Show Transcript
After a dramatic drop last March, U.S. equity markets have surpassed their pre-pandemic levels. Will markets continue to climb in 2021? Kim Parlee talks with Bill Priest, Executive Chairman and Co-CIO, Epoch Investment Partners about pent-up consumer demand, earnings, and fiscal and monetary support.
Print Transcript
- Bill, it's always great to have you with us. Thanks so much for making the time. I do want to get to your big themes, but I have to ask you-- we've seen a very dramatic few days on the markets with the retail investor frenzy hitting. My question to you is, is this going to have a longer lasting impact? It's faded off in the past 24 hours, but does this matter going forward?
- Actually, I don't think it matters a lot. In fact, it's happened many times before. If one wanted to go back to when George Soros went after the Bank of England, 1992, it was a currency speculator betting against the Bank of England. Who would have thought that would have worked out? But it did, and George, I think, made over $1 billion on that trade.
I think you want to make sure there's free access to the market. There's always new players. Just so happened that a group of players arrived at the same time in big numbers and scared the pants off of a number of hedge funds. So I think it's going to be fine. These things happen. There are always new entrants. Technology is allowing groups to get together very quickly and disband very quickly. So I wouldn't make too much of it, to be honest.
- All right, good perspective, and certainly it has paid off a little bit. Let's get back to your thesis. And I understand that you've recently given a presentation where you talk about the outlooks for the market for 2021, and you describe it, and you say, welcome to the roaring '20s. So what do you mean by that?
- Well, that is half of the story. There are not going to be any roaring '20s unless we can solve the problem of the virus. But it is a solvable situation today. And we're social beings, and the way to think about this is life is not to be hoarded. The pent-up demand for life as it used to be is rising every single day.
Consumers want to spend and travel, and they have the wherewithal to do it. And here's an experiment for listeners, readers to think about-- call your favorite resort in the world and see if you can book a holiday in the back half of 2021. You'll be amazed how many popular destinations are already fully booked. There is a huge expectation here that it's going to be normal.
We are so desperate to get back to enjoying life the way it used to be that you're likely to see if, assuming the virus is controlled, an accelerating level of economic activity in the back half of the year, and we'll go from our year of horror to the roaring '20s. And that may not be a far-fetched idea.
If we went back 100 years, remember, you had World War I, ended in 1918, then we had the Spanish flu, and then we had the Roaring '20s as there was just this huge desire for life to be experienced again. So that, to me, is part of the story. The other question is, can you finance it?
Well, this weaves in a couple of thoughts. The American consumer is flush with cash, and they really want to spend it. US households saved $1.5 trillion more since February than they would normally have done. And this excess savings equals about 10% of household spending in 2019. And since the end of '19, consumers have paid down $150 billion of revolving debt, they've added more than $2 trillion in bank deposits in money market vehicles.
Home equities increased by $1 trillion, and their stock market gains have vastly exceeded that number. In aggregate, most Americans, and I would argue most Canadians as well, are better off financially now than ever before, with total household net worth up by $5 trillion in the US.
Now, I caution that I use the word "in aggregate." Many, many families have been severely damaged and arguably permanently hurt by this.
And the way to think about it are what's called measures of central tendency-- such things as averages, medians, and something called a mode. It's kind of driven home by this study. For those individuals that make $100,000, let's say, about 60% of those people could actually work from home last year. But if you made $40,000 a year, only 10% of those people were able to work from home.
So all of this has aggravated this issue of income inequality and wealth inequality. And it really is threatening democracy. It's a subject, maybe, for another time. But there's a tearing apart of a certain fabric of democracies right now, because in a sense-- and it was the CIO of Morgan Stanley who made this point, when he said, essentially, what we've had is socialism for the rich and capitalism for the poor.
And what he meant was the individuals that had savings, had homes, they benefited tremendously from monetary policy and fiscal policy last year as they saw their savings rise. But if you were not part of that group, you had a very different experience. And it's unclear if you can sustain a democracy without a middle class. In fact, I think it's impossible. But those are some of the tensions that exist. But in aggregate, the Roaring '20s can be financed in the second half of the year. If we solve the virus problem, could be remarkable.
