In America, the economy sinks but markets surge. What gives?
BFM 89.9: The Business Station speaks with CEO and founder of Complete Intelligence, Tony Nash, to explain why the markets have surged and earnings seem resilient despite the US GDP falling to negative 4.8 percent.
Produced by: Michael Gong
Presented by: Noelle Lim, Khoo Hsu Chuang
BFM: We are talking to Tony Nash, the chief executive of Complete Intelligence on the American markets. Tony, thank you for talking to us. American GDP shrank by 4.8% overnight, the steepest fall since the last recession. What did you think of these numbers in terms of what you expected prior?
TN: It was a bit worse than many people thought. But it wasn’t as bad as it could have been. That was the thought that many people had, and markets tend to be looking forward. So looking at Q2, we now have big states like Texas and Florida and others that have started to open up fairly aggressively. So markets themselves are looking forward. And markets are looking pretty favorably on some of the opening up lines.
BFM: Fed Chair Jerome Powell is calling for more action from the government. What are the options and what do you hope to see?
TN: Well, there are options for more fiscal stimulus. The federal government could do things like an infrastructure plan. Two years ago, in his State of the Union address, the President talked about a $1.5 trillion infrastructure plan for the U.S. They could do something like that. The individual states, which really imposed a lot of these restrictions, they really haven’t had to pay up much aside from kind of the standard unemployment benefits.
So the states could pony up a bit more cash than they have. They’ve really been relying on the federal government to pay for this whole thing. And they haven’t really had any accountability for the decisions that they’ve made. So I think the states really need to pay up a bit in terms of fiscal stimulus.
BFM: The Fed has backstopped the corporate bond market in the fixed income market for some time. Obviously, you can see that exemplified in the six and a bit trillion dollars of debt on the balance sheet. Do you think they’ll come a time when the Fed backstops the equity market as well?
TN: I don’t know. There’s been talk about that, they’ve certainly done that in Japan and the BOJ owns a lot of the ETFs in Japan. I don’t necessarily see that happening in the U.S. because it’s a door that once you open, it’s very, very difficult to close.
It’s the same question with negative interest rates. And so these are activities that once you start, they tend to be very, very hard to stop. And most of the market observers don’t really want that to happen.
BFM: Q1 GDP came in minus 4.8 percent. But the consensus estimate of economist on Bloomberg reckoned there’s going to be a minus 26 percent drop in Q2. And even more astonishingly, I think a nine percent improvement in Q3. Do those two numbers strike you as a little bit extreme?
TN: Q2 seems a little underestimated, meaning I don’t necessarily think it’s going to be that bad. Q3? It’s possible it could be nine percent. I think given how negative it could be in Q2, you could definitely see a rebound like that. But that’s just a base effect in terms of the quarter on quarter growth. It’s not necessarily a dramatic year on year growth. In fact, year on year, that’s actually negative and a negative print. One would hope that if Q1 and Q2 are so bad that you would see a print that’s at least nine percent in Q3.
BFM: Yet markets charge ahead despite relatively bad macro data. What is this optimism based on?
TN: Seeing the states open, seeing some realistic plans being put together to do this, there’s a balance of doing it aggressively and carefully. I know that sounds a little silly, but we’re seeing some real push by Americans to want to open. So the state governments are going to probably do things a little more aggressively than they initially wanted.
There was some concern that Q1 earnings would be worse than they are. Meaning that companies may try to pack all their negative news into Q1 in hopes that Q2 will look slightly better. But sure, they’ve packed some of the negative news in Q1. But some of the Q1 earnings haven’t been as bad as people had feared. So markets are looking forward. And in the U.S., it’s a flight to safety.
We’re also seeing on a relative basis, U.S. markets perform fairly well as, say, non-dollar assets or overseas dollar assets come into the US.
BFM: Microsoft, Facebook, and Tesla all came out last night all the better than expected. Microsoft showing some picture of health in the corporate sector. Tesla, obviously, where car sales are concerned, then Facebook where the ad consumer market is concerned. Can we read this optimism into Q2 and possibly even into Q3?
TN: I think certainly Facebook and Microsoft, with people sitting at home, those two will probably do quite well in Q2. Tesla? I wouldn’t expect Tesla to do well in Q2. Auto sales have been way down in Q2. And with oil and gas prices as low as they are, the substitutionality effect of electronics from internal combustion engine cars, the incentive is not as high as it once was. So I don’t necessarily see Tesla’s performance to be better than expected. But then again, Tesla bulls are Tesla bulls. They’ll buy, and they’ll pump up the price regardless of how they perform in real life.
BFM: So you don’t expect this to be a broader momentum for the broader market?
TN: Anything focused on productivity, anything focused on virtual activity, will do very, very well. But things like car sales, again, they’ve been really difficult. Anything around entertainment or group, physical, in-person, entertainment, obviously, it’s just not possible or hasn’t been possible for those to grow. So those are going to be really, really hard for people to get optimistic about.
On the other hand, you’ve seen, energy firms actually performing really well today. The major oil and gas firms and U.S. markets performed really well. Part of that is on the back of gossip that the U.S. Treasury may come to the rescue with some preferential financing for American oil and gas firms. Whether or not that’s going to happen, we don’t really know yet. But that may come to pass, which may help some of these firms.
BFM: Talking about the oil industry, are there any structural changes they can make to improve their prospects of survival? Some of these oil majors that you spoke of?
TN: Oil and gas firms are incredibly inefficient. There are a lot of productivity changes the oil and gas firms could make, whether they’re NOCs, the national oil companies, or the private sector majors. Oil and gas workers tend to make a lot more than other sectors.
They tend to be more bloated, so there are a lot of productivity measures that can be taken. For NOCs, for the national oil companies, there can be more activities taken to make them more accountable than markets. And so I think in Malaysia, you’re lucky. Petronas performs pretty well.
But other NOCs don’t perform as well and you can see some major changes in terms of fiscal accountability. Assuming oil prices stay lower, accountability to the central governments and performance rather than the subsidies coming from central governments, as we’ve seen in the past, may come to pass in some countries if they can’t really afford to continue to subsidize these governments. Because, you know, we’re seeing the emerging market and middle-income country currencies come under a lot of pressure versus the U.S. dollar. If you’re seeing energy revenues decline and you’re seeing pressure on the currency, it’s really hard for some of these governments to subsidize their national oil companies.