Actively Speaking Podcast
Steve Bleiberg, portfolio manager and thought leader at Epoch Investment Partners, Inc. (TD Epoch) takes on current topics and issues facing today's investor.
Actively Speaking Podcast
The Pandemic Accelerant
The last six months have been profoundly transformational, with the COVID shock acting as an accelerant for the digitization of the economy. This radical transition is especially advantageous for asset-light business models. Tune in, as Epoch's Kevin Hebner returns to Actively Speaking to discuss his latest paper, The Pandemic Accelerant (September 11, 2020)
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Hello,
Speaker 2:And welcome to Actively Speaking. I'm your host, Steve Weiberg. Join us each episode as we discuss current issues concerning capital markets and portfolio management from the perspective of an active manager.
Speaker 1:Welcome back, everyone, to another episode of Actively Speaking. I'm joined today by a repeat guest, Kevin Hevner, who is the global strategist at Epic. Welcome, Kevin.
Speaker 3:Thanks, Steve.
Speaker 1:And so we would do two things in this conversation. Number one, you were here in March, right at the beginning of the pandemic, and we talked about, one of the things you talked about was the need to follow all sorts of new high frequency data series that are available to us these days to give us a, a more real time picture of what's going on in the economy as opposed to waiting for government statistics that tend to be reported with a bit of a lag. So I thought we'd update listeners on what's that data is saying today about the economy, because we've been getting all sorts of, uh, we promised we would, and then we've been getting all these angry letters saying, Hey, where's that update? And then second, you, you and Bill Priest have written a, a new white paper that's really interesting, uh, about how the pandemic is accelerating the, the quote Adams Tobis transition that you've written about before. So we're gonna turn to that afterwards. But let's start with bit of an economic update. So Kevin, where do things stay in these days in the global economy, and what, what are the, some of the interesting data points you're seeing?
Speaker 3:Um, thanks, Steve. As part of the digitalization of the economy, we have all these new high frequency indicators, and I still think they're receiving too little attention by investors and, and by commentators in the news and so on. There's too, still too much reliance on the old government statistics that often come up with lag and are revised and so on. But overall, when you look at the, the new high frequency indicators, they improved a lot from early May into mid-June, but since then, the e even though the recovery is still continuing, it's doing so much more slowly than it was previously. So the slope is still positive, but a lot lower than it was before. And, and this is roughly consistent with the type of swoosh shaped recovery that we've been talking about, and what we view as the 90% economy that is, we never get back to a hundred percent, I'm just gonna be parts of the economy that don't come back primarily in the hospitality sector, um, keeping the economy running a little bit slowly. It it's also interesting, in the last few weeks we've been hearing more and more about the K shaped recovery. That is some sectors housing, manufacturing are doing very well, growing very quickly. And then there's other sectors, restaurants, travel and so on, remaining very weak. And I do think this case shape metaphor is gonna be with us for at least another four quarters, maybe longer. And then within the, the indicators, for example, one we've talked about is open table, which makes their data available at the state level, city level, and then also for a host of countries. But overall, it's running about 48% down year and year. And the trend has been pretty flat. It was increasing through May and June, but over the last two months, not much or no improvement there. Box Office Mojo is another one. You know, there are some big releases going on now, but box office receipts are down about 81% year in year. One company called wombly, which processes small business revenues. They provide a lot of data. And, and this sort of, with the case shape recovery, it's, it's hard to generalize on that because there's so much variation by sector within that on air traffic, this is using TSA data, it's down about 70% year and year. Particular international travel is weak for, for reasons we can all understand. And there's also mobility data. There's a few sources for that. Apple, Google, Tom, Tom, uh, and it shows mobility data within cities, between cities, a lot of things. So from late March, early April, where places like Manhattan and where it felt like ghost towns, we have seen an improvement. But overall, the mobility data is down about 40% from either what it was at the beginning of the year or from this time last year.
