July 2, 2020

We came into the week expecting to see the focus turn to the economic data, where the table was set for positive surprises. 

We've seen it.

And we finish the shortened holiday week with more positive surprises this morning — in the big June jobs report  (released today, instead of Friday, due to the holiday). 

Remember, last month, we had a huge positive surprise in the May jobs report.   The market was looking for 8 million in new job losses.  Instead, the report showed 2.5 million of job gains.

This morning, the June report showed job gains of 4.8 million, against expectations of 3 million. 

Again, this is all very good news. We're now 80 days into the reopening of the U.S. economy (which started in Georgia), the employment picture is continuing to reflect success in the policy response (keeping both employees and employers whole through the shutdown). 

What about wages?  This is the spot we've been watching for more evidence that inflation is coming.   

Remember, the Fed got excited last year when wage growth ticked up 3.5%, as a signal of economic health.  That was the hottest wage growth in more than a decade. Contrast that with these numbers …  

For June, average hourly earnings were up 5% compared to last year.  That follows an 8% jump in April and +6.7% in May. 

So, in the wake of historic joblessness, the wage numbers continue to print higher, not lower.  And these wage increases will have to stick, to compete with what the government has offered in unemployment compensation.  Add this to a supply disruption, and trillions of dollar of excess money in the economy, and we have a clear formula for higher prices

July 1, 2020

As we discussed on Monday, with the economic data rolling in this week, the table has been set for some positive surprises.

We're seeing it. 

And I thought we would see some inflation data that would begin shifting the attitude on the inflation outlook. I don't know about the attitude (yet) but we're getting the data.  

Check out this chart from this morning's numbers on manufacturing activity for the month of June. 

The month-over-month increase was the hottest since August of 1980. 

This is what you get when you turn demand on, like a light switch (lifting stay-at-home orders), and that demand is met with a supply chain disruption.

With that, I've been waiting to see the very important inflation component of this report (the ISM prices paid), which came in this morning.  

It was indeed a hot number.

In an economy where economists are forecasting a contraction for the second quarter, of anywhere from down 35% to down 45%, the price that manufacturers pay for raw materials in June had a huge jump. 

That leads to this index that shows buyers are no longer in the position of strength to negotiate on price.  And I suspect it's going to get a lot worse for them. 

Again, we've already seen higher prices in food/groceries.  Now, we will begin seeing it in other final products, as manufacturers are paying more for their inputs.

As we discussed frequently in my daily notes, surrounding the inflation story, a key piece in this story is wages.  And we'll get more on that tomorrow morning, in the jobs report (i.e. average hourly earnings).  

Remember, thanks to hazard pay and federally subsidized unemployment checks, we've had this jump in wages over the past two months. 

 

As we've discussed, the genie is out of the bottle, and higher wages are here to stay.  Trump signaled that today, as he said he'll have a "statement on minimum wage coming in the next two weeks." 

This is all continues to support the thesis we've discussed here, on "the global reset of prices and wages."  This is simply the product of global governments and central banks flooding the world with new money.   

June 30, 2020

Stocks rose as much as 1.4% this afternoon as Powell and Mnuchin testified before the House Finance Committee, on the Pandemic response. 

As we know, both the government and the central bank will do "whatever it takes" to maintain stability and promote a recovery, and if whatever they are doing is not enough, they will do more.

Early on in the testimony, both Powell and Mnuchin talked about doing more. Even more money flooding into the system, means even more inflation coming down the pike.  As we've discussed, if the economic recovery trajectory continues even close the current path, there will be trillions of dollars of excess money sloshing around.  

That makes the nominal price of assets go UP.  And, indeed, asset prices went up today. 

Stocks were finished up over 1%.  But the bigger movers of the day were metals.  Platinum was up 2.9%.  Silver was up 2.9%.  Copper was up 1.4%.  

And while gold was up "just" 1% (less than the rest), it wins the chart of the day. 

Gold traded to another new eight-year high today, and it's just a few dollars away from breaking out, and making a run to the 2011 all-time highs. It's coming. 

June 29, 2020

We have a short week this week, with the observance of Independence Day on Friday. 
 

But this should be a big week, where the data will take center stage.  Not the virus data, but the economic data.  

We'll get manufacturing activity and durable goods orders for the month of June.  We'll get some June inflation data.  And we'll get the June jobs report — all by Thursday morning

This will give us two full months of data since the reopening of business started in Georgia.  

With this in mind, I want copy in an excerpt from my May 1 Pro Perspectives note, shortly after Georgia re-opened, and let’s look at how the economic data is playing out:

"Just as we evaluate the probable outcomes for markets, based on the way sentiment is leaning, we can also evaluate probably outcomes for the economy. 

And after being in the business of markets for 24 years, I can tell you that the best trading opportunities are found in situations where sentiment is heavily leaning in one direction or another – and/or when the expectations bar has been set at an extreme level (either overly optimistic, or overly pessimistic).  These are opportunities to bet against sentiment, because these situations set up for the element of surprise.  And with surprise we tend to see sentiment violent swing from extreme levels. 

I think we are set up for this swing in economic sentiment.  Public officials have set the bar very low on expectations of getting back to normal life.  And they've set the game plan accordingly for the re-opening of businesses – slow, and in stages.  And the broad belief is that the behavior of people will follow this very conservative path. 

This is set up for a surprise, related to how both businesses and consumers behave.  And I suspect we're going to get it. 

So, the market was set up for positive surprises in the data.  And we have indeed seen some big positive surprises.  You can see it clearly in the Citigroup economic surprise index below.
 

