10 charts that define 2021
Published on: December 17, 2020 • Duration: 23 minutes
This week Real Vision’s Roger Hirst uses Refinitiv’s best-in-class data to review the dramatic year through the lens of 10 charts and then picks 10 more that define the narrative for 2021. It’s easy to forget that 2020 started off on a soft footing even before the pandemic struck. The narrative for 2021 is reflation, but is this dollar or growth reflation and is everyone already on the same side of the boat?
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2020 has clearly been a dramatic year for both financial markets and economies, and that uncertainty looks like it's going to continue well into 2021. In this last episode of The Big Conversation for 2020, I'm going to look at 10 charts that tell some of the story of the last year and also 10 charts that raise some of the big themes and topics for the year ahead.
When we look back at 2020, it's very easy to forget where we were prior to the pandemic. Before Covid hit, what were economies actually like? Were they stronger? Were they weak? Well, here's a chart, and this is the first chart that I'm going to show, which is one of the labor differential from consumer confidence. And it's a chart that I used at the end of 2019. So this is before anyone really knew the Covid pandemic was going to be an issue. What we see on this chart is that it was already showing weakening signs of the economy. If you look at this, this is jobs that are easy to get or plentiful, minus jobs that are hard to get. When we look at this, it was already rolling over. Now over the previous 30, 40 years, when it's rolled over, it's normally been leading to a recessionary type environment, perhaps the only one that that didn't happen was nineteen ninety five to nineteen ninety six. And if we just move this chart on for an extra sort of few months, you can see that because the pandemic, it did what you'd expect to see during a recession. But remember, before the pandemic, things were already starting to weaken in certain areas. And remember the equity market in the US, although it was at an all time high prior to the pandemic, the Federal Reserve had been very active in the repo market from September 2019, kind of greasing the wheels and making sure that there was support for the equity market. And I think that's key to remember because we'll see some other signs of weakness that were there before the pandemic hit. But once the pandemic hit, then we saw some quite dramatic moves. And firstly we saw those dramatic moves in markets. You may recall that there's probably two or three phases to how risk assets move. Firstly, we have that general risk off, this was late February, early March, where people sort of generally selling, but it wasn't really a sort of panic type environment. Then that risk off started to really accelerate. And so we got that deleveraging process, and that deleveraging process happened in the middle of March. And this chart shows just how dramatic that was for the bond market, because most people focus on the equity market, but bond markets are really what cause the Federal Reserve to really kick into action. In the middle of March when equities were selling off, suddenly we had a dramatic reversal in bonds. And you can see this with bond yields going up on the chart. Bonds were selling off aggressively at the same time as equities. Everything was being liquidated. You may recall that silver, gold, bitcoin were also selling off. And this is the point where the Federal Reserve and other central banks realized that they needed to come in and help. And that was mid-March. Another move that we saw later on, it was about a month later was in the oil market. And remember, in oil, everyone said we've had negative oil prices. I think the oil market was one where there was a dramatic move, there was also the oil price war in the midst of all of this. But I think one thing I'd point out here is that when we got those negative oil prices, which was the big headline, zero we went to minus 40, it wasn't that the oil price went negative. It was the price of oil for delivery against the April contract, futures contract on West Texas that went negative. If you look at the other contracts globally like Brent or even the second-month contract, which is where all the liquidity was for WTI, they never went into negative territory, it was only really this one and a few other localized types of contracts within the North American landlocked landmass. So generally, oil prices fell dramatically, but they didn't go negative. But what this did show is that if you have a lot of ETFs, ao Exchange Traded Funds, and indexes which are based on an oil price, which is based on futures, you have to carefully watch how you look after your futures and roll those futures. And that's what we really saw in that period where that oil price went to minus 40. But perhaps everyone really focuses on the equity market. And we saw some dramatic moves in the equity market, particularly the S&P. Now, obviously, the first move in equity markets was to sell off quite aggressively. But normally when you get a very deep recession or at least a stunning recession like we saw, you'd expect the S&P to fall 50 percent or more and stay down for a long period of time. It fell 35 percent almost in a straight line, the fastest sell off ever seen, but then it dramatically rebounded. Not only did it rebound, but it went back to the all-time highs and beyond, led by the Nasdaq. And you can see in this chart here, GDP has not yet recovered, and yet the S&P is at a new all time high. This is a reflection of the policy mix, but it's also a reflection of an environment that had been in play for at least four or five years beforehand. If we look at this next chart, it again shows the weakness of the underlying fundamentals versus the strength of the equity market, a world in which fundamentals had already been divorced from the liquidity story and asset prices themselves. Earnings on the S&P had been flatlining even before they sharply decreased during twenty twenty. They've recovered back to their old level. But as you can see here, the S&P had already been massively outperforming earnings. The