Speaker 1:Yeah. So I'm actually, I'm surprised though, being in the New York area where restaurants are well in Manhattan, there's no indoor dining and restaurants, movie theaters are closed. So it, it sounds like movie theaters are actually open in parts of the country.
Speaker 3:Yes. Yeah. And there have been some major releases from the studios coming out.
Speaker 1:Yeah. To the, also, anecdotally, I was walking around Manhattan, you know, a few days ago, and there were definitely, you know, you could, you could tell there's less just getting to your mobility data point. There's, there's a lot less, uh, vehicular traffic than normal, uh, in, in the city. What are you seeing, uh, elsewhere in the world? How, how does it compare to the us?
Speaker 3:Well, it, it's, it is very complicated. You can make some generalizations. Clearly Europe overall has done better than the US although, you know, we've seen the Sirius second waves in places like Spain and Italy. So all of the high frequency data in those places is rolling off coincident. Much of Asia is much closer to being back to normal. China, for example, domestic airf flights have almost fully recovered, though international flights still are down dramatically in places like Beijing, traffic, restaurants, theaters. They're not quite back to normal, but a lot closer to normal than where, where the US is.
Speaker 1:Why do you think, uh, Kevin, the people still focus so much on, you know, the traditional data that, that, as you say, is always reported with a lag and then gets revised, things like monthly industrial production numbers with the quarterly GDP figures. Why is there still such a focus on that and not on the data you've been talking about that gives us a much, you know, more quick, uh, realtime insight into what's happening?
Speaker 3:Yeah, that's a good point, Steve. And I think right now, commentators are, investors are spending about 10% of their attention on the traditional national statistics. You know, I say 90% on that and about 10% on these new high frequency indicators. So over time, I think that's gonna switch, and 90% of the attention will be paid to these new digital indicators. The high frequency indicators in terms of why people are being so slow to switch too, the new digital indicators, I think a lot of it is habit. In the paper we talk about atomic habits and how difficult it is to get somebody to change from their normal routines. They have their spreadsheets, they have the way of thinking about things, the way they conceptualize the world, and you need some type of shock to get people to change. And, and obviously over the last six months, we've, we've been shocked in many ways and, and our habits have changed profoundly in some cases. But in terms of how we're analyzing and processing data, it seems to me that we're only 10% of the way to where we will be going and where I think we should be going.
Speaker 1:Yeah. Well that's a, that's a good segue into talking about the paper. So let's do that. The, the paper is called The Pandemic Accelerant Digital Age Business Strategies written by You and by Bill Priest. And I wanna talk about, first some of what I thought were the kind of, you know, 50,000 foot points that, that I thought were really interesting. One was, uh, there's a comment in there, I guess a quote from, uh, Gary Kasparov, the, the former chess champion, talking about how events like this, or things like the pandemics, that they don't create trends, they, but they accelerate existing trends. Can you give an example of, of what he's, or what you talked about in the paper in regards to that? Yeah,
Speaker 3:I, I think that's an important point. So in, in the paper we talk about, we highlight five different trends working from home, E-fit and things like that. So these trends were in place before the pandemic. And so the world was moving in this way. These sectors are becoming digitized and then the pandemics turbocharged or accelerated those processes. And I think that's also similar for automation and robotic, but during the last five months or so, we've also been having people talk a lot about, well, you know, we have the death of cities, the end of vacations, the collapse of professional sports, no one's going to music concerts anymore. And, and I think that's more controversial because those were not pre-existing trends. And it's not clear to me that once the, the virus is contained and we've learned to, to deal with it in some ways, that the reasons why cities are so attractive and add so much value, why we love to go abroad for vacation. Vacation, why we like to go and see Billy Joel or Whate whatever type of music, sports events. Broadway,
Speaker 1:You're dating yourself. Uhhuh.
Speaker 3:Yeah,<laugh>, yeah. I think that those type of activities will endure, but there are a lot of trends that are going on beforehand that they get to recharge by the, the pandemic.