- Bill, you gave a great, I'll say, table-setting, if you will, in terms of what you're looking for this year. It's going to be very important seeing the consumers back, just want to have fun, want to spend. But you alluded to some things, I think, that have much longer term implications-- the inequality and maybe the impact of some other things you're seeing. So maybe take us past this year, what you're going to be watching in terms of outlook.
- Well, I think a lot of it's technology, and a lot of it has to do with social media. Essentially, we are watching two kinds of surveillance societies unfold. A year ago, we talked a little bit about China. And China very much has a surveillance society-- a social scoring of its citizens. And President Xi effectively said, as long as your social scoring is high enough, you can go anywhere in the world. If your social scoring is too low, you won't be able to walk out the front door.
So you have kind of this surveillance issue. It's not been recognized that much in the United States, but it's starting to rise. And it has to do with the role of these social media companies, that, in effect, it's a kind of surveillance too, but it's capitalistic surveillance. This is going to become a big issue. It's going to be about data, your data, who knows about you, do you know they know about you, and who decides what they can do with the data they have with respect to you.
So all of this is going to be worked out. This is going on in the stock market. When you look at the size and scale of the fiscal surplus, it is substantial, unlike anything we've ever seen. And it's going to continue. Biden, his agenda has really been fiscal stimulus. He wanted something over $2 trillion. He won't get it, but he'll get something-- at least half of that.
Tax hikes, which will take something off the table from stock markets earnings expectations. Regulation will be back. It's going to be present in energy, and environment, consumer finance, and I think big tech. And trade with China-- probably our policies will be much different than we experienced with the last administration. All that said, there is this tremendous pent-up demand.
You have the balance sheet, if you will, to have the Roaring '20s, and you will have some additional stimulus to help you out. When you get into the value of the stock market itself, it's fair. We don't think it's particularly overpriced or underpriced. The key is, will rates stay as low as they are? If they do, I think there will be potential pockets of opportunity.
People often worry about reflation. It's not an issue so long as inflation doesn't get into wages. And technology is inherently very deflationary. So unless you see inflation get into wages, it's just not a problem. So you may have bond yields rise a little bit from here-- consensus would be maybe 130 basis points by the end of the year for the 10-year. But we don't see it rising a whole lot.
Part of this has to do with what's called the Magic Money Tree-- it's a name we've used, but actually, it's much more serious than that. It's Modern Monetary Theory. The way to think about Modern Monetary Theory-- and I think it is a new regime we've entered-- just a couple of seconds on a little bit of history. It was in the '30s that John Maynard Keynes came into being and everybody adopted many of his recommendations. It was about fiscal policy solving demand issues that was embedded in the Depression.
And he became the guy, so to speak. It worked until the '80s. But in the '80s, we had an odd situation of less unemployment and high inflation. Keynesians didn't expect it and didn't explain it. We then went to monetary theory and Milton Friedman in Chicago. And his theory, essentially, was velocity of money doesn't change, and as long as it doesn't change, by controlling the supply of the money, we could control GDP and its components, price, and real growth.
Well, that worked until '98 when the world kind of started to fall apart. Modern Monetary Theory is essentially a deal between the government and the central bank. The central bank will finance the government deficits. And no one knows what the limits are. You'll kind of know it when you hit it. But right now, it's eminently possible to kind of finance this deficit. And it's the right thing to do, given the pandemic that we've just gone through. So it's unclear how all this plays out. But MMT is for real.
The other somewhat related issue which we can get into is essentially digital money. And central banks are going to get into the digital currency business sooner or later. There are a number of major papers by the Bank for International Settlements out. Many of the authors are Canadians. And the Canadian economists are very familiar with these concepts.
But you're going to see that coming, in my view, because it's a very efficient way to put fiscal policy actions into practice. You just don't have some of the friction you have when you're going through other mechanisms. But at any rate, we see valuations to be fair, bond yields, as long as they stay low, you'll likely see a reasonable market.
We think it's likely to be single digits when all is said and done. Inflation is not an issue until it affects wages. That would be kind of a summary of our market expectations.
