Record highs on Wall Street tell us that investors are looking forward to a strong economic rebound in the post-COVID-19 world.
As crazy as the valuations are, I don’t think they are wrong about the rebound—at least not for mid-2021.
More, it seems likely to me that the release of a lot of pent-up demand will cause economic indicators to overshoot. Delayed purchases, construction, holidays, upgrades, medical procedures, and more may all break records next summer.
Several quarters of economic activity compressed into one or two could give the appearance of a much higher level of recovery than is sustainable.
This could happen even without more handouts from Washington—but I’m sure we’ll see more of those as well.
What often gets overlooked in the rosy coverage by the talking heads on financial media is what happens after the rebound subsides.
How much lasting damage is being done by the shutdowns?
Few seem to want to give this much thought.
I have been thinking about it, and here are some potential consequences to keep in mind:
- The appearance of the economy not only being back to normal, but “better than ever,” would likely result in many errors on the part of businesses, investors, and those in government.
- Investors, in particular, could chase stocks so high, today’s ridiculous valuations could look almost reasonable by comparison.
- Frenetic economic activity combined with monetary authorities seeing no risk of it could cause inflation to increase dramatically.
- While it lasts, the rebound would likely boost all commodity prices—and could do so even in advance of consumer price inflation taking off. Oil, specifically, would be a huge beneficiary.
- The appearance that “everything is better than ever” could cause an ill-advised, temporary decrease in demand for monetary metals among investors and traders who don’t pay attention to the monetary situation.
- But don't count on that last point; if inflation is picking up by this time, gold and silver could keep rising, even without fear driving people into safe-haven assets.
- An even bigger rebound in travel than most currently expect in 2021 could create over-confidence in related industries and send share prices in public companies in the space much higher.
- The “build back better” meme and its equivalents around the world are particularly bullish for the minerals needed to power the green energy agenda.
- That same agenda is increasingly bullish for uranium.
- Real estate, especially around medium-sized, more “livable” cities would likely do well.
- To the degree that anything overshoots because of the release of pent-up demand, it’s subject to sudden reversals. The whole economy could undulate like a yoyo until it settles down into whatever the new normal will be.
- Some of what we experienced in 2020 will leave permanent scars. I expect people to be more conscious of germs going forward. Facemasks may become commonplace around the world, as they already were in some places pre-2020. Many companies that discovered they can do without (or with much less) office space won’t go back to how they were. Etc.
That last point goes to the unanswered question of how much long-term damage all these shutdowns have done—and will do this winter. I don’t believe anyone has a good answer for this. There’s no way to tally up the butcher’s bill while the damage is still being done.
What does seem clear to me is that the likely rebound next spring and summer will cause the cheerleaders in mainstream media and many investors to become unrealistically optimistic.
I doubt that would last long, but it’d be one heck of a party while it lasts.
Caveat emptor,
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