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Peter Cecchini: I don’t think we’re going to see a V-shaped recovery

Peter Cecchini, Founder of AlphaOmega Advisors, LLC, joins Yahoo Finance’s Julia La Roche to discuss his outlook on the markers as another 1.1 million Americans file for new unemployment claims.

Video Transcript

JULIA LA ROCHE: Of course the jobless claims report coming in-- it gets worse than economists had expected-- more than a million. Again, 1.1 million Americans filing for unemployment claims in this latest round here. I know they had expected it to be under a million, again. What do you make of it and is this just another sign that things are starting to slow down this recovery here?

PETER CECCHINI: I think there are a couple of things to note. Clearly, the high frequency data like initial and continuing claims right now are the most important pieces of data to take a look at. You know, the numbers are so large and so unprecedented that to have continuing claims now just under 16 million, that even the methods for collection-- you know, they should be fairly accurate. But indeed, there are all kinds of problems when the numbers of these big-- are this big.

I don't think we're going to see frankly, a V-shaped recovery, so really, it is not a surprise to me to see continuing claims hovering around 60 million and initial claims above a million. I would expect frankly, when it comes to the real economy, more of a W shaped recovery, with a trajectory that's very difficult to predict. I mean, the severity of the downturn has been extreme. And so therefore, I think it wouldn't be all that realistic to feel that you know we're seeing some sort of a V-shaped shape boom in economic activity as perhaps the White House might characterize it.

JULIA LA ROCHE: Yeah, I certainly want to dig further in there. And I know we've talked a lot lately just about the Fed's moves here-- basically, the dependency on the Fed, but also, the fiscal side of things is something that folks certainly need to pay attention to. So, I mean, how much further can the market even go at this point, given all of the actions that we've seen over the last several months? And do you think that things will finally start to turn in the other direction?

PETER CECCHINI: Yeah, I really do think fiscal policy piece of this is key. And I wrote about that-- thank you for mentioning it-- in my newsletter in a piece called It's a Mad World. And really, my view right now is that Fed policy is really more palliative than it is stimulative. And what I mean by that is the Fed is engaged in sopping up massive issuance. We had a couple of recent auctions-- we had a 30 year and 20 year that didn't really go all that well. And sopping up Treasury supply is really going to keep the Fed busy.

Short of any additional activity it may undertake under section in 13.3, which is what has enabled it in conjunction with treasury to buy, for example, IG and high yield debt. But I don't think they're going to execute on a more aggressive policies under 13.3 until frankly, things get a bit worse, which in fact, they may, because fiscal policy is the key. And it doesn't seem like it's going to be coming in short order. And that's really to me, combined with sort of working from home day trading, has what sort of contributed to this in my view, sort of irrational exuberance in the equity markets.

JULIA LA ROCHE: Yeah, I know something that you had talked about. I think you're the first to coin it, calling it the Portnoy top, of course, referring to that Daey Day Trader Global, and that kind of phenomenon that we're seeing. What is it that you think people are fundamentally missing here? Is this just because people just have this massive fear of missing out or they feel kind of locked down at home and they just think that there's really no other alternative here other than markets that continue to go up?

PETER CECCHINI: Well, I think that that latter point is really important. I think in some regards, many-- new newbie investors really haven't seen markets where there hasn't been such massive support. And I think it's very difficult for all of us, including newly minted investors and market participants, to really understand just how massive the downturn was and how massive the fiscal and monetary policy stimulus has been. And in my view, to understand the fact that it's not sustainable from a fiscal policy standpoint.

Yes-- and by the way, the Fed can-- and I don't love the term-- but it can print money to infinity. But the efficacy of that policy really is no better than what it does to interest rates and to interest rate volatility, which it has absolutely crushed. So a near zero marginal-- the marginal benefit of additional QE from a rate perspective is not read at all.

JULIA LA ROCHE: That's really interesting that you mentioned interest rate volatility. Help unpack that for our viewers. What are the implications of that? I think that would be a really interesting thing to discuss.

PETER CECCHINI: Yeah. Well, and in fact, I know you have an upcoming guest from DoubleLine-- Jeffrey Gundlach of DoubleLine tweeted, actually, about how interest rate volatility had been in Death Valley having moved from, I think, he said Mt. Whitney.

And I picked up on that and I actually tried to put a bit of math around it in one of my pieces more recently, which will be on me Rosa and Roubini website. We discussed exactly how efficacious the policy has been thus far, absolutely crushing interest rate volatility. But the point here is that when rates are so near zero across the curve, unless the Fed changes its tack and decides that it wants to undertake negative interest rate policy, which even if it did, might not be all that effective, quite frankly, there's not a heck of a lot more the Fed can do from an interest rate policy perspective.

Interest rates are in Death Valley. They're going to stay there. But relative to the benefit to the real economy, the Fed in my view is probably done about as much as it's able to do.

JULIA LA ROCHE: You know, another area that you have been constructive on, if you refer back to the bond math, if you will, you've been talking about gold. And of course, gold has different purposes and reasons for folks investing in it. Where do you stand on gold today and how do you sort of continue to play that trade if you're still in it?

PETER CECCHINI: Yes, thanks. You know, I started getting instructive of gold sort of late last year. And it became clear that interest rates were going to continue to move towards zero. And, you know, there's obviously been of late an inverse correlation of rates to gold. And there are reasons for that we might not have time to discuss now, but I remain constructive on gold, because I think it remains an important substitute for treasuries. It's a real asset without a contra treasury liability, if you will. So especially if you are an emerging market central bank, gold can serve as an attractive store of dollar value without having that contra treasury liability, which at such low interest rates, lives with an awful lot of convexity risk as bond traders might call it.

JULIA LA ROCHE: And I guess before I let you go, Peter, and hopefully, we'll have more time here-- people often talk about-- and you hear the common refrain-- is that the markets are disconnected from the broader economy. We hear that constantly. So I would just kind of get your perspective. What would cause-- or what would be that kind of scenario where those two things would be reconnected, if you will, and what happens when they do start to be reconnected, the markets and the economy?

PETER CECCHINI: Yes, well, you know, markets often are disconnected from the economy. And this market in particular has some very interesting idiosyncratic elements to it, one of which is that the top five or six names in the S&P 500, and certainly in the NASDAQ, have actually, to some extent, benefited from the very trends that have hit the real economy.

So that's one-- that's one really interesting piece of the puzzle here. When you look at, for example, small caps, when you look at the Russell 2000, when you look at transports, or when you look at regional banks-- banks, for example, are down 30% year to date. And that's precisely because they tend to be more connected to the real economy than technology companies that actually benefit from work from home.

So the catalyst, in my mind, that will reconnect even some of those companies that have benefited from the pandemic, if you will, will be number one, fiscal policy not coming through in the right size, because I do think those direct deposits into people's checking accounts have made a tremendous difference relative to money supply growth and the ability of work from home folks to invest through Robinhood and other platforms into equities as a form of savings in their mind. And I think-- you know, so fiscal policy is number one. And number two, I do think there are inevitable defaults that are in the offing, particularly in commercial real estate, but also, in corporate America, because the debt load is absolutely immense. And even with lower interest rates, if spreads should widen at all, those companies are going to are going to begin to miss coupon payments, in my view.