- It's incredible, Bill-- it's an incredible roundup. I was going to say, you really couldn't have more-- I feel people are drinking from the fire hose on highly material, strategic things that are hitting the market. So I appreciate you rounding it up all for us. Thanks so much. We hope to talk to you again soon.
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- Actually, I don't think it matters a lot. In fact, it's happened many times before. If one wanted to go back to when George Soros went after the Bank of England, 1992, it was a currency speculator betting against the Bank of England. Who would have thought that would have worked out? But it did, and George, I think, made over $1 billion on that trade.
I think you want to make sure there's free access to the market. There's always new players. Just so happened that a group of players arrived at the same time in big numbers and scared the pants off of a number of hedge funds. So I think it's going to be fine. These things happen. There are always new entrants. Technology is allowing groups to get together very quickly and disband very quickly. So I wouldn't make too much of it, to be honest.
- All right, good perspective, and certainly it has paid off a little bit. Let's get back to your thesis. And I understand that you've recently given a presentation where you talk about the outlooks for the market for 2021, and you describe it, and you say, welcome to the roaring '20s. So what do you mean by that?
- Well, that is half of the story. There are not going to be any roaring '20s unless we can solve the problem of the virus. But it is a solvable situation today. And we're social beings, and the way to think about this is life is not to be hoarded. The pent-up demand for life as it used to be is rising every single day.
Consumers want to spend and travel, and they have the wherewithal to do it. And here's an experiment for listeners, readers to think about-- call your favorite resort in the world and see if you can book a holiday in the back half of 2021. You'll be amazed how many popular destinations are already fully booked. There is a huge expectation here that it's going to be normal.
We are so desperate to get back to enjoying life the way it used to be that you're likely to see if, assuming the virus is controlled, an accelerating level of economic activity in the back half of the year, and we'll go from our year of horror to the roaring '20s. And that may not be a far-fetched idea.
If we went back 100 years, remember, you had World War I, ended in 1918, then we had the Spanish flu, and then we had the Roaring '20s as there was just this huge desire for life to be experienced again. So that, to me, is part of the story. The other question is, can you finance it?
Well, this weaves in a couple of thoughts. The American consumer is flush with cash, and they really want to spend it. US households saved $1.5 trillion more since February than they would normally have done. And this excess savings equals about 10% of household spending in 2019. And since the end of '19, consumers have paid down $150 billion of revolving debt, they've added more than $2 trillion in bank deposits in money market vehicles.
Home equities increased by $1 trillion, and their stock market gains have vastly exceeded that number. In aggregate, most Americans, and I would argue most Canadians as well, are better off financially now than ever before, with total household net worth up by $5 trillion in the US.
Now, I caution that I use the word "in aggregate." Many, many families have been severely damaged and arguably permanently hurt by this.
And the way to think about it are what's called measures of central tendency-- such things as averages, medians, and something called a mode. It's kind of driven home by this study. For those individuals that make $100,000, let's say, about 60% of those people could actually work from home last year. But if you made $40,000 a year, only 10% of those people were able to work from home.
So all of this has aggravated this issue of income inequality and wealth inequality. And it really is threatening democracy. It's a subject, maybe, for another time. But there's a tearing apart of a certain fabric of democracies right now, because in a sense-- and it was the CIO of Morgan Stanley who made this point, when he said, essentially, what we've had is socialism for the rich and capitalism for the poor.
And what he meant was the individuals that had savings, had homes, they benefited tremendously from monetary policy and fiscal policy last year as they saw their savings rise. But if you were not part of that group, you had a very different experience. And it's unclear if you can sustain a democracy without a middle class. In fact, I think it's impossible. But those are some of the tensions that exist. But in aggregate, the Roaring '20s can be financed in the second half of the year. If we solve the virus problem, could be remarkable.
- Bill, you gave a great, I'll say, table-setting, if you will, in terms of what you're looking for this year. It's going to be very important seeing the consumers back, just want to have fun, want to spend. But you alluded to some things, I think, that have much longer term implications-- the inequality and maybe the impact of some other things you're seeing. So maybe take us past this year, what you're going to be watching in terms of outlook.
