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Daniel Lacalle: Don’t Believe in a ‘V’ Shaped Economic Recovery

Submitted by Taps Coogan on the 15th of March 2020 to The Sounding Line.

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Daniel Lacalle, Chief Economist at Tressis Gestión and author of ‘Freedom or Equality,’ recently spoke with CNBC about the selloff in markets and what he expects in terms of the timing and strength of a recovery. Echoing sentiments by shared by Mohamed El-Erian and Dr. Lacy Hunt, he believes that while there will be a recovery, it will not be ‘V’ shaped.

Some excerpts from Daniel Lacalle:

“The first thing is not falling into the trap of trying to buy the highest beta sectors because those are the ones that will rise faster in a ‘V’ shaped recovery. Don’t believe in a ‘V’ shaped recovery… This concerted selloff… is creating very important opportunities but it is creating opportunities precisely not in the sectors that many people believe to be getting very cheap: airlines, autos, etc… In my opinion, if you want to buy something for the long term, what you need to buy is precisely the ones that are going to be more benefited from the policy actions, which are: utilities, telecoms, and bonds…”

“Let’s remember that 2019 was already a very weak year for global economic growth. So, that’s why I think you should not be looking to cyclical sectors, because I don’t believe in that ‘V’ shaped recovery. There will be a recovery… The second quarter will be important… because it will take away the idea that the recovery is starting to take shape… That is likely to drive bond yields probably lower. That will, at the same time, drive investors to the safest assets possible… You go back to the dollar… You go back to gold. You go back to bonds of the highest quality and you avoid the most exposed to emerging markets and commodities.”

“There will be a (policy) response and it will be enormous and the enormous response will create more overcapacity because you don’t respond to a supply shock with demand side policies. When you implement very large and abrupt demand side policies, that money generated by central banks and supported by governments, goes immediately to the lowest productivity sectors. So, it goes to brick-and-mortar and basically that creates further overcapacity on top of a problem of overcapacity that existed already and that was showing in the very weak level of growth that we saw in 2019. So, the thing that you need to be aware of is: Yes there will be a massive response. Don’t believe that it will drive growth further. It can put sort-of a stop to the selloff. It can put some level of bottom for asset prices, but it is definitely not going to drive GDP growth and productivity higher. Actually the opposite. It’s very likely that governments decide to take a very aggressive approach, fiscal policy plus monetary policy, (and it) drives a demand deflationary process and debt ridden deflationary process added to a supply shock short term.”

There is much more to the interview, so enjoy it above.

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