equity market was being driven by liquidity, by policy and not by underlying fundamentals. So that equity market reflects both this new framework that we're in that existed before the pandemic. But it also shows just how incredibly active policymakers have been in helping assets, financial assets recover. But then after we've seen those financial assets react and then central banks through the policymakers come in with, in the US case, QE infinity, we then eventually saw with that lag the implications for the real economy, and I think we shouldn't forget, given that the rebounds in financial assets have given us this feeling that things are a lot better, we shouldn't forget how deep the moves were. And although we've seen some quite sharp recoveries, we've not yet recovered back to where we were. Firstly, if we look at U.K. GDP, that was an incredible decline. The U.K. was one of the worst hit in Europe. Yes, we saw a rebound in the following months, and this is monthly GDP, but as you can see now, and as with many of the GDP's around the world, GDP is rolling back over and will probably go negative again. We are probably going to get a double dip recession. As we can see with the GDP numbers, there has also been a dramatic move in unemployment the world over. Now as some countries have supported jobs, others have supported or created income support for those who have been furloughed. But nonetheless, when we look at the US numbers, initial jobless claims, that initial surge was enormous. And yes, we have recovered dramatically, but if you look at where we are, the numbers today are still higher than nearly all the other peaks during other all during all the other recessions over the last 50 years. So, yes, we have recovered, but we've not recovered back to where we were. This is still an economy which is in some level of trouble. Some level of support is still needed. Now because of that sequencing where firstly we saw asset prices move, then we saw the impact on the real economy, we obviously had that quite impressive policy response. It started firstly because of the asset prices, but then it's been ongoing and remains prolonged because the impact on the real economy. And that policy response was in two parts - there was the monetary, which is the QE, so this is the bond buying, obviously interest rates being cut, and then the fiscal, which is the support for wages, support for businesses. Now again, what we've got to remember is that on the monetary side, we'd also been in a very, very unusual position prior to the Covid pandemic. Globally there had been over 13 trillion dollars worth of QE over the previous 10 years. But as you can see on the chart, this then accelerated with another five or six trillion in the matter of months as all those central banks once again opened the spigots and did QE infinity. But this was also matched by this time an incredible fiscal response. And the fiscal response is government spending. Prior to the Covid pandemic, prior to 2020, we've mainly seen all the heavy lifting from monetary. But this time we've seen lose fiscal. What we can see in the US is that the budget deficit is minus 15 percent of GDP. This is quite a stunning decline and it reflects the speed with which the fiscal authorities have had to inject cash effectively into the economy to support businesses and to support wages.
So this is quite a loose fiscal scenario. But one of the big questions is will it be loose enough for the economy going forward? So when we take all this fiscal together with the monetary, what that means is that there is a narrative that is starting to build and it's a reflation narrative. It's a reflation narrative that growth will kick in again in twenty, twenty one. And we can see that reflation narrative in this final chart for twenty twenty, which is the linkage to twenty twenty one. Here we can see an emerging market, which is the Korean market or the cost be mapped onto copper, which is Dr Copper, which is always seen as being an indicator of economic strength. Copper going up is an economy that's doing well. The chart of copper and the cost be looked like that one in the same over the last five years with this particularly impressive move up through 2020. That is a market which looks like it is pricing for growth in twenty twenty one. But is that growth in twenty twenty one a reality? If it is a reality, how quickly will it arrive or are there other issues that are at play which might mean we get something completely different from reflation? We're going to look at those next. I think firstly we've got to look at what is reflation and what is that reflation narrative. The reflation generally means a rebound in growth, although the last 20 years it's meant just any type of growth because growth over the last 20 years has generally been much lower than prior to 2000 and the dotcom bust. So reflation generally has meant growth. In the early 2000s, it was generally China led and we saw a little bit of that in the middle of the last decade as well. But when we see reflation through reflation, growth, reflation, normally you get emerging market outperformance, you get commodity strength, you get the dollar on the back foot. And as you can see in this chart here, you see the S&P underperforming emerging markets with dollar weakness from 2002 to 2008 and from 2008 to present day. Largely, we've seen dollar strength with the S&P outperforming the emerging markets and the S&P outperforming because of those tech growth stocks where they grow their earnings in a period where there is very little underlying economic growth. So classic reflation is you're going to see em outperform and commodities outperform, which would be a divorce from what we've seen over the last few years. And another part of that reflation narrative would also be a rotation, and that rotation would generally be out of those growth stocks and in. You value or cyclicals, this would be out of tech and into things like financials, perhaps, but certainly the mining names, energy stocks, although there are some issues, political issues around those things like industrials, some of those old world stocks, they're the ones that people would expect to perform the cyclical