- Well, I think a lot of it's technology, and a lot of it has to do with social media. Essentially, we are watching two kinds of surveillance societies unfold. A year ago, we talked a little bit about China. And China very much has a surveillance society-- a social scoring of its citizens. And President Xi effectively said, as long as your social scoring is high enough, you can go anywhere in the world. If your social scoring is too low, you won't be able to walk out the front door.
So you have kind of this surveillance issue. It's not been recognized that much in the United States, but it's starting to rise. And it has to do with the role of these social media companies, that, in effect, it's a kind of surveillance too, but it's capitalistic surveillance. This is going to become a big issue. It's going to be about data, your data, who knows about you, do you know they know about you, and who decides what they can do with the data they have with respect to you.
So all of this is going to be worked out. This is going on in the stock market. When you look at the size and scale of the fiscal surplus, it is substantial, unlike anything we've ever seen. And it's going to continue. Biden, his agenda has really been fiscal stimulus. He wanted something over $2 trillion. He won't get it, but he'll get something-- at least half of that.
Tax hikes, which will take something off the table from stock markets earnings expectations. Regulation will be back. It's going to be present in energy, and environment, consumer finance, and I think big tech. And trade with China-- probably our policies will be much different than we experienced with the last administration. All that said, there is this tremendous pent-up demand.
You have the balance sheet, if you will, to have the Roaring '20s, and you will have some additional stimulus to help you out. When you get into the value of the stock market itself, it's fair. We don't think it's particularly overpriced or underpriced. The key is, will rates stay as low as they are? If they do, I think there will be potential pockets of opportunity.
People often worry about reflation. It's not an issue so long as inflation doesn't get into wages. And technology is inherently very deflationary. So unless you see inflation get into wages, it's just not a problem. So you may have bond yields rise a little bit from here-- consensus would be maybe 130 basis points by the end of the year for the 10-year. But we don't see it rising a whole lot.
Part of this has to do with what's called the Magic Money Tree-- it's a name we've used, but actually, it's much more serious than that. It's Modern Monetary Theory. The way to think about Modern Monetary Theory-- and I think it is a new regime we've entered-- just a couple of seconds on a little bit of history. It was in the '30s that John Maynard Keynes came into being and everybody adopted many of his recommendations. It was about fiscal policy solving demand issues that was embedded in the Depression.
And he became the guy, so to speak. It worked until the '80s. But in the '80s, we had an odd situation of less unemployment and high inflation. Keynesians didn't expect it and didn't explain it. We then went to monetary theory and Milton Friedman in Chicago. And his theory, essentially, was velocity of money doesn't change, and as long as it doesn't change, by controlling the supply of the money, we could control GDP and its components, price, and real growth.
Well, that worked until '98 when the world kind of started to fall apart. Modern Monetary Theory is essentially a deal between the government and the central bank. The central bank will finance the government deficits. And no one knows what the limits are. You'll kind of know it when you hit it. But right now, it's eminently possible to kind of finance this deficit. And it's the right thing to do, given the pandemic that we've just gone through. So it's unclear how all this plays out. But MMT is for real.
The other somewhat related issue which we can get into is essentially digital money. And central banks are going to get into the digital currency business sooner or later. There are a number of major papers by the Bank for International Settlements out. Many of the authors are Canadians. And the Canadian economists are very familiar with these concepts.
But you're going to see that coming, in my view, because it's a very efficient way to put fiscal policy actions into practice. You just don't have some of the friction you have when you're going through other mechanisms. But at any rate, we see valuations to be fair, bond yields, as long as they stay low, you'll likely see a reasonable market.
We think it's likely to be single digits when all is said and done. Inflation is not an issue until it affects wages. That would be kind of a summary of our market expectations.
- It's incredible, Bill-- it's an incredible roundup. I was going to say, you really couldn't have more-- I feel people are drinking from the fire hose on highly material, strategic things that are hitting the market. So I appreciate you rounding it up all for us. Thanks so much. We hope to talk to you again soon.
[MUSIC PLAYING]
