Expect Inflation, Downgrades and Defaults, Bond Strategist Tells SHOOKtalks

928 views | Aug 20, 2020, 08:19 am EDT

From forbes.com

R.J. Shook Contributor

If COVID-19 carried a warning label, it might read: Exercise caution. Significant economic side-effects accompany this virus.

Investors should prepare for downgrades, defaults and a shuffling of which industries are driving global economic growth, said Paul Brain who heads the fixed-income team at London-based Newton Investment Management, a BNY Mellon subsidiary.


Paul Brain, Head of Fixed Income, BNY Mellon IM, Newton Investment Management 



Brain discussed the road ahead with SHOOKtalks in a webinar titled, “Deflation, inflation, and Modern Monetary Theory: Will COVID-19 prove to be the through-the-looking-glass moment?”

Brain’s cautionary words come as market euphoria erupted again this week. Investors drove the S&P 500 to a new high on news that scientists are closing in on a COVID-19 vaccine. Meanwhile, governments across the globe continue to dump money into local economies.

Brain disagrees with the prevailing view that the economic recovery will resemble a V shape.

“We think the economic recovery will be more like a U shape, it goes down and bounces back up, but it takes at least five years to get back to where you started,” Brain said. “This is because large parts of the economy are shutting down, being restructured and it takes time for those employees to get re-employed.”

In his view, the industries facing the biggest threat are airlines, commercial real estate, commercial aircraft, and auto manufacturing, retailing and hospitality.

“There will be casualties and mergers,” Brain said, mostly in areas suffering under the weight of overcapacity. “Trends such as the ever-rising capacity of the airline industry and the building of airports to accommodate that capacity are going to reverse.”

Once the airline industry shrinks, airfares will increase, he said.   

Forecasters often compare the current economic downturn to previous recessions. This time is different in several respects, Brain said. COVID-19 laid bare structural changes that were already underway in the global economy, Brain said.

“There were a number of factors here at work - elitism, para-capitalism, bonus structures and the globalization of free trade,” Brain said. “Now, we are looking at a rise in populism, increasing potential power of labor and the potential that governments will support a low, basic level of income.”

Governments have responded to the economic downturn by pumping records amount of money into the economy, most of it going to businesses and laid-off workers. Watch for government to follow up with major fiscal stimulus in the form of big-ticket infrastructure projects, Brain said.  

Won’t all this spending be inflationary and lead to the economy to ruin?

Brain said the policies are a form of helicopter money or what some call Modern Monetary Theory. MMT holds governments are free to run big deficits without suffering negative consequences since the government has the power to print its own currency. Critics counter that such policies are reckless and inflationary.

During the 2007-08 financial crisis, Brain said the Federal Reserve injected money into the nation’s banking system. The move increased liquidity but was not inflationary. However, Brain said he feared this time could be different. The money is going directly into the hands of consumers who are currently saving it or paying down debt. “That could change should they start spending it.”

Expect the U.S. dollar to continue to be the mainstay reserve currency and that central banks will continue to keep interest rates low. “In this economic environment no one wants a strong currency,” Brain said. Given low interest rates, and the risk of defaults, bonds remain unattractive from a yield perspective. Investors should consider inflation-protected securities and investments outside of the United States, Brain said. 

Brain said the global economy will ultimately recover from COVID-19. “I think there is still a positive GDP number, enough to get us back to where we started. There will be defaults this time around and there will be a loss of capital. For the next two years at least, we are looking at a low-income (investment) environment.”

Follow me on Twitter or LinkedIn. Check out my website

R.J. Shook

We are experts in two areas. We are the world's #1 Wealth Advisor research organization that focuses on the quality of the advisor (disclaimer: no one else in the world does this). Our rankings appear as Forbes feature stories multiple times a year. Philanthropically, we give back by leveraging our skills to research America's biggest givers (our annual ranking appears in the annual Forbes Billionaires issue every September). Our philanthropic approach results in positive publicity, which encourages individuals to be more involved; our research has helped to raise hundreds of millions of dollars for the world of philanthropy. This is our way of giving back. With our Wealth Advisor research, SHOOK Research has two missions—to help investors find a trusted advisor…and to help advisors get better at serving investors. We are proud to be the only organization that has a focus on the quality of an advisor’s practice, in addition to quantitative measures.



Expect Inflation, Downgrades and Defaults, Bond Strategist Tells SHOOKtalks. (Aug 20, 2020, 08:19 am EDT). Forbes. Retrieved August 24th, 2020, from https://www.forbes.com/sites/rjshook/2020/08/20/expect-inflation-downgrades-and-defaults-bond-strategist-tells-shooktalks/#7e4016431eed

Rate this article:
No rating

Please login or register to post comments.


Get Your Free Investment Kit

Free Investment Kit
To receive your free kit please fill out the following form.
All form fields are required