The Year in Business and Economics Through Charts

It was a remarkable year for the economy. As the pandemic surged in early spring, financial markets and the global economy nearly collapsed. Then central banks responded forcefully and risk assets rallied furiously, even as the real economy continued to struggled. The yawning gap between the haves and haves-not has only grown wider as businesses adopted to the pandemic. 

Driving many of the changes was the Tech sector, which had been disrupting and transforming business for years. The Covid-19 pandemic sharply accelerated trends already underway. These charts taken from the amazing Visual Capitalist chronical a turbulent year (click to enlarge):

March 2020: Historic unemployment as the US economy goes into lockdown

May 2020: Aided by technology world starts to work from home. A small company called Zoom becomes a verb (and bigger than the global airlines industry)

June 2020: Tesla-mania!! The electric carmaker surges to become the most valuable automobile company in the world and just keeps going...increasing ~700% y-o-y by year-end

 July 2020: Big Tech dominates business and drives a wild bull market

August 2020: Back-stopped by central banks in Spring, investors piled into risky assets leading to the shortest bear market in history

November 2020: The CARES Act, supportive monetary and fiscal policies helped stabilize the real economy. But the recovery was uneven and most Americans continued to struggle

Jan-Dec 2020: The nation's gaping wealth inequality was even more stark at the top. In 2020, the richest Americans increased their wealth by $1T   

Robots Just Wanna Have Fun

Boston Dynamics tries to give 2020 a cheery send off with an amazing dancing robots video: 

As the NY Post notes, robots are now doing the 'Human'. Elon Musk saw the future of humanity and warned "This is not CGI" (or maybe he just remembers his own dancing video). 

The Class of 2020

The NYT's Michelle Cottle looks back at the political newsmakers of 2020. (But where's Trump? Forgotten already? Nah, he looms large over nearly every member of the class)

2020: Amid the Gloom a Record Year for iBanking

Every crisis is an opportunity for someone. The pandemic has been catastrophic for many small businesses, but many large businesses, particularly in Tech, have thrived. Who else did well? Their bankers. 

Things looked bleak when credit markets froze in Feb. But after central banks came to the rescue, corporations raced to raise cash and lock in cheap long-term funding. According to the FT, companies raised a record $5T of debt in 2020. It was a robust year for equity offerings as well, with more than $300B raised through IPOs and secondaries. And all that debt and equity underwriting generated record fees for global banks--$125B worth!

The five largest US banks account for ~30% or $37B of the year's total investment banking fees. That haul should mean a very merry bonus season, at least at GS and MS. The other three firms all have big commercial banking arms and will need to set aside extra reserves for potential loan losses that have put pressure on their stock prices: the KWB Bank Index is down 14% YTD. All that reserving could shrink some of the rainmakers' pay at JPM, BoA and Citi...but probably not by much (if one bank pays well, everyone else dutifully follows). So expect Manhattan real estate to pick up again in February!

This is Us: The Economy Under Democrats and Republicans

President Trump was very proud of the economy and especially the stock market, pre-Covid. While it's debatable how much influence Presidents actually have on the economy or financial markets, they are more than happy to take credit when things go well and ascribe blame to others when they don't. 

It is however interesting to see what how the data falls. Using data from the BEA and thebalance.com, we can get a sense of different Presidents' stewardship of the economy over the last 40 years (with the acknowledgement numbers alone never tell the whole story). Republicans fancy themselves as better financial managers. Yet the US economy has clearly fared better under Democract presidents, growing at 2.8% per year vs 2.3% under their counterparts (click to enlarge):

From Reagan to Trump, the US economy has grown around 2.5% per year, on average. Breaking the data out by the Presidents themselves, the economy grew fastest under Clinton (3.9%) and Reagan (3.5%) and below trend over the others' terms. (The data for the Trump years include CBO's GDP projections for 2020)

Yes, Trump faced a once-in-a-century calamity. But even without 2020, the economy grew only at around 2.5% under his administration. Basically on trend.

Obama also faced a grave economic crisis in his first term. Excluding 2009, the economy grew about by 2.2% per annum on his watch. Not as good as Trump, pre-Covid (...though Obama and Biden will make the argument they laid the foundation for Trump's economy).

But what about the stock market? Which increasingly has little relation to the real economy but nonetheless is still held as a barometer of economic health and consumer sentiment ("...it's forward looking"). Don't investors favor business-friendly Republican administrations? 

