The Breakdown - The Anxiety Index: 4 Fear Factors Shaping the Economy

Episode Date: August 29, 2020

Today on the Brief: Skepticism around Powell’s inflation prognostications The Tesla Stock Split Game China’s COVID-19 vaccine maker presses countries for early adoption Our main discussion: The Anxiety Index We live in an economy organized around consumption and perpetual growth. In that context, factors that cause consumers to be fearful, reduce spending, increase savings, move less and generally slow down can wreak havoc.  In this episode, NLW discusses four factors shaping and driving consumer anxiety, including: COVID-19 related concerns, both health and economic Monetary policy questions  U.S.-China tensions  Election insecurity 

You take all these factors together, and whatever the historical anxiety index is, we have to be extremely high on that scale right now. When that happens, there's going to be a fundamental slowing, a shift to focusing on defensiveness, a shift to focusing on building resilience, an unwillingness to move more quickly to take risk to make bets. That's a really hard place to jumpstart an economy from. 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, bitstamp, and nexo.io, and produced and distributed by CoinDes. What's going on, guys? It is Friday, August 28th, and today we are talking about the anxiety index. This is four fear factors shaping the economy. First, however, let's do the brief. First up on the brief today, more reactions to Powell's speech. So Jay Powell gave a speech yesterday on the new direction of the Federal Reserve, which, as we'll see, is mostly a lot of the same direction, but in a slightly more accentuated way. And that's kind of the point is that we're now 24 hours on, and the reaction was a whole lot of meh.

Bloomberg's headline was, the Fed's new plan to lift inflation faces skepticism. and I've pulled a few quotes from that and other sources that I think reflect the general attitude. The chief economist at Jeffries says, the Fed needs to articulate very clearly how they plan to achieve the new objective, otherwise these are just words on paper and don't really mean anything. Referring to the toolbox from 2008 that has been redeployed, Robert Purley of Cornerstone Macro said, These tools took us out of the Great Recession but did not generate inflation.

It is possible that the Fed intends to use these tools in stronger doses, but even so, there is reason to believe that the power of those tools may be lower today than it was years ago. Ryan Sweet from Moody's said, The Fed can say they want inflation to overshoot, but that doesn't mean it will occur. Demographics and technology will be pushing against inflation. So I think what we're seeing is a settling of the mainstream narrative response to the Fed's speech as skepticism that they can even achieve this type of inflation, while it's certainly settling in a very different direction in some of the more alternative thinking

circles. Either way, you have to remember that the Fed's game is in many ways a game of confidence. Their job is to inspire markets to work the way they want them to work and act the way they want them to act, sometimes even without the ability to actually induce that behavior. Next up on the brief, the Stock Split game. Tesla is splitting its stock 5 to 1. Here's how the Wall Street Journal described it. recently said it would enact a five-for-one stock split, making its wildly popular stock even more accessible to individual investors. Trading on a split-adjusted basis will go into effect Monday.

Now, the B-School kids and traditionalists are batting their heads against the wall, because to them, a stock-split has nothing to do about the actual value of the asset. However, this is a narrative world, and in narrative world, a five-for-one stock split, as the Wall Street Journal puts it, makes it, quote, more accessible to individual investors. In other words, when you open up your Robin Hood app, you see Tesla much cheaper than it was, and you want to get in on that because you've been hearing about it, and now it feels like you actually can. Tesla shares have more than quintupled this year, and people are absolutely gobbling up options. The ratio of put-to-call options hit a record low about a week ago on August 21st,

and the co-head of derivatives at Susquehanna says, the options are pricing and the potential for more violent moves to the upside compared to the downside. It's a combination of euphoria, greed, and a little bit of fomo. This is relevant and worth keeping an eye on because Tesla is really the leader of the narrative game and the retail game right now, and this stock split seems to me to be the latest strategy in playing those cards. What will be interesting is to see if it actually works and if we start to see copycat stock splits really more focused on perception than real value.

