Harrison: Downside Risk Has Not Been Fully Appreciated By Markets

Your Real Vision Daily Briefing for August 3, 2020

Ash Bennington & Ed Harrison reckon with the idea of whether a COVID-19 vaccine will be the “medical bailout” everyone is staking their hopes on.

  • Countries that are handling the virus more effectively will do better economically because their new normal is more sustainable in the long-term.
  • The continued move toward a virtual world is an omen of absolute collapse in certain industries.
  • Equity prices have been reacting to risk premiums more than corporate earnings expectations but that may change in the fall.

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Countries that focused on adopting a sustainable long-term strategy as their new normal are containing the virus better than the U.S., and as a result, will fare better economically, too, Ed Harrison said during today’s Real Vision Daily Briefing.

Harrison argued that we may not get the medical bailout of a vaccine, and if that is the case, there will be collapses in certain areas because our current new normal is not sustainable. He sees a downshift of growth overall, nominal growth coming down, less consumption, and more unemployment. It’s going to be a very long, hard slog, he said, and we are only now starting to realize it.

Harrison also said he believes the second wave of the virus will accelerate bankruptcies in the fall, pointing to Norwegian Cruise Lines as an example. Three months after their debt issuance, they’re basically shutting down operations because of a new outbreak during this second wave. Harrison said this tells you how it is going to play out without a vaccine; companies like Norwegian won’t be able to roll over their debt continuously because of these kinds of ruptures and they’ll hit the wall.

It’s going to take a long time to move around and feel safe, Harrison said, which is widening the bifurcation between the virtual world and the real world, making it clear that the virtual economy will benefit from the new normal.

The fact that we’re in the worst financial and economic crisis in almost a century and stock prices are near all-time highs speaks to a lack of acceptance of the reality that faces us going forward, Harrison said.

So far, equity price changes haven’t been affected by corporate earnings expectations so much as the equity risk premium. Harrison said it went way up during the initial liquidity crisis and has come back down after the Fed intervened. He believes that come September and October, we are going to see the risk premium relatively stable and earnings will become the catalyst for stocks rising or falling.

The downside risk has not been fully appreciated by markets, he said. In the coming months, as the effects of the second wave of the virus become obvious, he’s worried that we may see another selloff.