicators rising as quickly as they were. The jobless claim numbers are improving on a net basis and on a trend basis, but not quite as reliably or enthusiastically as they were before either. So a recovery, but a slowing one.

And indeed we can see that in Canada as well. The Canadian retail sales figures for June came out. They were extraordinary at 23% increase. Retail sales activity all the way actually back to February norms. Albeit with a lot of government support lending a helping hand instead of organic working income. Nevertheless, Stats Canada also released a tentative estimate for July. And so in contrast to the 23% gain in June, they’re looking at less than a 1% gain in July. And so again a decelerating recovery, though still a recovery, nevertheless.

I guess the other comment would be, the U.S. as we record this at least, is potentially about to grapple with two major storms, possibly hurricanes in the Texas-Louisiana- Mississippi area. And so that could yet become relevant, though at this point it isn’t relevant in the economic numbers just yet.

And I want to mention as well, from a consensus growth forecast perspective, meaning not our growth forecast but the forecasts of everybody else, we’ve seen the consensus forecasts for August rise and so forecasters now more optimistic both for the U.S. and Canada for 2020, also for 2021. So there’s a rising momentum to those forecast revisions.

Now as we look forward, we are aware there are some new risks on the horizon. And so one obvious one is that schools are now restarting. They have significantly restarted in the U.S. Many other countries, including Canada, on the cusp of restarting. And so this is a new potential vector for transmission.

Though equally, of course, it lets parents go to work and lets young people learn and develop social skills and human capital. And so there are certainly value and merit to it as well. In the end, it seems like it’s a good idea to reopen schools in places where the count, the virus count, is low. Probably not a good idea where the virus count is high. But of course much depends on class sizes and mask usage and protocols. And flexibility seems to be key as well, and not trying to mandate a single solution for all schools or even for all students as well. And so something to watch. That is a risk that we see more transmission there. Though do keep in mind, perhaps we’ll see less transmission via other means between young people. For instance, young people were going to daycares and camps and sports teams, and these sorts of things. And they were presumably transmitting amongst themselves in those environments. So a bit of a pivot perhaps as well.

The other maybe nervous thing to watch over the coming few months is the U.S. has now withdrawn a bit of fiscal support. The cheques being made to U.S. unemployed people are now smaller than they were as of the end of July. And so we’re waiting to see what that does. Not just to household income, but to consumer spending as well. So there are some little headwinds there also.

Also on the COVID front—and this will be the last thought on the COVID front, vaccine timing. And of course we can’t get economies all the way back to normal until we get a vaccine. At least that’s the most common line of thinking. And so we’ve been tracking betting markets to see what they think on this subject. And at least from a U.S. perspective, with success defined as 25 million inoculated Americans—that’s not nearly all of them by the way, but a significant subset—the betting markets think there’s nearly a 50% chance that happens by the end of the first quarter of next year. So early 2021. They think there’s nearly a 90% chance it happens by the third quarter of 2021. So 2021 still looks to be that year. But again we’re not quite at that point of normalization yet.

Let me know talk about politics for a moment. And so U.S. politics, specifically Joe Biden, the now formal candidate for the Democratic party and Kamala Harris, his vice presidential candidate as well. The election itself is now less than 10 weeks away. The democrats do have a lead in the polls. They have a 14-point lead from a probability perspective. It’s a nine point lead in the polls. But the odds of them winning is deemed to be 14 percentage points higher than that of the Trump ticket.

In terms of what that might mean from a policy perspective. Well, a few things to think about here. One would be perhaps stricter COVID policies. And some of that would be perhaps masks and these sorts of things, and not necessarily something that constrains the economy. But you might imagine somewhat stricter economic rules. And so a short-term economic negative there.

On the other hand though, the democrats have been very keen on more fiscal stimulus. And so that makes the argument perhaps for a little bit more help. Though perhaps a medium-term relevance instead of a short term.

I think from a market perspective, the great concern is there are lots of proposals from the democrats to increase taxes, both personal in any number of ways but also to undo half of the Trump corporate tax cut. So to raise the corporate tax rate, but not all the way back to where it was pre-Trump. Also though instituting a minimum tax and a higher capital gains tax.

A higher tax is part of the story. And to the extent markets were very keen on those Trump tax cuts, they are likely not keen on this at all. I would say though keep in mind that broader policy picture. And so you’ve also got potentially more fiscal stimulus, potentially a better trade environment, probably at least more welcoming of immigrants and so greater population growth over the long run. And so there are some interesting offsets to think about.

I guess our assessment at this point is that in the very short term, a Biden and Democratic presidency might be a slight negative in the sense you have COVID restrictions, perhaps outweighing the fiscal stimulus in the short run.

Over the medium run though, that fiscal stimulus likely outweighing other considerations and proving a positive, including outweighing the higher taxes, and that’s an economic comment; however, not from a financial market perspective. For the stock market, the corporate tax rate is king. Perhaps carbon taxes are king. And from that perspective there are some headwinds afoot there.

But again this election isn’t done yet. Plenty could yet change. And so, for instance, in 1988 the Democratic nominee came out of the Democratic convention with a massive lead and that was completely eroded by the election. Things could yet change. Nevertheless, let’s pay a lot of attention to these Biden platforms because there is a very real, better than 50% chance, that he will be the next U.S. president.

And then let me finish on the subject of gold. And so I will say gold prices have clearly increased. In fact, they’ve even exceeded at times $2,000 an ounce, which is a record. In terms of why that’s happened, the economist in me says because people are worried about more inflation, and I think that’s not an unreasonable concern. And so it’s reasonable to price in that risk because bond yields have such low coupons that there’s no cost to shifting investments from bonds into something like gold. Because some people think gold in fact provides a better hedge against future trouble than bonds. How low can yields go from here? Perhaps they’re limited to zero or not much below, whereas gold doesn’t have those kinds of limitations. And then similarly we do think this is a U.S. dollar structural bear market. And so there has been some pivot towards gold as almost a substitute reserve currency. And so gold could continue to perform.

Let me warn you, I’m not a great predictor of gold or commodities in general, but nevertheless many of those arguments do remain in place for the foreseeable future. I would just say from a long-term perspective keep in mind the whole purpose of real assets is to be a hedge against inflation. Over the long run you sort of expect them to return something like a zero percent inflation-adjusted return. And so it’s hard to get rich off of that from a long-term perspective.

And why don’t I stop there, and so say thank you very much as always for your time. I hope you found this interesting, and I wish you very well with your investing.

For more information, read this week's #MacroMemo.


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