Speaker 1:Well, and, and related to this idea, there's another kinda analogy in the, you talked about in the paper about how some reactions will, it'll be more like a rubber band as opposed to a paper clip. And what do you mean by explain what that's all about?
Speaker 3:Some economists use the metaphor of a rubber band. So when you, you stretch the rubber band, the shape gets distorted and then you let go, it comes back quickly. Whereas if you have a paperclip<laugh> and you stretch out the paperclip, you let go and it stays stretched out. It doesn't rebound back to its previous shape. And I suppose that is the question for a lot of things. We've seen the acceleration in working from home, and we do think that this trend is turbocharged, but working from home, we're still gonna have some type of hybrid system. And we'll be working from home more than we did previously, but not as much as we're doing now. Similar with e-commerce, efi, telehealth, and so on. So to what extent we're going, and we won't know this, presumably, I would think it's gonna be at least six months from now, maybe 24 months from now, to know to what extent these activities are gonna more reflect the, uh, rubber band rather than the the paper clip.
Speaker 1:Yeah. So as you mentioned, you, you talked about five kind of specific examples in the paper of, or areas, and you talk about some detail about how the, the pandemic is accelerating the transition. And so the five are work from home ed tech, uh, you know, learning from home, e-commerce, uh, e-fit and telehealth. And I thought that maybe we talked about a few of those, I think work from home in e-commerce, our subjects that people are already quite familiar with and we don't need to dwell on. But the other three struck me as kind of new, like I don't think I've read a lot about them. So, you know, how, how the pandemic is accelerating the move towards online education, uh, or towards online fitness, and also similarly with health. So let's, let's talk about those. What's, what can you tell us about what's going on in terms of both EdTech education, technology?
Speaker 3:So EdTech, it's a process that's, you know, well, what's been going on for a while to some extent. We're still in the world of chalk and talk, you know, that we, we were in, in the 12th century, if you go back to the, you know, the oldest universities in England and Europe. But we have been getting more and more innovations, technological innovations in education, particularly starting from say, 91 out of Stanford and some of the, the moo courses that were coming out of that. And, and we have seen strong growth, you know, roughly 20% per year. But the numbers overall have remained relatively small. But with the pandemic, we've seen, uh, a massive movement onto online learning. And that can mean many different types of things. And it does appear that this is going to how lasting momentum and it's gonna change the nature of education going forward. I mentioned in the note that I have a, a son who's 13 years old, and his school was closed in mid-March for the Reasons weekend. Imagine, uh, the teachers initially had a very difficult time transitioning from in-person teaching to online. And so he, he was taking a couple courses online through Johns Hopkins University, algebra and Biology. And Johns Hopkins has been doing this for a long time. They have fantastic courses, the algebra course, and you know, you sort of grown when you think about algebra, but the teacher they had for the algebra course, he's a distinguished mathematician, he's a award-winning teacher. He wears purple shirts and orange ties. He sings while he is doing it. He's very engaging and it's multimedia. There's a lot of quizzes, there's a tutor to help and the learning experience from that. And maybe there's some algebra teachers up there who would be better than the online course, but I think it's better than what 95% of high school students are receiving through, you know, in terms of math and algebra, similarly for biology and so on. So it clearly, there's a lot of resistance to this from the, the education institutions that exist now and people who teach in these. But it does strike me that we will ha and we've seen this particular in China where online teaching is much bigger and there are some commercial companies which are doing very well. And I think in EdTech as well as a number of other areas of the digital economy, we do need to look to China to see what the future is. But I would think EdTech certainly we're gonna be seeing 20, 25% growth in many aspects of the ed tech world. That's very impressive, particular relative to the rest of the economy, which is at best gonna be growing 4% in nominal terms.
