Erik: Joining me now is Daniel Lacalle, chief economist at Tressis and author of the new book Freedom or Equality. Daniel has prepared a chart book to accompany today’s interview. You’ll find the download link in your Research Roundup email. If you don’t have a Research Roundup email, just go to our home page at macrovoices.com, look for the red button that says Looking for the Downloads?
Daniel, the question that’s on everybody’s mind, okay, coronavirus crisis, it seems like the worst of the first wave is behind us now.
So what does that mean for financial markets? Can we expect the V-shaped recovery that a lot of people are hoping for? Or is it more likely to be U-shaped or L-shaped? Or what do we expect?
Daniel: Thank you very much, Erik, and thanks for having me.
I think that what we are seeing right now in financial markets is the stage of what I call central bank hope. I think that the idea that we have seen the worst of the coronavirus crisis and that we have embedded in our macro and earnings assumptions are lost to 2020 is driving markets to think of a bottom and expect that the combination of very aggressive monetary policy plus very strong stimulus packages from governments is going to drive to a very rapid level of growth in 2021.
Ben, it’s great to have you back on MacroVoices.
It’s so good, because you know we’ve done a lot of coverage of the COVID-19 crisis with a lot of really smart people. We had Dr. Chris Martenson on. And, you know, we’re diving in to the nitty gritty of, okay, what’s R0 and what’s the transmissibility going to tell us about the virus mutation? And what’s the difference between antibody testing and contact testing? We’ve covered all that.
Something I’ve noticed from Day One of this crisis is you’ve always been the guy who’s thinking five steps ahead. Not just to what’s on the table right now in front of us but what are the long term implications on society going to be as we go through – as the entire world goes through something that it hasn’t gone through in more than 100 years?
I just think of you as the big-picture guy who’s got a better perspective on the coronavirus crisis, what it means economically, but also what it means for society.
Ben, we spoke off the air about three narratives that you talk about as they pertain to this crisis. Let’s start with those. What’s the first narrative?
Lak has prepared a terrific slide deck to accompany today’s interview. I encourage you to download it. You’ll find the download link in your Research Roundup email. Now, if you don’t have a Research Roundup email, that means you haven’t yet registered for a free account at macrovoices.com. Just go to our home page at macrovoices.com, look for the red button that says Looking for the Downloads? just above Lak’s picture on the home page.
Lak, it’s great to have you back on the show. You are Mr. Economic Cycles. Your whole career has focused on economic cycles. I’m at a loss here as to even where to start, because how does a cycles guy look at the current situation?
Do you look at the virus cycle of what happened in the 1918 Spanish flu? Or do you look at this in terms of what we know about economic cycles affecting recessions, which we’re clearly in now? Or some other way? How do you even approach this?
Dr. Hunt, I’m so looking forward to this interview. I’ve been thinking about you for weeks and weeks as we’re navigating this very interesting time in markets. You’ve been just fantastically prescient and fantastically right. We’ve interviewed you several times over the last few years. You’ve always stuck to essentially the same core thesis, and it has proven correct for all of this time.
I strongly encourage any newer listeners who didn’t hear those prior interviews to listen to those past interviews. Just type “Lacy Hunt” into the search box at macrovoices.com and you’ll see the previous interviews.
Dr. Hunt, for those newer listeners, please just briefly restate the core thesis of your view on interest rates and why we are where we are today.
Now, most of you know Dave as the famous author of the “Breakfast with Dave” newsletter. He’s actually branched out and got some really exciting new products and services that he is starting to explore in his own new firm. So we’re going to talk about that at the end of the interview.
But, David, obviously we’ve got to start with, wow, these are amazing times that we’re in. I gotta tell you, I am just dumbfounded. It seems like maybe a little bit of common sense in the last couple of days has hit the stock market. But until then, it seemed like most people thought, okay, it’s all over now. We’re past peak infections. It’s time for new all-time highs in the stock market.
I think it’s crazy. But what do you see here? What’s the big picture? Is this really ending? Or is it only just beginning?
Dave: Well, look, I think that when you’re taking a look at the extreme daily moves that we’re seeing in the stock market, it is completely characteristic of a fundamental bear market, not the onset of a new bull market. I mean, we’ve had, just in the past 20 sessions, 18 of those the DOW moved in either direction by at least 200 points. It’s almost like we’ve become numb.
Today, if the DOW moves 400 points up or down, it’s completely ho-hum. But these are dramatic daily swings. It’s showing a market that is completely confused and I think caught in this tug of war between – I wouldn’t say a V-shaped recovery – really caught between knowing that we have a very deep and sharp recession on our hands but also the Fed coming in and doing what no other Fed has done before.