Harrison: Private Portfolios Skewing Toward Long Duration Assets As Bond Proxies

Your Real Vision Daily Briefing for August 13, 2020

Senior editor, Ash Bennington, joins managing editor, Ed Harrison, to discuss secular stagnation, initial jobless claims, and the fiscal cliff.

  • Bank stocks at 30% below their highs are a signal of secular stagnation, and investors are turning to long duration assets as bond proxies.
  • Even though initial jobless claims numbers are still elevated the overall picture is improving, but political wrangling could threaten further recovery.
  • There will be weeks with no fiscal support coming to the U.S. economy and the likelihood we could go over the fiscal cliff is increasing.

GET REAL VISION'S FREE DAILY BRIEFING DELIVERED DIRECTLY TO YOUR INBOX EVERY DAY AFTER MARKETS CLOSE

Get the latest information as we analyze the next phase of our new global economy and discuss what we think is to come.

Despite the rally in equities, bank stocks are still 30% below their highs, which is a signal of secular stagnation that means this is no bull market, Ed Harrison said during today’s Real Vision Daily Briefing.

Harrison said the outgrowth of that is we see a bull flattening in the yield curve with the Fed pinning rates at zero, and then we see rates out the curve moving toward zero because of the time frame people think the Fed will be on hold.

That means the discount rate for equities and all risk assets have decreased, which makes long duration assets more interesting because you get a much bigger pickup from the distant cash flows in those assets as a net present value calculation, he said.

Harrison said it is a strange inversion as private portfolio preferences are skewing toward longer duration assets as a bond proxy.

He also looked at the most recent unemployment data during the interview and noted that while non-seasonally adjusted initial jobless claims are still up on average three to four times more than a year ago, they’re down over 150,000 from the week prior and with the exception of a single week, have been falling for 18 weeks in a row. This suggests the economy is getting better and we’re slowly getting out of the hole even though the numbers are still elevated.

Harrison said he looks for trends in unemployment data to inform his framework and initial claims are a good signal of flow. He prefers the non-seasonally adjusted numbers because late June to mid-September is typically a period of seasonal adjustment, so adding those numbers on top of the pandemic numbers will not accurately reflect the reality of the pandemic’s impact.

Finally, Harrison wrapped the discussion with some thoughts about the lapse in fiscal aid and the significant risks it poses to U.S. citizens and the U.S. economy.

With no deal likely until September, and the specter of a government shutdown in October looming, Harrison said there will be weeks with no fiscal support coming to the U.S. economy.

“Not only is the federal government withdrawing support, but state and local governments are likely to add to the pain,” he said. “They’re going to cut, and we’re going to feel the pain because of those cuts.”

The likelihood we could go over the fiscal cliff is increasing as our leaders play political chicken, he said.