Speaker 1:That does sound great. There are other, um, I don't know how to say this. I mean, you know, going to school serves other function and it varies depending on what age group you're talking about, but I mean, at a very practical level for younger kids, it's just that, you know, parents need to go to work and they can't be home while the kids are home all day. Um, so to some extent there's, there's an advantage to having children go to a physical location just because it enables their parents to go to work. But there's also, of course, the socialization aspect, making friends, kids kind of do need to be in the same location in order to make friends. And, um, I wonder, could we, could a hybrid outcome be that, you know, kids still go to a school, but the teaching is all done on the screen with, like you say, this, you know, could be that they're all, all, there could be kids in a hundred different schools around the country all watching the same algebra teacher on a screen in their classroom, but they're doing it in a school, not at home.
Speaker 3:Yeah, I, I think in, in all of these activities, the, the five that we discussed in the paper and, and a number of others, it's not gonna be zero one, you know, going immediately from a world of atoms to world of bits, but it's gonna be some type of, of hybrid model. And whether it's shopping or healthcare or education, you can imagine there's reasons why you'd wanna mix up bricks and mortars and, and mix of digital. And certainly in terms of education, there's the socialization, there's sports, there's a host of things, whether it's elementary, middle, high school, vocational training or, or universities that people want that. So definitely hybrid. But in terms of the proportion of digital, say online relative to bricks and mortar, we think that over time that proportion keeps increasing. And it's moved quantumly over the last six months. And maybe, maybe it'll come down a little bit over the next couple years, but the trend for the rest of the decade, I think the online portion increases about, you know, 20% per year.
Speaker 1:Yeah, no, i, I don't really disagree with that. I think that's reasonable. And of course I realized after I said it that I said, well, the parents need to go to work. But of course, maybe they don't, they'll be working from home too, but they, they need to do their work. They, they can't be, you know, not, not every parent has the ability to do homeschooling, cuz even if they're working from home, they still need to be working at home. Okay. So let's move on to the, uh, another one that efi, which I found fascinating. Uh, I, I just wanna quote this a I thought a funny line at the beginning of that section. The paper says before the pandemic sweating profusely next to other fitness fanatics in a dark room with loud music was worth$30 a class. Now getting that same workout from the comfort of your well-ventilated home seems much more appealing to most people. So I thought that was pretty funny. What do you think the outlook is, uh, for that? Uh, what's, what's gonna happen to all those gyms that are out there if people are gonna be working on their equipment at home and watching an instructor on screen?
Speaker 3:Yeah, and, and that's one area where we had a more difficult time getting data. So we, we know there's been some great successes like Peloton and that growth is very strong. And then we've had some surveys and we quote some of the survey numbers that of regular gym attendees about a quarter say they're never gonna go back to the gym, a sizeable percentage, 30% say, well, I'll still go to the gym, but a lot less often than before. And this isn't just the gym, it's also yoga classes, cycling classes, and in any of these fitness activities. So I do think we will, like all the activities, it'll be a hybrid model, but the online or digital portion will be much bigger and have much stronger growth than the in person in gym or in in yoga class percentage.
Speaker 1:Mm-hmm.<affirmative>. And lastly we've got telehealth. So, and start with an anecdote. I did this for the first time, I guess during the last six months where I, I had a, you know, a quote appointment with one of my doctors where we just spoke to each other by video. Uh, and it did seem kind of odd because obviously he can't really examine you physically in any way, and he can't take any blood or anything, but, so it, maybe it's not ideally suited for every task within medicine, but where do you see the opportunities for growth in, in telemedicine?
