Thursday, August 27, 2020

Blackstone's Byron Wein: "The Nuances May Provide the Truth"

A bit more pablum-y than we usually see from Mr. Wein but there are some valuable nuggets in here.

From Blackstone, August 20:

Investment strategist Byron Wien shares insights from his annual summer lunch series, which was held virtually this year. 
In spite of the coronavirus, we decided to move forward with the Benchmark Lunches this year.  For the past several decades I have been organizing four Friday lunches for serious investors who have homes in Eastern Long Island.  Usually, I have 25-30 participants at each one.  This year I knew bringing 25-30 attendees together in person was impractical. Accordingly, I planned five lunches to be held via Zoom because I expected that there would be a lot of interest and wanted to make them easily accessible.  The group included the usual assortment of hedge fund, private equity and real estate leaders, some academics, former government officials and economy and market observers.  The Zoom format, which I moderated with an agenda customized to the makeup of each lunch, worked well.  Some attendees found the arrangement even better than the physical lunch format because there were no servers or side conversations to distract from the conversation.  The physical lunches do give participants a chance to network and interact, however, and everyone hoped we could go back to meeting in person next year.

The general tone of the sessions was one of optimism tempered by uncertainty.  Only a small number thought we would be back to something like the normalcy of 2019 by next year.  Most thought we would get there by 2022, but there was a dispersion of opinion on what “normal” would look like.  Everyone agreed that two factors would be necessary. First, we would need to develop, test, manufacture and administer an effective vaccine.  Second, while the economy was still struggling, government assistance in the form of fiscal stimulus and monetary expansion would be needed to provide support to the millions of people who lost their jobs during the recession.  It would take a while for the economy to develop natural momentum on its own.  In any case, there would be some permanent changes, as there were after 9/11, that are unforeseeable at this time.

On the vaccine, there was considerable optimism.  Many companies are working to develop one, and several are conducting clinical trials and manufacturing doses in anticipation of regulatory approval.  These processes are underway in Europe and Asia, as well as the United States.  Many expected an effective vaccine to be available for essential workers by the end of this year.  They thought the general public could be receiving it by the second half of 2021, and by the middle of 2022 most people who wanted the vaccine could have it.  There was considerable controversy over how long the vaccine would last and whether booster shots would be required annually or more frequently to maintain immunity.  There was also disagreement on the willingness of the public to get the shots.  Only 40% of Americans obtain ordinary flu shots.  The feeling was that well over half the population would need to get Covid-19 inoculations for people to feel reasonably safe taking public transportation, eating indoors in restaurants and going to movies, theaters and sports events.  There was widespread agreement that the medical profession has learned a lot about the disease. As a result, more people contracting Covid-19 can be treated effectively enough to mitigate long-term health problems, and hold down the number of related deaths.

On the economic devastation wrought by the disease there was a wider range of views.  Most agreed that the unemployment rate would remain high – perhaps 10% – but were impressed by the current rate of recovery.  The manufacturing and housing sectors have shown strength, both helped by low interest rates. As an example of the bounce-back in manufacturing, U.S. domestic auto production increased by 200% from May to June and has recovered to nearly two-thirds of pre-Covid levels.  Around the world, purchasing managers indexes were above 50 in most industrialized countries, indicating expansion.  Still, thousands of small businesses have closed during the recession; many will never reopen because their owners have gone bankrupt or chosen to retire.

Large portions of the economy are in serious trouble.  The hospitality segment – including hotels, restaurants, resorts and cruise lines – will take a long time to recover.  The airline industry may suffer from secular change.  The use of Zoom and other such tools has demonstrated that certain business functions can be accomplished effectively remotely.  If you are selling something or investing in a business, there is no substitute for being present in person, however, and relationships are hard to build remotely.  We all like to travel for pleasure and to see friends and relatives, so airline and other travel businesses will come back, but it may take a few years for that to happen.    

The experience of working remotely is likely to have a secular impact.  Many of us have found working at home can be extremely efficient.  We can dress casually, avoid the hassle of commuting, and use the time saved for deeper thought and contemplation.  On the other hand, we all like interacting with colleagues, mentoring junior people and cross-fertilizing ideas in group meetings.  We look forward to going back to the office, but perhaps not every day as we did before.  This will also have an impact on group meetings outside the office and conventions. Less office space may be needed, although lower density could also be a countervailing factor.

We had a number of major real estate investors at the various sessions.  Most were optimistic that if their properties were well financed, they could wait the recession out and recover as they had in the past.  Some were looking to buy properties at distressed prices.  Most said that office tenants were paying their rent, despite the fact that most employees were working remotely.  All acknowledged that their retail tenants were in serious trouble and that the damage in the retail sector was likely to be permanent, as we have seen with the bankruptcies of Lord & Taylor, Neiman Marcus and Brooks Brothers. The United States has been over-stored....