Somehow, things turned out worse than Guggenheim’s Scott Minerd anticipated.
And that’s really saying something. Because, back on February 27, when New Yorkers were still allowed to come within six feet of each other, Minerd sat across from Joe Weisenthal and delivered a dark vision for the country’s future on live television.
“You know, one thing Joe, I will tell you, that I’ve not said to anybody else in public”, Minerd began, clearing his throat to build suspense during a series of what, at the time anyway, sounded like comically overwrought remarks. “This is possibly the worst thing I’ve ever seen in my career”.
Read more: Scott Minerd Woke Up On The Armageddon Side Of The Bed This Morning
Ultimately, Minerd was some semblance of correct, although I would still argue that his admittedly prescient proclamation (everything unraveled within days of that warning) was at least partly inspired by the allure of grabbing headlines with a high-profile doomsday prophecy.
Since then, Minerd has weighed in countless times, including via teleconference on Bloomberg TV, on Fox, on CNBC and, of course, in his latest CIO outlook, in which he proclaimed we’re living in the “end game of the great debt super cycle”, and that the only way out is to inflate the debt away.
Given the bombast (and in this case it turned out the bombast was warranted), you’d think nothing would have surprised Minerd, but according to his own account, the situation is even more dire than he figured just six weeks ago.
“The economic data seem worse than I had expected”, Minerd writes, in a note to clients that begins with a question he imagines is on everyone’s mind (“Is this turning out as badly as you thought it would?”).
“The economic drawdown is going to be bigger than I originally thought, and we are currently estimating an economic contraction of well over 10 percent this year”, he goes on to say.
It’s true: The data has been poor. And you can take “poor” figuratively and literally in this case, because millions of Americans are suddenly out of work and, generally speaking, $1,200 from Steve Mnuchin isn’t going to to be enough to plug the myriad holes in the leaky ship that is Middle America’s financial situation.
Those claims figures presage a truly disastrous April payrolls report, and March’s report was roughly six times worse than expectations (analysts figured the survey period cut-off would limit the headline decline to around 120,000 – no such luck).
According to the NY Fed consumer expectations survey out Monday, the perceived probability of losing one’s job jumped from 13.83% to 18.54% in March. That is the highest level since the survey’s inception nearly seven years ago.
“The expected growth in households’ income and spending fell sharply and the perceived availability of credit worsened”, the Fed said. “Additionally, the perceived risk of missing future debt payments increased substantially”.
If you ask Minerd, Congress hasn’t done enough to ameliorate this situation. After calling the Fed’s response “really good”, he delivers this assessment of the steps taken so far inside the Beltway:
The response out of Congress and the White House has been disappointing. The programs that have been put in place likely will not be anywhere near sufficient and, in some cases, they are somewhat misguided. Extending and increasing unemployment benefits is very good but sending out $1,200 checks to lower- and middle-class families is not going to have the kind of impact that we need to keep the economy going.
On Monday evening, Donald Trump again said he’s open to more direct stimulus if necessary.
To be sure, Minerd sees some opportunities in IG credit, munis and the structured space, but he echoes some of the warnings I (and plenty of others) have parroted recently – namely that it’s damn near impossible to value equities with zero visibility into earnings.
Minerd also says that bottom-fishing in the names and sectors that were sunk to the bottom of the harbor with a concrete block tied around their ankles may be a fool’s errand.
“Some of the hospitality stocks and airline stocks, for example, could be a death trap–some of them may never come back”, he remarks, on the way to noting that “one place to look for opportunity is in companies that will perform in… a resurgence in the United States in manufacturing”.
Despite the fact that I’ve had misgivings about Minerd’s doomsaying, I agree with those sentiments, for whatever that’s worth. One has to think that, when this crisis is over, the US economy won’t look quite the same. That’s not to say services won’t still be the dominant force, it’s just to suggest that a shakeup of some kind is probably in the cards.
I also agree with the spirit (if not the actual numbers) of the following observation from Minerd when it comes to earnings:
But one thing I would caution is that if earnings continue to fall as I expect them to, S&P earnings could get as low as $100 this year. Given the traditional market multiple of about 15 times earnings, that would put the S&P at about 1,500, still about a thousand points lower than we are today. Certainly, we are down from the recent peak of 3,386, so we’ve made a big move, but we still have a pretty good move to make. Investors should probably focus their activity on bonds at this point.
Again, I doubt very seriously if S&P 1,500 is in the cards (and if it is, I’ll be an eager buyer down there, that’s for sure). But there’s no question that from a purely fundamental perspective (i.e., not taking into account flows-based considerations, short covering, re-engagement from the same systematic investors that helped turbocharge the rout, etc.), we’re eventually going to be confronted with a shockingly low aggregate earnings figure for the S&P, even if just for a quarter or two.
At that point, we’ll have to assign a multiple, and when we do, what comes out the other side of that simple equation won’t be pretty. But I would argue it won’t properly be a “target”, either, because most investors are going to be inclined to look through some of this cliff-dive in profits.
In any event, Minerd goes on to warn that while emerging market sovereigns may not be as vulnerable as they were years ago, EM corporates have borrowed heavily in dollars, which of course is a recipe for disaster during acute bouts of turmoil. The Fed has taken steps (e.g., with the foreign repo facility) to ensure that foreign central banks have access to dollars which can then be lent along or otherwise provided to borrowers in those locales, but this is still an issue.
All in all, Minerd paints a disconcerting picture, even as the note doesn’t represent the kind of across-the-board apocalyptic vision he presented in late February on Bloomberg TV.
He closes by noting that “someday the pandemic will end”, which is nice of him to say, and on that point, I hope he’s correct.
“In terms of output, it will take about four years to get US GDP back to where it was at the end of the fourth quarter of 2019”, he projects, adding that “it will be another eight years before policymakers contemplate the idea of raising interest rates significantly”.
Every market move you make is a speculation at this point. Even staying in cash.
H-Man, when this is over and the consumer crawls out with $16T in debt, who is going out to dinner?
S&P earnings of $100 would, of course, never be valued “traditionally” because it would obviously be transitional. Surely Minerd was being rhetorical (or just silly). Money won’t chase “how bad could it have been”. But scared cash will eventually become even more scared of the memory of FOMO.
I think the entire discussion will now shift to recovery and the idea H wrote about of “raging stimulus unleashed” and it’s hard-to-predict upward pressure on S&P earnings in 2H+. Money DOES love to chase a bunch of hard-to-spot winners.