Speaker 3:Well, and it, it seems like there's a consensus from people who think about this, that at least in the next few years, say by 2025, we're going to go to model where about 25% of consultations will be done through telehealth health methods. And, and I think that probably seems reasonable. There's some aspects of health care, for example, mental health issues, which that percentage could be higher. And you can imagine others say orthopedics and things where it could be lower, but even areas like dermatology could be be quite high. We quote in the paper, you know, one of the cabinet ministers for, for President Trump who's in charge of healthcare, he mentioned that from February to April this year, we have a 400 fold increase in the use of telehealth. So we ramp this engine up pretty tremendously. And I think for most people they were surprised by how well it works. I've talked to a number of people like yourself have used it as a patient and the number of doctors who've been doing it, and people are quite happy. So I think if this does continue, we get new habits, people realize there is a different mode of delivery that's much more efficient In many ways, you cut down in commuting time, you cut down in waiting time. In some instances it's actually easier to do through video or through a phone than it is to do in person. So it does seem reasonable, but, but similar to Ed EdTech and e-commerce and the others that telemedicine is getting triple charged, it'll become a much more important of the healthcare segment than it was previously.
Speaker 1:Now what one of the topics I think you kind of then turned to in the paper, sort of retreating to a more, a broader view as opposed to stepping back from these specific industries, is, is the impact of all this on automation in the economy. And as you note, we've, you know, we've tended to think of automation as taking place primarily in manufacturing industries, which, which is true, that's where it started first. But, uh, talk a bit about what this all means for automation in the service sectors, which are, you know, employ the vast majority of people in this country. What do you think this is gonna mean for further automation in in service sector?
Speaker 3:Yeah, there's roughly 10 million people in the US employed in manufacturing and about 130 million in services. So this is a much bigger deal. It's at least 10 times as important in terms of number of jobs and, and there's no reason to believe that it's more difficult to automate jobs or task in the service sector than it is in the manufacturing sector. And with Covid there's been a, a real catalyst to increase automation and a host of different occupations. And the paper we mentioned a couple areas. One, well, the, um, the US Tennis open is on now they normally have three 50 line judges this year they have 100 because they want to minimize the number of touchpoints, places where there could be viral transmission. We've actually had that technology for at least 15 years, but this has been just a catalyst to encourage people to change their habit, their habits, and do something differently. We also mentioned in terms of convert concerts or sport events, they're often people who scan your tickets. Well, we can do that without, now that we have the technology to do that without any personal contact. And part of this is through facial recognition, which is now becoming quite normal and quite reliable, for example, in, in many airports. So we're doing that. Then we also mentioned meat packers, meat packing. They're in fact factories, they're very cold, they're very crowded. We've had a lot of viral outbreaks and uh, it's been terrible for a lot of people. And the US has really been lagging and automating meat packing plants. There are plants in Europe, for example, in Denmark that have, that are automated about tenfold 10 times through US counterparts. So this is something which the big US meat packing plants are looking at. But I think across the board, when you look at different sectors, people are looking at the potential to automate activities, to have less contact between individuals to, to lower the viral transmission risk. And in some ways this is good. So if we do have another pandemic, maybe next time it won't be as severe, but it will be negative for jobs in a lot of these sectors. And I think that is a big concern.
Speaker 1:Yes. Well, presumably that will not do anything to alleviate the already high level of social tension that we've got going on. Uh, if, if there's more automation of, of jobs in the service sector, that that will put another burden on the political system, which I don't know if it's prepared to handle that right now.
Speaker 3:Yes, in the paper we don't talk too much about sort of the macro implications of this, but I do think that's a, a worrisome one, that there will be downward pressure on wages and many occupations, and then there will be fewer people employed in some of these occupations. And the occupations that will be having growth are the ones which are demanding certain types of digital skills, digital training. And it's gonna be very important that the opportunities are there for a lot of the people and people who are, uh, losing jobs in other places. But people can move into these fields and these occupations. But there are ones that we do require digital skills that still, I think probably a majority of our labor force isn't currently ready for.
Speaker 1:Okay, well I think we've probably used up all our time, but if listeners would like to read the whole white paper, I would recommend that they do. So it's on our website@www.eipy.com and the paper is called Pandemic Accelerant Digital Age Business Strategies. Uh, so Kevin, thanks for joining me again.
Speaker 3:Thank you Steve.
Speaker 1:And, uh, we'll talk to you all again soon.
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