And we are willing to pay for it because after sitting around the same town for two years, the travel itch is strong (revenge travel). Instead, we want to go out and do things again, demanding more services (refer to the chart on right). We don’t need a new RV, the one in the driveway is only a year old. Now the wave of behaviour has started to change direction. Put all this into the mix and markets rock higher. We are not downplaying the contribution of stimulus, but changing behaviour is bigger.
Companies clamoured to expand capacity to meet demand and hired lots of people quickly-probably too quickly, as the passage of time will likely tell. So corporate profits soar and so does the economy. Even if supply chains were not impeded by pandemic issues, the economy has a hard time adjusting to such an abnormal shift in demand. The pandemic sent this line parabolic, with an extra trillion dollars being spent on stuff. Goods spending generally follows a steady growth path, with a dip down in recessions: you can see this in the left chart's drop in 2008 then, as the economy recovers, the line resumes its upward path. Goods spending has a bigger impact on both the overall economic activity and corporate earnings. All that income saved from not going to Six Flags or Le Bernardin (i.e., money spent on services) was instead piled into stuff (goods). When the pandemic hits, many began working remote, travel slowed, going out to dinner slowed-this was the initial behaviour response. Cars, iPads, renovating our homes to make them more comfortable, etc. consumer spending on goods or simply stuff. Let’s start with the left chart-this shows U.S. consumer data in these charts, but the pattern is similar in many developed economies. We think the following two charts can help explain just about everything: how the pandemic changed behaviors in one direction and then another, which has caused everything from a +25% year, -20% half year, global growth, now slowdown, inflation, central bank policies, and even why you can’t fly with your luggage or get a reasonable reservation at a fancy restaurant. (Okay, pebble in a pond may have been a better analogy but I’m now pot committed.) Now things will return to normal, but the impacts will continue to reverberate through the system for years, likely with a diminishing magnitude. The pandemic was an exogeneous shock to the entire system-it changed behaviors, economic relationships, moods, etc. Let’s say the butterfly (…perhaps Mothra) is the pandemic, and instead of the butterfly’s affect on weather, we are watching “the butterfly effect” reverberate through the economy, our behaviors, and the markets.
But the lesson is a small change (the butterfly) in a dynamic complex system (weather) can result in huge differences in outcomes over time.
Yes, we are misquoting a common misquote about chaos theory. If a butterfly flaps its wings in Africa, it can cause rain on the other side of the world, say in Toronto. Two charts that explain just about everything While many have complained of the positive correlation between equities and bonds this year, temporarily reducing the efficacy of portfolio construction, positive correlation is rather nice when everything goes up. Meanwhile, bond yields have dropped on recession fears. After a terrible June, the TSX has advanced around 4%, S&P 9%, and Nasdaq by 12% in July. Yet markets have rallied this month, reinforcing the fact that the market’s starting point matters just as much as the news flow. GDP posting a second consecutive quarter of negative growth, and the recession chorus growing louder, things are looking dire. One would think that with CPI rising, the Fed hiking rates by 75bps, the Bank of Canada hiking even higher by 100bps, the U.S.
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