Not necessarily. The chart below shows the cumulative price returns of the S&P 500 under different presidents. Clinton (1993-2000) had the best stock market. He certainly rode the Internet Bubble and left just in time. "W" had the worst. He inherited the Tech meltdown on the way in (a consolation of sorts for internet "founder" Gore) and oversaw the subprime meltdown on the way out. The stock market actually performed much better under Obama than under Trump (through 12/24/2020) and even Reagan!

Can Biden nuture the economy back to health? We'll see...but if you're looking to the stock market for any indication (you shouldn't, but if you are)...then the verdict is in. The S&P 500 is having the best post-election performance in at least 40 years (more due to Pfizer, Moderna and the promise of easy money than anything else, but I'm sure the Biden folks won't mind taking some credit).

Masks Still More Effective Than a Covid Vaccine

The latest forecasts from the widely cited IHME model suggest a hard few months ahead for the US, even with a rapid vaccine rollout. In fact, the best scenario still banks on universal mask usage. 

The chart below shows projected deaths by April 1, 2021 under the four scenarios modeled by IHME (click to enlarge): 

The model doesn't show how effective a combination of these scenarios could be, e.g., rapid vaccine roll-out and universal mask usage. However, widespread vaccination in the near-term may be overly optimistic. Even if the vaccine is as effective as early results suggests, it's of no use if people don't take them. A recent Pew Research survey reveals 4 in 10 Americans don't expect to get the vaccine once available.

The good news is most Americans are using masks. The bad news is they are not all doing so when needed the most. Covid appears to spread most easily not at work or school, but in small social gathersing indoors. And that's when Americans are least likely to wear masks, according to a new poll:

Capital Records: Companies Raise $3.6T from Public Investors in 2020

An unprecedented year keeps surprising. Who would have thought that in the mist of the biggest shock to the global economy in a century, corporations would raise a record amount capital from investors? Data below shows companies were able to raise to a stupendous $3.6T from record issuances of IG ($2.4T), BIG ($426B) debt and secondary stock sales ($538B) on the back of extremely accomodative central bank actions. (IPOs hauled in another $236B)

What does it mean? Success of monetary policies to stave of economic disaster? Or more moral hazard that will cause a bigger crisis down the line? Or both? 

November Factor Upheaval: Top Quant Funds Caught in Epic Rotation

Some of the industry's biggest quant names, including AQR, Renaissance and Two Sigma dropped sharply in November after the positive news from Pfizer's vaccine trial spurred a violent rotation out of high-flying tech stocks (Growth, Momentum factors) into cyclical, beaten-down Value stocks. The below chart from GS shows the reaction of various sectors (H/T HumbleStudentoftheMarkets):

Two Sigma's Venn platform provides further details on the the performance of different factors in November (click to enlarge):

Momentum had one of its worst month in history. Other factors with notable pullbacks were Low Risk and Quality. Low-leveraged and highly profitable companies underperformed more indebted and less profitable companies. Not surprsing as Low Risk and Momentum have been quite correlated in recent months (think FAAMG stocks).

Here's another look at Value and Momentum performances relative to history from JPM:

Additionally, much of the damage was done Nov 6-Nov 10. The Value-Momentum spread was relatively stable the rest of the month:

Hidden Figures: Unexpected Manager Exposures

Two Sigma's Venn platform has a very interesting analysis on the hidden exposures of fund managers. They analyzed the factor exposures of funds in four Morningstar catetgories: Large Growth, Large Value, Small Growth and Small Value. 

First up Large Growth Funds, which according to Morningstar: Invest primarily in large US companies that are expected to grow faster than other large-cap companies. Growth describes companies with high earnings and sales growth rates and high valuations. These funds are expected to exhibit negative exposure to Value factors (like low price-to-book) and zero to negative exposure to the Small Cap factor (market capitalization).

The analysis found that average exposure to Venn's Value factor was indeed negative among funds, though some funds in the category did exhibit some positive exposure to the factor. But surprisingly, the average Large fund displayed a fairly positive exposure to Venn's Small Cap factor! (Click on chart to enlarge)

Next to be analyzed were Large Value Funds.  The average positive exposure to Venn's Value facor was as expected. However, once again, the Size exposure was surprising. The majority of Large Growth funds exhibited positive Small Cap exposure.

Moving to Small Cap Growth Funds,  the analysis found that, on average, funds exhibited a negative exposure to Venn's Value factor--as expected (though a surprising number of funds did display positive exposures). There was little suprise in the Size exposure, with the vast majority of funds exhibiting positive exposure to the Small Cap factor.