value stocks in a reflation narrative. And at the end of 2020, we have seen those stocks start to outperform. But does that outperformance have legs for twenty, twenty one? And this is where we need to think about is this reflation narrative a true growth reflation narrative, which is where emerging markets in particular are doing well, led by the likes of China, where emerging market outperformance leads to emerging market currencies moving higher than the dollar to the dollar is on the back foot as a consequence of economic synchronized growth. Or is this that we're seeing those reflation assets, emerging markets and commodities reacting to a weaker dollar, which is what we've seen over the last few months? So let's look at that dollar. Part of the reflation narrative, as you can see in this chart, which is the DUI versus the Morgan Emerging Market Index, the DAX y, which is about 50, 60 percent. The euro is the one that's moved the most. So this is dollar dollar weakness is a big move down on this chart of the DAX by the orange chart. Now, if you compare that to the JP Morgan emerging market currency index, it's not moved quite as far. Again, if this is true, reflation growth reflation, it's the emerging market currencies that should be leading in terms of dollar weakness, not the euro, but it's the euro that has been leading. Now, why is this? Well, there's been this belief that the US is in the driver's seat when it comes to policy, both monetary and fiscal. But here, again, maybe the narrative has got ahead of itself. If we look at the ECB balance sheet versus the Fed balance sheet and this chart is the Fed actually minus the ECB, you can see over 2020 there has been a round trip. The Fed started aggressively in terms of expanding their balance sheet, but the ECB is now caught up and at the current rate of change will overtake the Fed for this year. So it's not necessarily true that the Fed has been the most aggressive in terms of balance sheet expansion for 2020. Now, on the fiscal side, it may well be the US can do more than Europe because Europe is constrained by the 27 members. They passed a package in July and to top that up, would need the Froogle five to agree once again. And they were struggling with agreeing the first time. So the US may be in the driving seat on fiscal, but that's still probably going to be well after the inauguration and will still depend on what happens in the Georgia runoffs. So it's not clear cut that the US is in the driving seat on either fiscal or monetary. And given that a lot of the positioning is now got extreme on things like copper because it belongs on the euro and also extreme shorts on things like the US 30 year bond, maybe the narrative has got ahead of itself once more. That means that therefore the reflation narrative could actually become an inflation narrative, a narrative where we don't get growth, but we do have the ingredients in place for inflation in twenty twenty one. And his two charge, which really epitomize that one is the M2 and then two is the things like savings accounts and checking accounts. This is M2 in the US and this is the year on year change. As you can see in this chart, it's had an incredible move higher through twenty twenty. And it's quite remarkable when you look at the previous ten years through all that QE, we never saw a dramatic move year on year in M2. Now, this doesn't necessarily mean inflation, but it does have inflationary potential. We can also see part of the story coming from US savings. Now, savings have gone up also in Europe, but they've gone up dramatically in the US. And this chart of cumulative US savings shows a very large increase in savings through 2020. That could be future consumption or it could be savings for a rainy day. But nonetheless, that is an inflationary potential coming from the US consumer. But maybe that's going to be saved for a rainy day. So reflation potentially inflation. But then when we look at things like CPI and velocity of money, we could actually make a strong case for disinflation or deflation. This first chart shows the velocity of money and this is a five quarter lead time versus CPI in the US. This suggests that CPI should roll over from here. So CPI inflation may actually have more downward pressure first in twenty twenty one before those inflationary impulses from savings can kick in and before any true reflationary growth story can come into the equation. And I think it's also worth bearing in mind that when we look at CPI historically and this is a chart that goes back to 1970, CPI during every single recession and particularly coming out of those recessions since 1970 has always been on a downward trajectory. Now, this might be the case at the end to growth this time around may have more of an upside impulse in CPI. But nonetheless, the historical precedent is that we should expect CPI to be falling, particularly if we are going to go into a double dip recession, as would seem likely in a lot of Europe and the US, where particularly in Europe, the lockdown's over the next few months could be. More all encompassing than they were earlier in the year and nearly all of Europe is now caught up in this pandemic. So are we going to get CPR going up or down? It looks like the pressure will be to the downside. So that all means is that the reflationary narrative based on the dollar, maybe one that's got ahead of itself. Actually, one of the risks for 2021 is insolvency. And this is still considered to be a low consensus trade. The high consensus trades are being long, US equities being long, emerging markets being short, the dollar. That's pretty much what the whole investment community is expecting for next year. Now, this is a chart that we showed earlier in the year, and it shows the bankruptcies of Chapter 11 verses unemployment. Now, although unemployment has spiked and reversed, unemployment still at very high levels, it would be expected that bankruptcies should still follow, as they did in the two previous spikes in unemployment. Now, these are bankruptcies that are going to take place at the non-listed level, the non-exchange traded level, the small company level, large corporates who can tap the capital markets are