Harrison: We’re Back to the Races Again—For Now

Your Real Vision Daily Briefing for October 7th, 2020

  • Ed Harrison is joined by Jack Farley to break down the vanishing fiscal stimulus and the K-shaped economic recovery. Markets powered forward today and it feels like they want to go higher as none of the economic data suggests the economy will fall out of bed in the near term.
  • While the immediate-term outlook seems positive, there could be trouble 3-6 months down the road when the impacts of the lack of fiscal stimulus become apparent.
  • The numbers from the financial economy aren’t indicative of the reality of financial distress under the surface for lower income households and small businesses.

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Markets powered forward today and it feels like they want to go higher, Ed Harrison told Real Vision during today’s Daily Briefing.

Harrison thinks the early September correction was all we are going to see and we’re past the point of major downside risk in the near term.

“We’re back off to the races again today because that is where the markets want to head,” he said, before pointing out that none of the economic data suggests the economy will fall out of bed in the near term. “There may be some negative surprises, but it won’t be enough to derail the uptick that we’ve seen in share prices.”

While the immediate-term outlook seems positive, Harrison thinks there could be trouble three to six months down the road when the impacts of the lack of fiscal stimulus and the outcome of the election become apparent. He believes that pessimism about election chaos is somewhat priced into the market, but said that the magnitude of the downside scenario from a public health perspective, plus the lack of fiscal stimulus and a social safety net, could bring about negative economic scenarios by the year’s end and into 2021.

Harrison also discussed the K-shaped recovery happening as wealthier households and FAANG-type companies continue doing well while lower income households and small businesses suffer. He said the numbers from the financial economy aren’t really indicative of the financial distress under the surface, and that there are households and companies on the precipice.

Harrison mentioned CCC companies, particularly in retail and commercial real estate, as examples of those on the leg of the K that’s sloping downward.

Adding to the bifurcation is the fact that small businesses have few options for relief while large companies have access to a massively liquid corporate bond market that is being stimulated by the Fed every day.

The Fed has your back only applies to the largest companies, not small businesses, he said, which is creating a wide dispersion in outcomes.

Harrison warned that this K-shaped pattern is dangerous. When small businesses go to the wall, the large corporations mop up and expand their market share to take their place, which is pernicious in terms of their pricing power down the line, he said.

RELATED CATEGORIES: Daily Briefing, Market Analysis