The last category was Small Cap Value Funds. The results of here were in line with expectations for both Value and Size factors. The average exposures to both factors were positive and no funds exhibited negative exposures to either factor. Well done Small Cap Value managers, you do as you say!

Note: The time period of the analyes was Oct 29, 2016 - Oct 28, 2019

Visualizing the Growth of the Gaming Industry

The Visual Capitalist is a cool website that displays economic data in concise and entertaining ways.

Below is a chart showing the growth of the gaming industry 1970-2020 from Pong and Atari to mobile games and VR. I was little surprised that the CAGR for the industry has only been 2.6%, growing from ~$60B in 1980 to $165B in 2020.

And from Statistica, the breakdown of game console sales:

The Biden Stock Market Off to a Roaring Start

The stock market is fickle, frequently irrational and increasingly disconnected from the economy it is supposed to reflect...but for anyone keeping score (and the Trump Administration certainly did), the S&P 500's current post-election performance is the one of the best ever:

  

More on Maradona's Passing

Naples mourns.
Argentina grieves.

England players pay tribute.

Tributes all around. 
Rory Smith on what Maradona meant to the sport.
Career trophies.
Serie A stadiums will broadcast his iconic 'Live is Life' warm-up before games.

Mourning Diego Armando Maradona (1960-2020), (Arguably) the Best Ever

Diego Maradona died in Argentina today from a heart attack. He was 60. I say 'arguably' the best, because there is no way to compare players of different generations, much as we love to. We all have our biases...if you're older than me you might say Pele was the best ever, if you're younger than me you might say Messi. I never saw Pele play and have seen far more of Messi's games on satellite TV, YouTube, even Netflix than Maradona's. 

Is Messi a technically superior player, was Pele? Perhaps, we can certainly debate it.  But as Bobby Ghosh wrote today on Bloomberg, Maradona was the best ever because "[he] came closest to defying the dictum that soccer is a team sport." Exactly.

Would Messi be the same player without Iniesta and Xavi? Likewise Brazil's winning teams of 1958, 1962 and 1970 had legendary players like Garrincha, Rivelino, Torres and Jairzinho alongside Pele. But for most of his career, Maradona "played in teams that lacked any other world-beating players", writes Ghosh. Maradona took Napoli, a struggling southern club, and conquered Italian football over northern giants like Juventus and Milan (and changed Naples). He then took a "slightly better supporting cast of Argentines" to a wonderous triumph at the '86 World Cup over far better regarded teams.  

As Ghosh says, "it is one thing to be a brilliant player surrounded by other brilliant players...but Maradona made magic out of mediocre materials." Even more remarkable is the weight of expectation he carried on his shoulders for both club and country. He was "the pibe de oro, or golden boy, as much talisman as captain and player." And delivered over and over again...until inevitably the pressure, drugs and addiction got the best of him. But he withstood those forces long enough to stake his claim of best ever. He was a hero and icon in both Argentina and Naples, who transcended sport.

And then, of course, there was THAT goal--the best ever. While there were similar ones over the years, none could match it in terms of occasion, pressure and importance (winning goal in the WC quarterfinals against rivals England in the shadows of the Falklands War).

Some tributes...

Clarin
Repubblica
Guardian
NYT
Russell Brand

A Tale of Two Economies as the Dow Breaks 30,000

Good vaccine news, Biden transition clarity, Yellen-Powell pro-longed easy money expectation...whatever the reason, the Dow Jones Industrial Average has gained 2,566 points or 9.3% since Election Day and crossed the historic 30,000 milestone today. Yay!!!

But behind the jubilation is a grimmer reality as an already uneven recovery slows...with Wall St and Main St seeing two very different economies:

Joe Biden and his team have a big task to not only put the US economy on a solid footing but tackle gaping income inequality and a host of related problems...

Monday News Roundup

The most interesting things to start the week:

1. More vaccine good news: AstraZeneca-Oxford announced its Covid-19 vaccine was up to 90% effective at preventing the disease. It is part of the new generation of genetics-based vaccines. But unlike the Moderna and Pfizer-BioNtech vaccines, AstaZeneca uses DNA (rather than mRNA) as the platform for delivering genetic instructions to make parts of the SARS-CoV-2 virus. Crucially, AstraZeneca's vaccine does not require extreme cold temperatures for storage. It can be stored in a normal refrigerator for six months, which makes distribution relatively straightforward. It is also expected to cost only $3-$4 per dose, compared to $15-$25 for the other vaccine candidates.

