Before, During and After COVID-19

Stewart: Welcome to another edition of Insurance AUM Journal podcast. My name is Stewart Foley, and I'm your host standing with you at the corner of insurance and asset management. Today with a very special guest, Chief Economist of Loop Capital, none other than Chris Meyer. Chris, thanks for being here with us today.

Chris: Stewart, thank you very much.

Stewart: Can you talk about your bio, your background just a little bit? You've been the Chief Strategist and Director of Analytical Services, that's your proper title. How'd you get there? Talk to our listeners a little bit about yourself.

Chris: Sure, I'd be glad to. I started out in investment management, working at a bank in Detroit called Detroit Bank And Trust, which evolved into Comerica Bank, which still exists. And I began in their investment department as a municipal bond analyst. I had graduated from the University of Michigan with a BA in Economics. And by virtue of starting with the bank, they were good enough to give me some experience and some skills. And so gradually progressed in the municipal finance business, worked for a mutual fund company, Kemper Funds. Worked for a couple more mutual funds before moving over to work at Loop Capital Markets. At Loop I started up the research group, which does a variety of things, including macroeconomic forecasting, regional analysis, industry level analysis, and financial market commentary.

Stewart: That is very interesting that the job that we want to have you do today is not an easy one, which is talk about the US economy in the midst of a very disruptive COVID-19 outbreak and crisis. So, maybe the place to start is where were we before all this?

Chris: I think that's the right way to start, Stewart. You've got to put it in perspective what we've experienced, if you can. And the last thing that I remember before the avalanche hit us was that 2019, if you recall, was a period of deceleration. So, we had the 2018 strengthen the economy. I use strengthen in quotations, a little bit of push in the economy. Some benefits from the tax cut and Jobs Act stimulus there. The economy performed better than expected. And then as we moved into 2019, there was a fairly wide expectation for a deceleration in the economy. So, 2018, for example, we came in at 2.9% for the full year and expectations were that we'd slow up a little bit to 2.3%, which is fairly good in the current context. If you recall, the big issues at that time were trade war, which was a big headwind, slowing global growth, an=other big headwind. Then we had to work through an inventory correction in early 19 and also that kind of strange consumer shock that we experienced as a result of the government shutdown the end of the previous year.

Stewart: It's really interesting. And I think one of the things, and you've been at this awhile, and so have I, is it's impossible to create perfect financial market forecasting models because you never know where the next risk is coming from. I think who could have foreseen this? What's turned into is this speed and depth of this economic downturn, at least on the initial numbers, is staggering, purely an exogenous shock obviously. But one that's very difficult to quantify. Is there anything historically that you can come up with that compares?

Chris: Stewart, there's nothing in the modern era that compares to this. And certainly by modern era, I'm really referring to the modern era of economics statistics, which really is pretty much post world war II. Economists don't really even like to use the data from the Great Depression, if they can avoid it, because of a variety of factors. So, there's no data we can look to, there's no real experience we can look to. Some people have tried The Pandemic Of 1918, but that's a sample of one even still, and that sample is from a hundred years ago. So, I don't know how instructive it might be.

Stewart: And when you look at the [FED 00:00:04:37]... So, I've got a finance background, you've got an economics and finance background, we all know how monetary policy is supposed to work. And throughout my lifetime and I'm gray and you're gray, people can't see us obviously, but if you would have told me at some point that interest rates would be below zero, I would have just told you that that's not possible. Today we have a situation where monetary policy and the way that it behaves when we get down into these kinds of negative rates, and where bond durations are longer than the maturities, it's a real odd situation here. Does the FED have any more arrows in the quiver? How do you see monetary policy fitting in with this current situation?

Chris: Well, I think monetary policy was about as effective as they can be under the circumstances and I give them credit, perhaps it's too early for that. But I think they did react fairly quickly and responded aggressively. And the fiscal side of the ledger, the administration followed in fairly quickly thereafter, there's a lot of imponderables with respect to The Cares Act. We can talk about that in a second. But I think the FED so far has done well with what available tools they have. Your question is a great one, what have they got left at this point? Well, they have an essence of unlimited ability to monetize the debt, if they want to. So, there's no limit to quantitative easing, if you will. In theory, the treasury would issue the debt and the FED would print the currency and you'd have a full monetization of the deficit.

Chris: I think the time really though, is for fiscal policy to go even beyond what they've done already. Monetary policy is just not going to have the effectiveness that it did during the Great Recession, for some of the reasons you mentioned, Stewart. The fact that we've done a lot of these things already, they've shown that quantitative easing has a diminishing return per experience, and a cycle QE3 was not as effective as QE1. And there's sort of a diminishing return probably to forward guidance as well. So, what does the FEW do? They're kind of down to operating in an emergency mode, when necessary. I think it's up to fiscal policy to really make sure that the economy recovers appropriately from this recession.

Stewart: It's unprecedented times, and I think there's so many news outlets and so many times I've heard that exact phrase. Unprecedented times. It is a remarkable time, and one remarkable comment that I've never heard, or thought I'd ever hear in my life, is our Senate majority leader, none other than Mitch McConnell, recently suggesting that the United States should be allowed to file for bankruptcy in order to deal with the rising deficits caused by the current pandemic. I'm a former municipal treasurer and the credit worthiness of the municipal bond market was paramount to their cost of funds. And the idea that anybody would suggest that the US government would file for bankruptcy astonishes me. What do you think when you hear something like that?

