New Economy, Old Wit

Winston Churchill came upon George Bernard Shaw at a cocktail party and greeted him by saying ‘Looking at you, one would think there is a famine in England’. Shaw, whose 1926 Nobel Prize was awarded for ‘stimulating satire’, replied ‘looking at you, one would think you caused it’.

While Churchill and Shaw were never close enough to constitute a literary Laurel and Hardy, they enjoyed a respectful and very witty acquaintance. This kind of relationship made me think of the bifurcated nature of markets – where since the coronavirus crisis ‘new economy’ (essentially anything tech) stocks have been lavished with capital, while those in the ‘old economy’ (banks and energy companies) have been starved of it.

Like the clever repartee between Churchill and Shaw, last week saw a quick twist and turn in the performance of ‘technology’ stocks relative to ‘old economy ones. For the sake of background, the shift in the relative performance between the two styles of investment flipped at a magnitude of ten standard deviations, according to some metrics.

The reason for this sharp change in investor mood was the release of vaccine test results from Pfizer/BioNTech, following on the news that Joe Biden had effectively won the title of President-elect. The Pfizer result (note that the company’s CEO sold nearly USD 6mn of stock on the result) is a manifest pivot point in the coronavirus crisis, not just for markets and the economy, but for the way people will lead their lives in the next year. Mentally, it has the effect of splitting the horizon into ‘the near future’ and the ‘longterm future’.

For the ‘man and woman in the street’ the ‘long future’ becomes rosier, and enhanced visibility will allow many the chance to think of travelling and socializing freely again, a la my ‘Roaring ‘20’s’ (Oct 17, thesis.

The (health) risk is that the promise of a vaccine (it will be a year before most people in developed countries are vaccinated) will lead many to change their ‘near future’ behavior such that the positive effect of lockdowns will reverse and healthcare systems will be further overwhelmed. The sad and unnecessary effect of this will be more fatalities and deeper lockdowns (I expect Europe and the US to impose ‘decisive’ lockdowns in early January). To this end, policy makers should play down the vaccine news.

Ideally, the Biden administration whose economic mission is to ‘reflate, repair and redirect’ (as per my recent FT Wealth article, would coordinate an international coronavirus (and vaccine) response. This would involve Europe, Japan and maybe China, that would also incorporate how best to manage an internationally integrated stimulus plan. For the next two months however, we can fantasize about this.

Back to markets where the vaccine news is, across the board more unambiguously positive. The arrival of a vaccine gives markets greater clarity as to when sectors like cinemas, airlines and hotels can return to normal. For business people in these sectors there is now also a degree of clarity as to when to restart investment.

With respect to sectors like banks and energy, which have been starved of capital, the market rebound has a reflexive element in that it removes the stress of an existential risk. Some companies in these sectors are very cheap historically and may now have a catalyst for better performance. The irony is that for younger investors, who appreciate the transformative power of technology and the importance of environmentally and socially responsible investing, it is really only fusty, old world industries like banking, mining and oil that can deliver the returns necessary (assuming their valuations revert to historical levels, i.e. their prices rise) to adequately support their pensions.

It is a bitter investment pill to swallow, more so if the valuation of technology stocks has now peaked. I am not sure that it has, but the last time we saw such wild swings between the yin of ‘old economy stocks’ and the yang ‘new economy/tech’ ones, was in early 2001. We know what happened next.

While we wait for the market dust to settle on the vaccine news, let’s consider another exchange between Churchill and his Irish friend in 1923. Shaw wrote to Churchill ‘Am reserving two tickets for you for my premiere. Come and bring a friend—if you have one.’ Churchill replied ‘Impossible to be present for the first performance. Will attend the second—if there is one’.

Have a great week ahead


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