2. Another first for Yellen: News leaked today that Biden is expected to nominate former (and first woman) Fed Chair, Janet Yellen, to be Treasury Secretary. She would be the first woman to hold the top Treasury post. 

Markets reacted positively, welcoming back someone they know well. And someone they feel will have their back, focusing more on macroeconomics than regulation.
 

She edged out a couple of other well-regarded contenders. The backstory here:

3. Moving on...(kicking and screaming): President Trump bashed his legal team, who have lost all 22 of the lawsuits they've filed since Election Day and officially authorized the Biden transition process late today.

4. Richie Rich$$$: Elon Musk is now the world's second richest person, with a $127.9B fortune, just ahead of Bill Gate's $127.7B. (But really, what's a couple hundred million dollars? All that separates them is basically a few minutes of trading.)

5. Regrets: We all have them...even those with $14B fortunes. Softbank founder and Japan's second richest person, Masayoshi Son, regrets deeply, embarrassingly, passing up the opportunity to invest early in Amazon and Tesla.

 

 

The West Wing: Cast of Season 46 Revealed

 

Joe Biden is ready to be President and has announced his picks for senior staff and cabinet positions. Looks like we might be going back to the old, boring way of doing things: picking experienced people with a traditional approach to governance and international relations. From left to right:

Jake Sullivan: National Security Advisor
Cedric Richmond: Director, WH Office of Public Engagement
Jennifer O'Malley: Deputy Chief of Staff
Ron Klein: Chief of Staff
Antony Blinken: (Nominee) Secretary of State
Avril Haines: (Nominee) Director of Intelligence
John Kerry: Climate Envoy

Not pictured:
Alejandro Mayorkas: (Nominee) Head of the DHS
Janet Yellen: (Nominee) Secretary of the Treasury
Linda Thomas-Greenfield: (Nominee) UN Ambassador 

The Perils of Sweden's Herd Immunity Approach

While most European countries locked down their economies in the spring to prevent the spread of the coronavirus, Sweden relied instead on voluntary social distancing. Swedish experts embraced the 'herd immunity' approach believing it would better protect against a second wave in the fall. 

And while it was never a stated part of the strategy, the government did make the case that keeping society open would limit the impact on businesses. That point of view was embraced by those who argued 'the cure cannot be worse than the disease.'

Well, this week Sweden announced it is abandoning its herd immunity strategy as a second wave looms. Cases, hospitalizations and deaths all have spiked in recent weeks. 

Per capita infection rate has exceeded those of Spain and the UK, two hard hit European countries. More than 200,000 Swedes have been infected and at least 6,320 have died.

The failings of Sweden's approach is clear when compared to other Nordic countries that did implement lockdowns. While Sweden has twice the population of its Nordic neighbors (Denmark, Finland and Norway), it has 8x-20x more Covid-19 deaths (through Nov 18): 

(And yes, if you want to be scientifically accurate, the difference in mortality rates between Sweden and other Nordic countries are epidemiologically/ statistically significant.)

Oh, and what of the purported economic benefits? Again, not so much. Sweden suffered the worst downturn in GDP among its neighbors in the second quarter. The governor of Risbank says the economy may even be harder hit than reflected in the official statistics and that the recovery seems to be "slower than we initially thought."    

So, the lesson seems to be...herd immunity doesn't work.

The Risk-free Tesla Arbitrage?

As many people know, on Monday the S&P 500 Dow Jones Indices announced that Tesla will join the S&P 500, effective Dec 21. The car maker will be the largest company ever to be added to the index, after its (so far) 600% run up this year pushed the company's market valuation over $460B. Adding a company this big to the index has its own set of challenges.

Regardless, the addition of any company to the S&P 500, let alone one the size of Tesla, is a huge deal. There is over $11.2T of assets indexed or benchmarked to the S&P 500, with index funds comprising $4.6T of the total. At its current size, Tesla is expected to comprise over 1% of the index. That means shoehorning Tesla into the S&P 500 on Dec 21 will force, at least, $50B of rebalancing. And that's where the arbitrage comes in.

The old adage in finance, and life, is that there's no such thing as a free lunch (except for diversification). Expected returns are proportional to risk. If there happened to some risk-free arbitrage opportunity it would quickly be bid away. But due to structural and behavioral reasons, sometimes near risk-free opportunities can exist. 

