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International tourism is only going to recover once there is a vaccine: Economist

Citi Private Bank Chief Economist Steven Wieting joins Yahoo Finance’s On The Move panel to share his thoughts on the financial crisis.

Video Transcript

- Let's talk more about that stimulus and the potential for more stimulus as well as that economic data we got today. For that, we want to bring in Steven Wieting. He is Citi Private Bank chief economist. He's joining us from New York. Steve, it's good to see you.

So obviously, we have seen already a lot of fiscal stimulus, a lot of monetary stimulus. We were just discussing perhaps the next tranche, although it looks like it's not happening. Do you think more stimulus is necessary at this point? And if so, what should it look like?

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STEVEN WIETING: More stimulus may be needed. I certainly think that the US is coming up pretty strong relative to the whole world thus far, and we're expecting, at least from what's been announced, about $6 trillion, the equivalent of fiscal stimulus around the world. And the US is 4% of the world population, and we're getting about a half of the fiscal stimulus that we've seen. So in many respects, the US is ahead.

Having unemployment insurance benefits annualize at about a $50,000 income with federal help through the end of the year, which is 2 and 1/2 times what states alone would provide, is quite a strong step. And I think that what we're seeing in terms of income supports is all pretty positive already.

What they can't assure is that there will be customers for small businesses, that there will be demand for the things that we need to get back on track, necessarily, on the other side of that. And that depends a lot on how we reopen. I think it's got to be clear here, though, that if you want to take a look at today's retail sales numbers, negative 16.5%-- I mean, how do you get that? Shut down the stores. That's how you can see record declines.

The kinds of employment declines that we saw in the month of April-- a typical recession lasts about a year of employment declines. At the April pace, no one in the whole country would be employed in six months. So we have to say, away from recessionary dynamics and what it will be like to try to get us rebounding, which I think is actually going to happen here in the third quarter this year, that there are massive, massive effects, just from shutting down and reopening. And a lot of that has nothing to do with even the coronavirus.

- So which is the greatest threat to these markets as we look toward the end of the year? Is it getting back up to speed, but not having the stimulus extended that unemployed people would need to spend money, or is this the potential trade war with China? Which is it that, as an investor, we should pay attention to?

STEVEN WIETING: Well, look, I think when push comes to shove, the US is going to have all the stimulus that it needs. Our ability to not even necessarily borrow, but to create the resources with newly printed money, is the best in the world. We're not alone in the world in doing this. It's not creating any sort of negative consequences here in terms of interest rates or the ability to finance.

We initially thought that we might need $4.5 trillion in total spending, and that might be overkill. And here we are with $3 trillion or more, even without them doing anything more on it. An issue like resuming a trade war and what that exactly means is a complete unknown.

And it already looked as if we had interrupted business in 2018-2019. But whatever you want to say about that, it's certainly not a single-minded focus on recovery if we're going to have disputes, whether that's US-China trade disputes, whether or not Europe has the cohesion to help its weakest members, whether particular states in the United States want to help others who have been more impacted by COVID. Any of those things distract from a single-minded focus on recovery. And I guess if you want to think about it from a financial market standpoint, you've had a 30% rebound in share prices. And that's certainly single-minded focus on recovery.

RICK NEWMAN: Steve, Rick Newman here. So you're at Citi Private Bank, wealthy clients. What are you advising them to expect during the next year? To just hunker down, and things will get more or less back to normal, or expect the unexpected, reconfigure your investments, your lives, and so forth?

STEVEN WIETING: Well, look, it's our initial take on this in February where we reduced our equity allocation, we added to overweights in US treasuries and gold. By April, we had reversed some of that. And we're not taking an overly large amount of aggregate risk. We're now neutral global equities with some areas of weakness and strength expected.

