Institutional investors should be “very well hedged” due to the over-valuation of equities and the likelihood of a protracted US recession, says well-known market commentator and analyst Danielle DiMartino Booth.
Painting a dire picture of the United States economy and the shocks that will convulse through it when the stimulus is eventually withdrawn, DiMartino Booth said she believes the stock market is “wildly overvalued”, but she still thinks US Treasuries are good value due to the likelihood of the recession being longer than expected which will drive more global investors towards treasuries.
DiMartino Booth is the CEO and chief strategist for research and analytics firm Quill Intelligence LLC and was formerly an adviser at the Federal Reserve Bank of Dallas.
To listen to the full unedited interview with Danielle DiMartino Booth on the Market Narratives podcast click above or find the series and episode on Apple Podcasts, Google Podcasts or Spotify.
Speaking on Market Narratives, a podcast series hosted by Investment Magazine’s head of institutional content Alex Proimos, she said the US economy faced the likelihood of a W-shaped recovery as Covid-19 resurges in numerous states and Federal Reserve policy was causing numerous problems to build up.
Fed policy is exacerbating the “barbell” shape of the US economy, she said. The wealthiest are kept wealthy by an artificial floor under junk bonds wh should have long entered bankruptcy proceedings, while the lowest income earners are making more money than they were prior to Covid-19 due to weekly unemployment insurance payouts.
With banks unable to foreclose on delinquent landlords and talk of extending rent moratoriums making it impossible to evict renters, banks continue to accumulate loan loss provisions but are unable to realise their losses.
The domino effect of setting in motion a more normalised credit cycle, whenever that happens, will have a far-reaching and hard-to-predict impact on the US economy, Booth said.
“Underneath the surface of keeping households with roofs over their heads are huge losses that are piling up at lenders. Somebody eventually has to pay the bill,” DiMartino Booth said.
“So this dynamic of constant stimulus that is required to prevent the credit cycle from starting is something the likes of which we have truly never ever seen, and what the implications are is very difficult to say because normally when a credit cycle begins it starts to set off a… set of dominoes.”
The corruption of price discovery in credit markets makes it difficult for investors to price out income streams and assess what price bonds should trade, she added.
Redundancy rounds in some of America’s healthiest companies paint a dire picture of the underlying health of the economy, she said, citing announced job cuts at Accenture and ExxonMobil as examples. One in five American companies are now “zombie” companies unable to survive without government life support, she said.
“What we’ve seen in the United States, and we’re not even finished with the second quarter technically, but we’ve seen almost two-and-a-half trillion dollars of non-financial debt get added onto the balance sheets of a lot of companies,” Di Martino Booth said. “That is going to have huge implications for investors going forward because there is going to be so much less in the way of collateral and value and assets when companies do declare bankruptcy that can be handed back to creditors because all of this extra debt has been amassed, creating these zombie corporations.”
Central banks should abandon the folly of targeting two per cent inflation, she said, which understates the contribution from housing prices and healthcare costs.
“The false two per cent target gives them a shield to hide behind so that they can make quantitative easing a permanent tool in the toolbox and continue to print forever,” Di Martino Booth said.
The longer people stay out of work, the harder it will be to return due to skills atrophy, DiMartino Booth said, and this will have implications for social unrest in the coming years.
Moving to the topic of China, Booth said Beijing’s reckless handling of Covid-19 – which she has previously labelled an “act of war” – and the resultant pandemic was more likely than any other event to cause a wake-up around the world of Beijing’s ambition to dominate the world economy, and the dangerous measures it will take to achieve its goals.
“I’m hoping this crisis is a good wake-up call for rest of the world and that we can find a way to rebalance the world economy such that it’s not so dependent on China going forward,” DiMartino Booth said.