The Breakdown - Mirage Recovery: What ‘Record’ GDP Growth Tells Us About the Economy

Episode Date: October 30, 2020

Today on the Brief: FTX launches equities trading  Avanti gets Wyoming bank charter France locks down and ECB intimates new stimulus Our main discussion: GDP growth report  The Department of Commerce released its Q3 GDP numbers. Touted as record growth, this is actually a much more complicated story. In this episode, NLW breaks down what the numbers tell us and what they don’t, and why we should be more focused on understanding long-term consumer behavior shifts than short-term numbers. 

People are going to make different decisions that don't care about what they're ordered to do because they just make sense for people to do. And as we start this new beginning, we're starting weaker. And the easy gains in many ways have already happened with reopenings. The demand and the desire for a better economy is there. It's just a question of when it's really possible. Welcome back to The Breakdown with me, NLW. It's a daily podcast, on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com, nexo.io, and elliptic, and produced and distributed by CoinDesk. What's going on, guys? It is Thursday, October 29th, and today we are talking about

a mirage recovery? What the GDP report tells us about the economy? First, however, let's do the brief. First up on the brief today, FTCS is launching Bitcoin and Crypto Pairs for stocks. FTX is enabling users to trade 12 with theoretically more coming, equity, and cryptocurrency pairs. They can trade Apple, Amazon, Tesla, etc. against Bitcoin, stablecoins, and more. So what is interesting about this? First of all, it opens up access to stocks to global markets. This is actually not available for U.S. users because of regulations. But historically, it's It's been very difficult for people in other markets to actually get access to U.S. stock, so this changes that. Second, it makes fractionalized shares super easy, which facilitates liquidity.

This is a use case for tokenization that is something that really fits with consumer demand. Being able to buy easily a very small part of a Tesla or Apple or Amazon stock just makes sense, especially to people who have been in the crypto markets for any amount of time. Third, and this is sort of about tokenization as well, it reinforces an actually makes real in some ways the tokenization of everything narrative that has been around for some time but really hasn't been real. This is something that Real Vision Crypto actually literally just had an interview about. And I was talking about it in the comments with Stacey Herbert, and I thought her comment was really smart. She basically mentioned how Abra had tried to do something like this

before, but it ran into U.S. regulatory interference. And she talked about how nuts that was, because it actually would be a great way for the U.S. to continue to expand its economic sphere of influence. So in any case, a very cool announcement that I think feels like it was both inevitable, but still no one had broken through yet. Next up on the brief, Avanti gets a bank charter from Wyoming. So this is the same special purpose depository institution designation that Cracken got a few weeks ago. And of course, this charter itself was worked on by the CEO and founder of Avanti, Caitlin Long. The benefits you'll remember are that people who have, or institutions rather that have this status, can operate nationally. They don't have to go through the state-by-state rigmarole of operations.

They can provide final and simultaneous settlement between digital assets in the U.S. dollar, which is something that other institutions can. It basically opens up a variety of not only use cases, but also confidence for a new category. of participants. We're big fans of Caitlin Long at this show. I'm super excited that this is now official. I think we all saw it coming, but it's nice that they can now go do what it is that they're going to do. So congrats to Avanti, and congrats to the rest of the industry for having more of these bank charters for digital asset focused institutions. Finally, on the brief today, there is more stimulus coming to Europe. Yesterday, France announced that there would be a new national lockdown until at least December 1st on an increasing wave of

COVID-19 cases. This was perhaps expected Europe has been flirting with lots and lots of more situational or specific lockdowns, but this is the first second wave lockdown to be at this sort of national level. Now, when it comes to the economy, the big question then is what is the European Central Bank going to do? Bloomberg today reported ECB signals December stimulus coming to new virus lockdowns. And this is a quote from the ECB. They said, the new round of Eurosystem's staff macroeconomic projections in December will allow a thorough reassessment of the economic outlook and the balance of risks. On the basis of this updated assessment, the governing council will recalibrate its instruments as appropriate to respond to the unfolding

situation. Basically, stimulus is coming in December. Expect it. With that, let's bring the discussion back across the pond to the U.S. economy. The Bureau of Economic Analysis released its third quarter 2020 GDP gross domestic product estimate. Now in quarter two, real GDP had decreased 9% quarter to quarter for a 31.4% annualized rate. So obviously people were hoping for a big number here. Economists expected a number that was a 32% annualized growth rate. Well, they got that headline they wanted. The economy grew at record pace 7.4% over last quarter, which means a 33.1% annual rate. It's important to note here that many economists hate the fact that the press annualizes the growth rate for maximum impact in headlines, because really the story is the 7.4% growth over last

quarter. So even though that 33.1% number is bigger than the 31.4% decline number from the quarter before, it actually means that the economy only recovered about two-thirds of the ground it lost earlier. Overall, the economy is currently about 3.5% smaller than it's. the end of last year. There are some other notes from the report and from other parts of the economy today. Initial jobless claims fell another 40K to 751,000, which is the lowest since mid-March. Consumer spending, which was part of that GDP report, and which accounts for more than two-thirds of U.S. economic output, increased at another record 40.7% rate in the third quarter. The housing sector was also another real bright spot. Low mortgage rates, demand for larger living spaces,

