Pal: Corporates Don’t Expect Growth to Return to Normal

Your Real Vision Daily Briefing for June 19, 2020

Raoul Pal joins Ash Bennington to reflect on a week of muted volatility amid a “quadruple witching” & unprecedented central bank interventions.

  • With COVID-19 cases rising in many parts of the world, we’ll likely see rolling shut downs and marginal behavioral shifts that will have larger economic impacts.
  • Europe is not doing enough to deal with the size of the economic damage they’ve taken and sustained cooperation through debt mutualization seems improbable.
  • The credit markets are distorted now that the Fed is buying and we could see a wipeout of shareholder equity in companies like GE.

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As concerns about a second wave of coronavirus infections grows amid rising cases in many parts of the world, we will likely see rolling shut downs in areas where cases are spiking, Real Vision CEO Raoul Pal said During Today’s Daily Briefing.

Pal said that Apple’s decision to close stores in Florida, Arizona, and the Carolinas is telling given the vast amounts of data they have to go on, and localized shut downs are a reality the U.S. and other countries will need to deal with as the virus lingers.

To gauge the impact of these marginal shifts in economic activity, we need to see how much the virus will change people’s behavior, since behavior is what drives markets, he said.

On the European front, Pal said he is unconvinced that the ECB’s recent meeting around fiscal policy will galvanize support for ongoing debt mutualization and he believes we’ll soon see the ECB and the BoE go into hyperdrive with their printing.

Because he doesn’t think Europe is doing enough to deal with the size of the economic damage they’ve taken, Pal said he is extremely concerned about European banks and is still negative the euro.

Pal also discussed the potential impacts of the Fed’s buying of individual corporate credits. He said the Fed doesn’t want BBB companies to be downgraded to junk because there are no buyers of junk and then they have to step in and buy those.

The reason they say they’re buying fallen angels is that they’re trying to stop the cascade of the doom loop that blows up the pension system. That’s great, Pal said, but what happens as a result is the equity goes to zero. He sees shareholder equity being wiped out in companies like GE.

The credit markets are distorted now that the Fed is buying them and Pal said it is interesting that right now companies aren’t buying back shares or spending on infrastructure, but shoring up their balance sheets instead.

The fact that corporations are raising cash is an important signal. According to Pal, it tells us they’re fearing a solvency event more than they’re expecting growth to go back to normal.