pretty much guaranteed an ability to get hold of funds unless they are already in a perilous state beforehand. But if you're a small business and you're reliant on loans from banks, that's a very different matter. And it's very difficult to get those loans because banks are hoarding their cash. In this environment, we should expect Chapter 11 to go up. That would be an insolvency crisis potential for 2021. So next year may be more of a deflationary environment than an inflationary or deflationary environment. And in this final chart is a chart that I've shown many times through 2020 and again, will encapsulate a lot of the issues for 2021. This is gold versus real yield. Gold performs well when real yields are going down and vice versa. The reason why this chart matters is that in some ways 2021 will probably play out in the space of real yields. If we get inflation and we get bond yields moving up, then real yields won't really move. However, if we get inflation and bond yields are capped with a lid on them by central banks who buy those bonds and in fact may even target yields at a specific level, then we might see real yields fall. And if real yields fall, gold should do well and equities should do well. And the big question will be how much can central banks control those bond yields? Will bond yields stay relatively stable at these current levels with low volatility, thus supporting risk assets? Will they spike because we get inflation? Or if we get insolvency, will they start to roll over and head south again? They roll over and head south. That's probably OK for risk assets, but it means that the overall economy is probably coming under a lot more pressure. And that means we're going to get more fiscal, but it will be fiscal support. So fiscal policy, monetary policy combined will be key in 2021. And that's why the reflation narrative is the main narrative. And it's also where we might see some of this play out in assets like Bitcoin, which is what we're going to look at in the next section. As we saw that last section, the big narrative for 2021 is reflation, and that's a topic which David Craig, the CEO of Refinitiv, is now going to look into in a little bit more depth as well. And then also take a look at Bitcoin, which is an asset which really came onto the radar screens again in 2020, but perhaps not as much as people may have thought.
There's a clear narrative in the market for 2021, and that narrative is reflation. We've seen exuberance since Pfizer's vaccine news in November, we've seen copper at its highest since 2013, and we're seeing the Nikkei at its best levels since the early 90s. Korea's Kospi, again, all time highs. These are classic reflation trades. And there's more evidence from a survey of fund managers by Bank of America, and they picked emerging markets as the clear outperformer in 2021. We wanted to see if this narrative of strong reflationary growth is borne out in market activity, or is it more a story of reflation off the back of simply a weak dollar? We looked at our internal data showing what financial market users are looking at just to get an idea of this. And what we found is at the market's interest in Japan and Korea, those classic reflation trades, has actually been pretty flat since November. We're not seeing users jump on the reflation narrative except in copper, which you'd expect when the dollar is weak. So what this really speaks to is how quickly will the global economy recover while the virus still rages and we have some time to wait before a good slice of the population has the vaccine. The market might not seem as bullish as appears. I wanted to show you one more chart where the price action has been similar, but the usage data perhaps indicates the reverse, and that's Bitcoin. It just hit a record high. But of course, it's famously volatile in price. What's really interesting is to compare usage of data on Bitcoin the last time this cryptocurrency hit the highs back in 2017 and compare that with today. Back then, this is what we saw in terms of usage. And this time round, it's hit a fresh high, but on a quarter of the data usage. What that says to me is that a lot of the froth around this market might be dissipating. We know institutions are starting to look at crypto more seriously, and perhaps this graph underlines the fact that real money is invested in Bitcoin. It's attracting a more stable base of investors and perhaps that's the best piece of news for Bitcoin as we approach 2021.
So as we saw from David, a lot of what he was seeing backs up a few of the observations I was making in the previous section, which is that we're seeing a lot of the reflation assets move in price, things like Taiwan, Korea, copper. But the actual data usage is not necessarily following the narrative of price. And I think this is because what we're really seeing here is dollar deflation. Dollar has moved down and we've seen a reaction from assets the related to a dollar weakness moving higher. But what we're not seeing is synchronized growth reflation. We're not seeing the sort of reflation we saw with China coming into the market 2002, 2008. And so therefore, maybe this is a narrative which still doesn't have the legs behind it. So we need to be cautious of that. But perhaps we need to be less cautious about the Bitcoin narrative. Now, Bitcoin is obviously a story that's been around for a while. But what's interesting of 2020 is that we made these new all time highs on price, and yet usage was well below 2017 levels. There's perhaps more skepticism at the public level, and yet Bitcoin is starting to be, I wouldn't say it embraced, but it's starting to be taken seriously by the institutional investor. And if they move only a small percentage into the Bitcoin space, then that could have a very dramatic move in price. Thank you, everybody, for watching The Big Conversation throughout 2020, and we look forward to seeing you again in 2021 and I hope you have a great festive season. And you can now get the big conversations from Refinitiv as a flash update on your Alexa device or Google assistant. If you want to know more about how to download it to your smart speaker, please go to Refinitiv dot com forward slash flash briefing.