Chris: Well, it's obviously a concern. I should say that my employer Loop Capital Markets, it is a public finance firm that engages in municipal financial market activities, underwriting bonds, and whatnot. So, bear that in mind. But what we want in the municipal market in general industry participants is a market that can function efficiently, or as efficiently as possible, that offers the chance for the widest number of issuers to participate as possible. And when various folks in Congress sometimes mention a new policy line or resurrect an old policy line that sometimes it can conflict with what market participants believe is sort of a common sense approach that previously prevailed.

Stewart: I think that's an interesting way to look at it, an interesting take. And I mean, I think that we can agree that in the last couple of years, lots of things, or maybe old ways are out, and one of them is the criticizing of the FED chair. And Mr. Powell has come under some frequent criticism from our President, which has led to some concern that the FED is being politicized. How do you feel about that? Can you explain to us, one way or the other, your views there?

Chris: Yeah. Stewart, I'm opposed to any brow beating of the FED, just as I'm opposed to any attempts to influence the Supreme Court or other areas of the government that are afforded protections for political influence, for good reasons. The FED, as you know, is only going to be as effective as it's allowed to be independent. A controlled or a non-independent FED, or one that's under coercion, or a central bank that's in fact run by the government is never going to be as effective as the independence of the central bank that has worldwide financial market credibility. And that's what the FED has. They have the largest economy behind them in the world, they have the largest financial markets, the reserve currency, in the world. And they're in a position to have effective and appropriate influence on what's going on.

Chris: I'm kind of rambling here, but let me get back to the point. What's wrong with coercing the FED? Well, politicians always have a desire for low interest rates, so the business of their constituencies does well. The FED at times needs to battle inflation and needs to keep interest rates higher. And so left to their own devices, the politicians would engineer a world where we suffered from inflationary pressures consistently, and usually over time inflation builds, it builds. So, you need the independence.

Stewart: When you look out today, lots of uncertainty, what are the two or three primary economic indicators that you're going to be having your eye on, going forward?

Chris: Well, I'm going to be looking to initial jobless claims to tell me that the claim levels are hopefully returning very rapidly to pre-COVID levels. That would tell me a lot. The speed at which they come down and the level that they come down to is going to be very informative. One of the things I'm concerned about is how many of these temporary job losses, and that's all they are so far, how many of them will become permanent? I think that's a function of the length of time the economy spends in shutdown mode, which hopefully won't be too much longer, as well as the industries and trade flow dynamics of how the virus shut down certain occupations faster than others. I think that's going to be a big indicator.

Chris: I think you've just got to watch the FED. Everything they say and do right now, their speeches, it seems like they're in full alignment on policy, they're emergency Defcon one mode, as they should be. The administration and their plans are going to be key. This is just an environment without precedent. So, the same things I'm watching, like the COVID numbers, and trying to get hopeful glimmers that we've [inaudible 00:12:29] the curve and headed in the right direction. Those are all the things, the stock market's a great barometer, as you know. It's one that everybody has access to. Or price of gold, or Bitcoin if you're more contemporary.

Stewart: There you go. So, here's the hard question. Are you expecting a V-shape a U-shape? And what do you think is the primary determinant?

Chris: I think it's going to be a V-shaped recovery, and the V-shaped is the most desirable, but the least seen. It's only happened about a quarter of the time, V-shaped. But it's the most desirable because, assuming you have to go down in the first place, it bounces back off the bottom very quickly. More and more economists and strategists, like myself, and other folks are thinking that the length of time spent bouncing along at a zero or negative growth might be several quarters. And so the shape of the recession as they describe it would be U-shaped, and that in fact is the most common type of recession. Usually it would only be instances like this, with the virus where you get an immediate abatement of the dynamic that's subtracting value from the economy and markets and whatnot, and they can return to normal levels over a period of time. But the basic argument is between V-shaped and U-shaped.

Stewart: And maybe a correlated data point supporting your thoughts about a V-shaped recovery, when the bars opened up in Milwaukee, there was overwhelming pent up demand. So, I think that certainly backs up your thoughts there.

Chris: Well, some of those types of indicators are the best indicators you could find. What's happening at your local Milwaukee house of refreshment, or any other location, that gives you real time indicators. I remember really early on in this whole process talking to the cab driver, and he just turned around and started ranting about being down 35% and having no clients. It was just horrible to watch, but certainly told me where things were at that time economically.

Stewart: Absolutely. It's a pretty direct line. Well, I can't thank you enough for being on with us. It's great to get a guest that has as much a great perspective and a great background as you. Thanks for spending time. I also found out personally that Chris, your parents and I both lived in Columbia, Missouri, around the same time. So, small world indeed. Go Tigers.

Chris: Absolutely.

Stewart: So, thank you so much. We've really enjoyed having you on. And I just want to remind everybody that you can find us on all your major podcast platforms, follow us, like us. If you have suggestions for guests, you can reach us at podcast@insuranceaum.com. My name is Stewart Foley, and this is the Insurance AUM Journal podcast