Last up on the brief today, China COVID vaccine maker trying to move fast. a Wall Street Journal exclusive Cancino is looking for early approval for its vaccine to COVID-19. An executive at the company says that they are discussing with several nations to distribute that vaccine before the completion of the final phase of clinical trials, often known as phase three. Now, the Chinese military has already approved this before phase three, but obviously those large-scale trials haven't happened. So why is this relevant? Well, this kind of previews our larger conversation about the anxiety.

index, but frankly, we're going to see a lot more of this story. Remember when Putin announced that they had the first COVID vaccine in Russia? It shows just how intense this battle around a vaccine around the solving of COVID-19 is. But these early pushes also sort of create a different type of chaos because there is an additional dimension going on here, which we spend far too little time on, which is the trust of the public. It's a red flag to them, even if they're hungry for a solution like a vaccine when these potential vaccines aren't going through the full process of trials. This, in fact, is the perfect segue to move us to our main topic, the anxiety index for fear factors shaping the global economy. So what is the anxiety index? Well, it's a thing that

in terms of just pulling it together is a name that I just made up, but really what I want to look at here are the things going on in the world that shape specifically consumer sentiment, which, of course, shapes consumer demand, which, of course, is at the center of a global economy based on consumption. And for that right now, in 2020, you have to start with COVID-19. I believe that there are a number of dimensions about how this plays into the anxiety index. First of all, there is an economic dimension to this, right? Am I going to be able to do my job? Will it be prevented in somehow? Will the economy be shut down again? Will people keep coming to my store if I'm a small business owner? These are all really and very serious concerns given what we've seen over the last half year. There's also a health

dimension, of course. The cases in the U.S. are growing for the fourth day in a row again, and people are wondering, will I get sick? Am I at risk? Will there be another resurgence? Will there be a fall wave? What are the long-term impacts? One of the things that we haven't dealt much with because it's been so politicized to talk about death rates is what the actual long-term impacts of this disease are, and they do not seem very good. This is not something that you just get over in quite the same way of just a flu. What's going on, guys? I'm excited to share that one of this month's breakdown sponsors is Crypto.com. Crypto.com offers one of the most cost-efficient ways to purchase crypto out there, as they've just waived the 3.5% credit card fee for all crypto purchases.

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Layered on top of this is the sort of glib idea that somehow a vaccine solves everything, which of course doesn't at all take into account the notion, the reality, that Americans in particular are super skeptical of vaccines. There is in fact an entire Wall Street Journal article about this today, COVID-19 vaccine hesitancy is a growing concern for researchers and health officials. There are at least four different sets of people who are contributing to this skepticism of vaccines. On the far, far end of the spectrum, there is the whole Bill Gates conspiracy side of things, which frankly is a non-negligible size group of people. A second group are the folks

who aren't necessarily in the conspiracy world, but who have spent the last 20, 25 years, listening to the anti-vaxxer movement more broadly. A third group of people are those who are concerned because of politics, who are saying things like they certainly won't be taking anything before the election. And then the fourth, which is by far the largest of these groups, are those who have very reasonably just lost their faith in the medical establishment, because, of course, their abysmal track record on what really was going on with COVID, and in particular what was really going on with masks.

Unfortunately, the medical establishment has convinced a lot of people this year that they are less trustworthy than they were before, and so now the idea that they're going to turn around and ask people to take a vaccine is going to get some people skeptical. I suppose then you even have a fifth group, which is the folks who are looking at these rushed trials and the incredible financial incentives to be the first to market with a vaccine, who are skeptical not even because they inherently have a distrust of the medical establishment now, but because they're watching the medical establishment's previously established process be thrown out the window. Take this all together and you literally have five different groups who are hesitant to say nothing of downright resistant to a vaccine. So the idea that somehow a vaccine is just going to solve everything is completely nuts. This matters in terms of this idea of an economic anxiety index because this fear is hugely,