Pioneering quantitative strategist, Rob Arnott of Research Affiliates has shown that companies that get added to the index are typically 'hot' companies with lofty multiples, while companies that get removed on a discretionary basis (i.e., not due to M&A or other corporate actions) are usually deemed unimportant and are generally cheap. Arnott estimates that there is about a 3-to-1 ratio in valuation multiples between the added and deleted companies. In effect, when passive indexes (and some active investors) rebalance in response, they are buying high and selling low. Testing data from 1989 to 2017, Arnott found that

over the following 12 months, deletions, on average, outperformed discretionary additions, by 23%!!

Not bad, not bad at all. So will the trade of 2021 be shorting Tesla and buying the stocks it displaces? Of course, Arnott's analyses is about average returns for the strategy; any given trade may do the opposite...And many high-profile investors have been burned betting against Musk, who has a cult-like fan base.

Superstores are Super Spreaders...Get Your Groceries Delivered

Data from UK's NHS Test and Trace App reveal that supermarkets are the most common Covid exposure setting. The app looked at the contacts of those who caught the virus between Nov 9 and Nov 15 and retraced the steps of 128,808 people who tested positive. 

About 18% had visited a supermarket, followed by 12% who attended secondary school. Full list here:

So skip the lines at Costco or Walmart and use curbside pick-up or in-home delivery. Which should be good news for Instacart.com, which is seeking an IPO at a $30b valuation!

The Electoral College is Undemocratic...Too Bad

That's the gist of Steven Teles' recent op-ed in the NYT and Ezra Klein's article at Vox. An asymmetry exists in the American politics because the current system weights the votes of small states and rural areas more heavily than that of big states with significantly more people. Add in aggressive gerrymandering and you have electoral rules that favor Republicans. In effect, to win the Presidency Democrats must win the popular vote by 3-4 percentage points. To win the Senate, by 6%-7%; the House by 3%-4%. So to win, as Klein argues, "Democrats must appeal to voters ranging from the far-left to the center-right, but Republicans can win with only right-of-center voters." In a sense, we really are a center-right nation.

These fault lines are further divided by differences in race and wealth. Republicans dominate rural areas that are predominately white, while Democrats control big cities that are far more racially mixed. A relatively small number of, mainly Democratic, districts also drive the lion's share of the nation's economy (e.g. <500 of the counties won by Biden this election generated 70% of the US GDP in 2018 versus >2400 of the counties Trump won that generated only 30% of GDP).

And while other federal states, like Germany, Australia and Canada have similar deficits in their constitutions, they do not, as Teles points out, have "the same degree of representative inequality that the Electoral Collage and the Senate generate between a citizen living in California versus one living in Wyoming."

Ultimately, these structural imbalances are bad for democracy itself. As Klein argues, "what motivates parties to change, compromise, and adapt is the pain of loss, and the fear of future losses. If the party is protected from that pain, the incentive to listen to the public and moderate its candidates or alter its agenda wanes." 

This imbalance and "unfairness" looks set to continue for the foreseeable future (or at least until Texas flips). And a rationale Republican party will do everything it can to hold onto its advantage.

    

Do Face Masks Really Work?...Science on Both Sides?

Joe Biden swears by them...Trump, not so much. Iowa Gov. Kim Reynolds (R) was recently criticized for saying there was 'science on both sides' of the mask debate. While the CDC recommends wearing masks and studies show their positive impact, there have not been many large scale trials demonstrating their efficacy. But we now have the results from one such trial from Denmark involving 3,000 participants. The 'Danmask-19 trial' was a randomized controlled study--making it the highest quality scientific evidence. And the results...

..."no statistically significant difference between those who wore masks and those who did not when it came to being infected by Covid-19." Details can be found in the Spectator.

But as Forbes reports, the publication of the study in the peer-reviewed Annals of Internal Medicine has generated heated debate. Health experts, including the lead researcher behind the study, disagree with the results. The study has numerous limitations, but Dr. Christine Laine, editor-in-chief of the above journal, argues that the study did a good job of answering a very specific question: whether or not face masks protect wearers from Covid-19 in areas with low infection rates and high levels of social distancing. "It did not answer the question about whether widespread masking mitigates SARS-CoV-2 infection."

Bottom line: In areas where infection rates are low and social distancing is practiced wearing masks may not be that important. So, wear them in crowded places but okay not to in big open spaces. Seems intuitive.