Yahoo Finance’s Myles Udland, Julie Hyman, Brian Sozzi, and Julia La Roche speak with Jefferies Chief Market Strategist David Zervos about the de-urbanization trend amid COVID-19.
JULIE HYMAN: We are back now with David Zervos, Jefferies chief market strategist, as well as our Julia La Roche. David, one of the other trends that you've been watching that I've been living, as you and I have emailed about, is "Escape from New York," the sort of de-urbanization that we are seeing now in the wake of the coronavirus pandemic. And we've talked with a lot of people about this, what effect is it going to have on work-from-home dynamics?
You're thinking about it sort of even bigger than that. Like, what effect is it going to have in a macroeconomic sense? So what do you think here as we go through the next six months, and you think this trend is really going to stick? And by the way, you escaped from New York as well, clearly, as we can see behind you.
DAVID ZERVOS: Yes. Yeah, I made my escape about almost five years ago now when my last kid went off to college. But it does seem that the escaped tendencies have gotten much bigger. Even before COVID, there was an escape tendency, given the SALT changes in taxes and some of the difficulties people were having with higher tax rates or just the disparities became very large.
So I think-- look, the point of the piece I wrote earlier this week, which honestly I probably-- I haven't even finished responding to the emails that I got from that piece called "Escape from New York," yet I'm about halfway through about 150 emails, trying to get back to all the people that had comments or questions or observations. A lot of really similar observations, some different, for sure.
But I think the story is really a work-from-home story. That is, that if work from home becomes embraced the way I think it will, even if it's two days a week, even if it's three-- or if it's more, but as people and executives get more comfortable with this idea that people can be more productive in their home environment, the potential cost savings are enormous. And we're seeing that in the margins on so many companies, particularly finance companies-- finance sector companies, like Jefferies, but many others.
And I think it's just going to resonate with everybody that sort of knew deep down in their hearts that we didn't really need New York City. We might have liked New York City, might have been fun. But as it becomes more and more expensive and the alternatives become more viable, I think you're going to see that exodus really accelerate.
And I'm not sure where New York goes. But, you know, I did have the movie "Escape from New York" in 1981 as part of my metaphor in the story, which was a great movie if you haven't seen Kurt Russell in his 20's, you know, fighting through the streets of New York. You haven't seen-- you haven't seen anything that great yet, it's an amazing histo-- it's one of those great films that I loved as a kid.
And remembering New York in the 80s, particularly the early 80s, it was just a very different place. But it had an edge, it'll come back, it'll come back differently. And maybe it just won't be the billionaire playground that it became. And for someone like me, I'd say that's probably a good thing, not a bad thing.
But then again, you know, it's a very difficult place to raise a family and do what we've done in New York for the last 10 or 15 years, which is really gentrify it beyond maybe where that gentrification should have gone or maybe was inevitably unstable, given the political backdrop of a city as complicated as New York. So I'm bullish on the get out of New York trade.
I don't buy the trade that it's all going to just revert right back to what it was like 9/11. I don't think this is a 9/11 storyline. I think there's something bigger, and a lot of it comes from work from home.
JULIA LA ROCHE: David, I certainly believe you that you got hundreds of emails. And I know I immediately reached out to you as soon as I saw your note. I do want to kind of talk a bit more about this, explore some of the macroeconomic consequences, especially when it comes to labor. I think you were also alluding to that. And also how it kind of plays into your views.
You have these disinflationary views and how this kind of plays into that.
DAVID ZERVOS: Sure, I mean, it's a very-- it's a pretty straightforward argument. If you're going to take, you know, Goldman Sachs Asset Management or a big chunk of JP Morgan or, I think we've heard now that one of the-- Moelis is going to let its bankers kind of move anywhere and go and work from home. I would find it impossible to believe that some of that cost savings won't be shared just by-- some of it will be shared by workers, but other-- by shareholders and those that own the business.