important in terms of how people make decisions. If they're taking risk minimizing positions, they're saving more, they're spending less, they're doing fewer things. And of course, there's a world in which that just seems like healthy economic behavior, right? They're designing for resilience. However, that's not the way that we've structured our economy in our society. It depends on people getting out there, spending money, and doing more things. And this is the direct enemy of that. There is unfortunately growing evidence that people are settling into this more defensive posture. The growth of consumer spending in July was a slowdown compared to these strong rebounds in May and June. It was still a growth, but it certainly wasn't

anything like the quick rebounds we saw in those earlier months, and that reflects in particular the rise again of cases in July. So if COVID is the obvious anxiety index contributor, let's talk about a few things, which maybe have a more indirect impact, but I believe are still part of this. The first is, let's just recap the monetary policy side of this. This is obviously a little bit less about individual decisions and more about corporate decisions and investment decisions, but I believe that it merits at least discussion. And so really, I just want to point out that there is a fear and anxiety on two totally different sides.

On the one hand are those who fear that this new policy, this new lenience with inflation, is going to lead to run away inflation at some point, believing that it will hit the poorest first. On the other are those who are convinced, as we mentioned just a few minutes ago, that the Fed is powerless to stop the demographic and technological deflationary forces that will themselves drag the economy down. And the point again, coming back to who this is going to impact is that people who are worried about these types of things may be less inclined to bet on long-term R&D and themselves take more of a defensive posture, which could contribute again to the slowing down of the whole economic growth engine. A third fear factor on the anxiety index is the U.S.-China trade war. And again, on the one hand, this is more focused on businesses and professionals. There are specific industries that follow this most closely.

In many ways, for regular people, this is just a political football, and certainly we've seen a sort of one-upsmanship about who can be the hardest on China right now. However, there's a few ways in which that's breaking down, and this is impacting regular people a little bit more. The first has to do with trade relationships where it is, in fact, smaller people and smaller businesses that are impacted, particularly in agriculture. One of the big parts of the phase one trade agreement had to do with how much China would buy from the U.S. of agricultural goods.

Right now, prices for corn and soybeans, which are both having banner years in terms of supply, aren't rising. They haven't risen since the start of the year since that trade agreement was signed. In fact, most active futures are actually down. Corn futures are down 16% since the start of the year. Wheat is off 6% and soybeans are off 5%. These numbers seem abstract, but have incredible impact on the farmers who are actually growing these crops. Another fallout of the U.S.-China tensions, while much stupider, still I think, drives the point home that this is finding its way to individuals. Of course, I'm talking about TikTok and the millions of TikTokers who are wondering if they're going to have, to flee to new apps within just a few weeks. This may seem frivolous, but one, you do have a

new class of social media influencer who's trying to build their profession around these channels, and two, more importantly, you have this whole generation of young people who are having this make the reality of US-China tensions very poignantly clear and impactful to them. Finally, there is, of course, a whole lurking military dimension and a military fear underlying this issue. And as soon as there are any indications that this is moving from any sort of cold to any sort of hot conflict, it implicates us all in a very different way. The last factor I want to touch on just very briefly in this anxiety index is election instability. The conventions are both over, meaning that we are in the major last run biggest phase of the presidential election.

And no matter what side you are on, including no side, everyone feels primed for not just a bloody battle, but for even a potential non-acceptance of the result. In fact, I've heard people on both the left and the right wax poetically about they hope that it's a runaway landslide at least one way or the other so that there isn't that potential for rejection of the results. You take all these factors together and whatever the historical anxiety index is, we have to to be extremely high on that scale right now. When that happens, there's going to be a fundamental slowing, a shift to focusing on defensiveness, a shift to focusing on building resilience, an unwillingness to move more quickly to take risk to make bets. That's a really hard place to jumpstart an economy from. And I think it's worth keeping track of some of these factors to understand

the confidence, the sentiment, just the feeling that underlies participation in the economy, because ultimately, it's a really important driver of what happens next. Anyways, guys, I appreciate you listening. Just an interesting way I thought maybe of looking at what's going on right now. Let me know what you thought at NLW. And until tomorrow, guys, be safe and take care of each other. Peace.