Human Behaviour After COVID-19

Weekly Investor Letter: Macroeconomic Update

By Steven McClurg

“Skid Row.” Howard Street, the street of the unemployed in San Francisco, California 1937. Photo by The New York Public Library

There is hope and an expectation that lives will return to normal after the quarantines loosen and “non-essential” businesses are allowed to open in the US and globally. Market participants believe that a $2 trillion dollar aid package is enough to float small and large businesses, as well as the 20%+ who are now unemployed — not to mention freelancers who do not qualify for unemployment and many who are underemployed. In fact, the markets continue to rally on hope and news that the COVID-19 curve is flattening and a vaccine is close.

Hope is good for mankind, for peace of mind, and should be spread to all humans. Hope is essential for building a better world. Unfortunately, hope is not a great investment strategy.

After the Curve

The last two months have created xenophobia and fear of any and all other humans. The Government’s medical advice is to wear masks and stay six feet apart (except for the WHO, who have consistently stated that masks will not protect you). It has become a societal norm to not gather, avoid crowded places, and stay at home. It has also become commonplace for people to call the police and cyberbully others who do not follow their own beliefs and standards on how to stay “safe”.

Humans develop behavioural responses to deeply embedded fears spurred by events — be it from dangers to person, mind, or finances. After the Great Depression, an entire generation hoarded food in freezers and cellars, distrusted banks, pinned money inside their clothes, or hid money in their homes.

After being forced into a COVID-19 lockdown, many generations to follow will behave differently from this point forward.

Industries that have been hit the hardest from February to April of 2020 have been travel, hospitality, food service, and personal hygiene. The travel industry will likely continue to suffer, particularly airlines, which have no revenue at the moment and are quickly burning through cash. The government bailout for airlines is estimated to not last beyond September.

Beyond this summer, people will continue to avoid airports, where TSA lines are long, passengers are flying through from “God knows where”, and the potential for spreading a virus is likely the highest than any other public location. Planes are recirculating air, spreading any disease, bacteria, or virus from any one person to everyone on the plane by the time the flight has landed. The same is true for ships and cruise lines. Airbnb will possibly burn through their cash, despite current fundraising. People will have a hard time trusting random people to clean their vacation rentals over a big hotel chain. Hotel chains are not off the hook either as they will also suffer from people generally distrusting of who might have stayed in that room before.

Restaurants will have a very difficult time re-opening as well. Many are barely breaking even, if surviving at all, by turning into takeout catering services. Psychologically, people will have trouble returning to dine-in, especially with the most profitable restaurants being those that operate on a wait or pack people into close tables. Even when restaurants re-open, it typically takes three months to a year to train staff and get to profitability. Most importantly, restaurants mostly hire people working at, or in some cases, below minimum wage, as servers mostly rely on tip income.

Attitude Towards Working

If a restaurant server was making minimum wage (we will use California’s $12/hour since California is the most populous state), which comes to $24,960/year, or $480/week. On unemployment, the same person qualifies for $240/week plus $600/week extra from the Federal CARES Act, for a total of $840/week, which is $43,680 annualized. At nearly double the wage, there is an incentive to continue not to work, even beyond the term of the CARES Act benefit.

Local businesses will have difficulty hiring back employees when they are allowed to open again. Given that $56,000 is the median salary for the US, at $54,000 annual wage, an American can collect the same amount in unemployment benefits as a paycheck.

Just shy of half of all US wage earners are better off on unemployment insurance under the CARES Act than actually working. Many know this and are asking to be fired. Needless to say, it may be difficult to hire back employees once they are gone, and a V-shaped return to full employment is very unlikely, even if there were jobs available.

Unemployment rates, GDP, and Future Earnings

Official unemployment rates are 16.4%, but we estimate that real rates are closer to 24%, with little reason to decrease. As the economy re-opens, it will be extremely slow, and customers coming out of hiding will be slower. Hirings will be deliberate if there are many lower-paid laborers who want to come back to work immediately (see above).

Higher paid labor will find it more difficult to find jobs. Unemployment will remain higher than 15% for most of 2020, the highest in the post-war period. Unemployment insurance will not last forever, and are covered by the states, who unlike the Federal Government cannot print more money. Large states like New York, California, and Texas have nearly depleted their through unemployment insurance coffers. During the last recession, states borrowed over $150 billion from the federal government to float unemployment payments. This time, states will likely need to borrow $500 billion.

Though lower unemployed wage earners make more through the CARES Act, overall there is less income for discretionary spending among unemployed and underemployed workers. Less available cash alongside low consumer confidence should push GDP down further.

Q1 GDP was down 4.8%, despite lockdowns put in place in only the last 2 weeks of the quarter. The economy was already softening, but the spending halted. Q2 GDP could lower as much as 40% YoY, creating a much more severe recession than 10 years ago. At the growth rate the US experienced in the aftermath of the last recession, it would take 3 years to recover.

Future earnings of the market is already a concern.

Terrible earnings reports have been released every day but the market is only down 12% as of April 18th. With over 20% unemployment and a 40% GDP decrease, earnings could drop as low at 110. If P/E ratios reflect past recessions, we can expect 16x earnings, which means the S&P can drop to 1,760.

Our actions are dictated by emotions; and the markets are a representation of the collective consciousness of all participants. As the market and economic indicators continue to decline, we will also continue to experience a psychological downtrend of emotions including anxiety, panic, anger, and fear. This vicious cycle will exacerbate an already ominous and disastrous situation that will be felt from our pocketbooks to how we help others. Let’s hope for a strong and swift rebound while we also prepare for the tumultuous times ahead.

Valkyrie Funds

Steven McClurg — CIO
Leah Wald — CEO

Valkyrie is a discretionary global macro investment management firm. By analyzing fundamental macroeconomic, geopolitical, and social factors we are able to listen to the markets and effectively manage risk and generate alpha.

Valkyrie believes that shifts in government economic policies, political climates, currency exchange rates, international trade, international relations, and interest rates impact all financial markets. Utilizing this expertise of the global economy and financial markets, ExI has constructed unique portfolios with a dynamic macro edge that includes exposure to emerging asset classes.

Together, Steven and Leah utilize macroeconomic strategy to structure and manage portfolios.

About Steven McClurg (CIO):

Steven McClurg is the Chief Investment Officer at Valkyrie. He was a managing director at Galaxy Digital, through the acquisition of his previous company, Theseus Capital, where he was a founding partner and CEO/CIO. Steven started his asset management career at Guggenheim Partners, a leading global investment and advisory financial services firm, where he was managing director and portfolio manager, including oversight of Emerging Markets and Sovereign Credit.

About Leah Wald:

Leah Wald is the CEO at Valkyrie. She was a Partner at Lucid Investment Strategies, an asset management firm specialized in investing in macroeconomic trends. Prior to joining Lucid, Leah was at Vital Financial analyzing investment strategies for Japan, Asia, Middle East energy, and global macro strategy. Leah started her career working at the World Bank Group reporting directly to the former Vice President of the Africa Region.


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