drove U.S. home sales to a 14-year high. Sales of previously owned homes climbed 9.4% in September, which was the fourth monthly increase in a row. This episode is brought to you by Crypto.com, the crypto super app that lets you buy, earn, and spend crypto all in one place and earn up to 8.5% per year on your Bitcoin. Download the Crypto.com app now to see the interest rates you could be earning on BTC and more than 20 other coins. Once in the app, you can apply for the Crypto. metal card, which pays you up to 8% cashback instantly on all purchases. Reserve yours in the crypto.com app today. In this crisis, many investors aim to keep and grow their digital assets.

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reopening of the economy. It's a far cry from signaling the all-clear that the economy is in great shape here. Bloomberg economist Andrew Husby wrote, Much of the third quarter strength was concentrated in the beginning of the period. A significant slowdown has emerged since then. Bloomberg economics expects a weak patch through the first quarter, driven by the impact of elevated COVID-19 transmission on behavior and lapsed fiscal aid, and a return to the pre-pandemic level of GDP in the fourth quarter of 2021.

Expanding that out, a Wall Street Journal, October survey of economists said that more than half don't expect GDP will return to pre-pandemic levels until next year, and they expect the economy to contract 3.6% in 2020. Now, what about the political sides? Because you know this is a political document a week out for. the elections. Paul Krugman tweeted obligatory tweet on GDP report. Everyone knew it would be a big number. It's telling us about the rapid but partial snapback of late spring slash early summer. Growth has slowed a lot since then. We're still far from full recovery and nobody cares.

Of course, the other side had a very different interpretation. President Trump tweeted GDP number just announced, biggest and best in the history of our country and not even close. Next year will be all caps fantastic. However, Sleepy Joe Biden and his proposed record-setting tax increase would kill it all. So glad this great GDP number came out before November 3rd. And then there's this finally, a Bloomberg opinion piece by Nier-Kassar and Tim O'Brien. The record economic boom is a mirage. The largest expansion in decades follows the greatest decline on record, and it looks like trouble ahead. And one of the things they point out is how hard these GDP numbers are because they are lagging. So they're looking at a different economic indicator to show maybe a little bit more

contemporary or current of a story. They write, for example, the Chicago Federal Reserve National Economic Activity Index tracks more than 80 economic data points such as production, employment, and consumption. After a cumulative decline of 22% in March and April, the index grew 4.2% in May and 5.9% in June, but it has posted slower growth in each successive month dropping to just 0.3% in September. How should we interpret all of this? Well, First of all, this is a hugely partisan issue in the context of the media that it's being dropped into right now. Although, I have to say Joe Wisenthal from Bloomberg made fun of it really well, he said,

I'm an annualized rate of change of sequential growth voter, so I'm going to be watching this number very closely. And of course, the joke here is that when it comes to the economy, people want things they can feel, see, and touch. And so it doesn't really matter what these numbers are. People either feel like the economy is getting better or they don't. A second interpretation is just a reminder. that there are going to be winners and losers coming out of this recovery or not.

This is going to be a hugely uneven thing. This is because we're seeing big shifts in how people live, and you would expect alongside that for that to cause demand shifts. This is naturally going to absolutely cleave some industries, make others thrive, and probably bring rise to some whole new ones. This matters in terms of how we discuss these things and how we make policy, because when we apply terms overarchingly to the economy, when there's such a radical winning and losing dynamic

in the midst of tectonic demand shifts and behavior shifts, it just doesn't make any sense. And speaking of not making any sense, the language of recovery just feels incorrect to me. It feels more like we're at a new beginning. Could be situational lockdowns, and even if there aren't, for I don't think that most Americans will abide

any sort of lockdown anymore, there are still going to be massive voluntary shifts in behavior. People are going to make different decisions that don't care about what they're ordered to do because they just make sense for people to do. And as we start this new beginning, we're starting weaker. We have 11 million fewer workers on payrolls than there were previously. Savings have evaporated trying to keep people going through so far. And the easy gains in many ways have already happened with reopenings, although, of course, if we go into lockdowns and then reopenings again, you could see it, come back and yada, yada, yada. But I will say, of course, that the demand and the desire for a better economy is there. It's just a question of when it's really possible. I will also

say, however, that the longer this goes on, the longer this weird twilight in between pandemic-ish thing is going on, the more fundamental the changes and decisions people are going to make. Because of that, the most useful economic analysis is unlikely to be these historic measures. Instead, it's going to be about changed beliefs and changed behaviors that follow. If we want to understand what the future looks like, we have to dig through second and third order effects to understand what's likely to happen next in terms of people's actual decisions. Of course, any data is helpful for filling out the story, so I hope this was interesting. I hope you learn something and I appreciate you listening.

I also appreciate, by the way, all your ratings and reviews. They're making a huge difference for helping the show grow. So keep it up. And until tomorrow, guys, be safe and take care of each other. Peace.