So I think it's just a disinflationary story all around. It's expensive to live in New York. You're going to spend less on housing, you're going to spend less on food, you're going to spend less on daycare, you're going to spend less on education, commuting. Even if you don't think there's wage disinflation, which there may or may not be depending on how competition rolls, I think there's just the services that people use are going to cause disinflation numbers to become more prevalent as we move through time.
And potentially even from a housing perspective as we equalize out a city like, you know, Bozeman, Montana, or Boulder, Colorado, or Miami to some of the suburbs of New York, which are clearly much, much more expensive. So I think there's that-- that is a disinflationary tone. And it's very much like some of the outsourcing disinflation that we got when we were taking businesses and moving them and offshoring them to China, we're sort of offshoring a bit of New York City into its own backyard in the United States.
And that's just another disinflationary trend, which keeps me pretty excited about my disinflationary views. By the way, these are-- and it's important to recognize these are not negative disinflationary views. They may be negative for a few people that have high-end real estate in New York. But they're not negative from a growth perspective, they're actually positive-- as we economists would call it, positive supply shocks.
They make producing the widget cheaper and the cost of production cheaper. That's really what work from home does. And the whole gig economy that we were talking about coming in over the next 10 years basically got forced in, instead of in 10 years, in 10 months. And I think that's a big-- that's not just work from home, but it's all the technology that we've adopted. And it's a huge disinflationary impetus, I think, into next year and beyond.
MYLES UDLAND: And David, if you look at markets right now, yeah, look at DoorDash, Airbnb, the way those IPOs were received, you see all the SPAC activity happening. Stocks go up every day. Everyone's very excited about this next wave of innovation in the economy. And are you as excited, I guess, as financial markets are suggesting in those pockets? And how is that maybe coloring some of your views here as you look out longer term, right, what the next 10, 15 years, with that macro cycle of millennials getting older looks like?
DAVID ZERVOS: Well, look, I think-- I'm not going to comment on any specific stock, that's not what I do for a living. I'm a macro guy. And I've always found, even going back to the 90s, I was-- you know, I look back at some of the pieces I wrote back then, and it was very much a disinflationary technology view. And then I've added to that a demographic disinflation view that's really got me much more excited in the last decade or so.
But I've always been a believer in that positive supply side shock story being the driver for business cycles. I'm much more of a supply side economist than a demand side economist. I never really got brought up with Phillips curves and Keynesian economics. You know, taught at Rochester by a bunch of Chicago profs that were really neoclassical in their beliefs.
And technology was a big driver of business cycles for real business cycle theory types, like the ones that were teaching me. So I've had that in my DNA for a long time, and it never went away. And it drove me to have big disinflationary views in the 90s, which were very counter to the views in the early 90s when the long bond was yielding 7.5% and the funds rate was at 3 and 1/2 and everybody was thinking yields were going to go back up to double digits. Again, it helped me have a standout view back then on disinflation.
And I think that is where I come into this year. I just still have that view. So it's very hard for me to see, without a mistake, a financial tightening-- financial conditions tightening that's executed by mistake and then gets rectified. It's very hard for me to see why we have some big yield rise, why we have some big, sort of, risk off move based on inflation scares.
In fact, I thought it was funny, yesterday, Jay Powell, not a lot of people picked up on it, but he was talking about how excited the committee was that inflation expectations from the tips market had now gone back to getting closer to 2%. And, you know, I think they're even-- if they get up to 2.25%, 2.5%, they're going to be even more excited.
They're going to say, see, we can do it. Because there's a lot of people out there that think we are Japan and we can't get inflation, and there's a risk of that, probably a bigger risk of that than staying with too high inflation. But I think we have a very disinflationary storyline here in the US. We've had it, it's been in with us for decades.
I know everybody in the bond market loves to talk about inflation scares. And honestly, I hope we get one. I hope a bunch of those guys come out of the woodwork and I get to fade them again because it's been a great trade for three decades fading those guys.
JULIE HYMAN: Yes, you have been right, and there are a lot of people that have been pushing for that inflation, calling for that inflation for a long time who have not been correct. David Zervos, that's one of the reasons that we love talking to you. Jefferies chief market strategist, thank you so much for being here. Julia, thanks as always as well.