But when you think about this, we've had this remarkable bifurcation in markets where the digital economy, what we're doing right now, has year-to-date gains for the largest companies. And companies in the health care sector have done equally well. But if you think about many, many other what we'll call COVID cyclicals, companies that have been beaten down-- we're thinking about unusual things like real estate. We're thinking about energy.

All of these typical things have been bitterly beaten down, and that divergence in markets is such that it's not easy to immediately invest in an economy that is contracting as rapidly as it is right now, even if it's purposeful. But we have to start gradually phasing in some risk, because you're not going to have a strong rebound in assets that never dropped.

DAN HOWLEY: Steve, I kind of want to ask about-- going back to the plunge of retail sales, from a global perspective, where do you see that starting to pick up again? What sectors of the retail sector do you expect to really come back first, and when you expect something like, for instance, clothing stores, which took a particularly bad clobbering-- expect them to come back?

STEVEN WIETING: I think that there is probably pretty strong pent-up demand. I mean, I might not need new suits, but there will be a really strong pent-up demand. And I think you'll see some pickup as stores open.

I just think as a potential leading indicator, China shut down first. It was hit by COVID first. Its January and February had horrific declines. If you take a look at auto sales in China, they were down 83% in the month of February. They rebounded 240% of the month of March. This is part of the math, again, of gains and losses being asymmetric. That 240% rebound does not get you all the way back what you lost with an 83% drop.

But we then went on-- and China in April went on to a new high for the year in auto sales, pre-COVID sales. And again, it's potentially people thinking that they're not going to take public transit. So I think things that we assume-- that no one is going to drive anymore, everyone will work from home in the future, that it's going to mean that we will not have any demand in traditional areas-- again, we might find out that it's quite different from that.

And I think that we will see, obviously, people are not going to do things that are deeply unsafe, or pubs will not be filled with people for a while. But we are going to, again, probably see some strong pent-up demand. And early, early indications on driving statistics, et cetera, in the United States are showing that here we are in May, and we're already above April. I think that you will see a rebound in retail sales readings right in line with the stores reopening, and that that will be partial. It will not get back everything lost, but it's very soon.

- Steve, I want to ask you about how the recovery evolves around the world as well. You mentioned those China numbers. I mentioned at the top of the show Germany also seeing a pullback of 2.2% in the first quarter. Do you think that the global dynamic of leadership is going to change at all out of this in terms of the US being the biggest economic engine, or do you think, like with us getting back to our routines, that things are going to revert back to that model?

STEVEN WIETING: Well, larger economies that borrow in their own currency have big advantages here. The reason this is a little different inside the very large eurozone is individual countries don't have control of their own currency and can not entirely, independently have a fiscal offset without the agreement of others within the union. And that is an issue.

Aside from that, a couple of things that we would think about is international tourism is something that is going to only fully recover after a vaccine. And you have certain countries that have much larger shares. Southern Europe has much larger shares of international tourism in its output. A couple of these countries, 15% of their GDP is just that. Others that are part of supply chains that will be fairly slow to recover.

So if you think about how the post-2009 period of the European Union lagged behind the United States in the recovery-- it's not that it didn't have a recovery, but it was slower. Some of those same structural impediments are at work in favor of US economic growth right now. Asia, maybe even having the example of SARS back in 2003, seems somewhat more prepared to live with these social distancing requirements and still have the economy operate properly.

And then in some cases, you are just going to see bounce-back from very low levels. We do worry a good deal about some very strong petroleum-linked countries. We think petroleum rebounds, but the levels at which it rebounds to given the-- it's clearly at the heart of transportation, travel, air travel a very, very important demand source-- that the recovery leaves it short of where it had been before. So I think that when we look out a few years, we're going to see, again, the relative shares of economic activity around the world could look quite different.

- Really interesting stuff to think about. Steve Wieting, good to see you. Stay well. Steven Wieting is the Citi Private Bank chief economist. And by the way, he was just talking about international travel. We're going to delve much more into that issue in a few moments, particularly with the vacation rental home market.