Now, with the big June data rolling in this week, we'll get to see how the economy looks with every state in some form of "open for business." 

I suspect we will continue to see the positive surprises roll in (related to jobs and demand), against a low expectations bar.  But with some key inflation data also in the mix, we may see the attitude begin to shift on the inflation outlook.  

June 26, 2020

Yesterday we talked about the context around the rising virus cases.
 
Again, we are beginning to see the degree to which positive tests are asymptomatic. It's early.  It's not surprising. 
 
Remember, in New York, back in April, they did an antibody study on 3,000 people across the state of New York. They found that 14% had the antibodies.  In New York city, it was 21%.  These are people that didn't know they had been infected.
 
That would extrapolate out to as many as 1.7 million people walking around New York City (prior to the lock down) that were asymptomatic.  That would mean 2.7 million people statewide.  How many have tested positive so far?  Now, through June,  New York has 415,000 cumulative cases.  That's a factor of 6.5. 
 
The CDC now estimates that there's more like 10 asymptomatic cases walking around for every 1 positive symptomatic case.  
 
So, what's different today, relative to April, when New York did this study?  The difference, young people are getting tested.  Why?  Assumably, as socialization has increased with economies opening, they may have come in contact with someone that has tested positive. They may be required by employers to return to work.  They may be required by schools to return to school. 
 
But don't underestimate the likelihood that politics are involved. Remember, we've talked a lot about mail-in voting.  As we discussed back in April, mailin voting will likely be the determining force in the November election (mailin or walk-up voting).  It will dramatically increase voter participation, which is a direct benefit for the Democratic party.
 
The Democrats lost traction on it, when the trajectory of the health crisis improved and economies started opening up.  Their case, that people would be risking their lives to go to the polls, was weakened dramatically. 
 
Now, with "spikes in cases" and with talks of another round of stimulus in the works, as we discussed last week, they are looking for a way to cram "mailin voting" into the bill.  That would probably seal the election for them.  But as we also discussed last week, the Republicans would then have no choice but to outright block another package. 

June 25, 2020

With "cases spiking,” let's take a look at some charts. And then I have some very interesting commentary from a Florida hospital leader that offers a more sober reality relative to the media end-of-the-world hysteria.   

First, here's the chart of daily new cases in Florida …

As you can see in the chart above, the daily infections (new cases) are more than triple the numbers of April and May. 

Here's the positivity rate in Florida.  It's going up. 

 

What about deaths?  Deaths have remained stable to lower. 
 
But, of course, any changes in deaths would lag new cases by a couple of weeks.

With that, let's hear from the front lines on what this rise in cases looks like. 

On Tuesday, the head of Orlando Health, a network of Central Florida hospitals did a press conference with the Florida governor.  Here are four very important takeaways: 

1) First, as the governor said, the median age of new cases is 35 in Florida.  Early in this crisis, it was low 60s.  [my comment: As we discussed yesterday, as young people are being forced to test before returning to work, we're beginning to see how expansive the asymptomatic population might be.] 

The remaining points were made by the hospital exec: 

2) Hospitalizations are rising, but it's in part to their treatment protocol (Remdesivir) which is an infusion therapy and it requires a long hospital stay to complete the therapy.  Hospitalization numbers are reported as current, not new daily changes, so the longer stays results into higher numbers.  As he said, "there is an impact to the numbers that accumulate, as far as our inpatient count."  

3) "20% of the COVID positive patients in the hospital were in the hospital for things completely unrelated to COVID. It could have been a broken leg, it could have been a gunshot wound." [my comment: more asymptomatics]

4) Finally, and most importantly, the hospital exec said, back in April 50% of their COVID patients were on ventilators.  Today, it's just 3%.

So, we have some context for the data.  With this, we should expect expect cases to continue to move higher.  We should expect many, many more asymptomatic case diagnosis as young people continue to be forced to test (work, school).  We should expect the hospitalization rate (relative to cases) to plunge.  And we should expect daily deaths to continue to follow the trend of decline.  

Now, let's talk about the nice recovery in stocks today. 

There are plenty of algorithmic trading firms that have machines trading on headlines.  They seem to locked and loaded for "cases spiking."  But after the dust settles, in a zero interest rate world, when excess money is sloshing around, money will continue to move into stocks, and dips are buying opportunities. From those that watch technicals, the S&P 500 held perfectly into the 200-day moving average. 
 

June 24, 2020

With all of the fear the media is stoking from the rise in cases in some states, let's revisit what we know.

To start, we know a lot more about the virus and its health impact than we did four months ago. 

As a backward looking analysis, if you don't live in a long-term healthcare facility, your chances of death from the virus get nearly cut in half.  And if you look at a state like Pennsylvania, where 70% of the deaths are from nursing homes, that number of LTHC facility death rate (as a proportion of the overall rate) nationwide is probably much higher.  

Add to this, the case fatality rate overall is much lower than the experts originally thought. Of the CDC's most recent projections, their best case scenario has death rates at 0.20% of those infected.  Their highest confidence estimate is 0.4%.  Either way, it's much lower than what was thought back in March.  You can see it for yourself in this chart …
 

With the above in mind, the crisis in New York was the turning point, not the starting point for the country. That's where they threw everything at it, and clearly, back in early April, something worked (some therapeutics/treatments). The severe cases began to decline.  That translated into declining deaths. And ultimately, the crisis in NY has subsided.

As you can see in the chart below, the peak in daily deaths in the United States was mid-April.  That lagged by a week or so, the peak in New York (which was early April) – and the crisis nationwide has been subsiding. 

 

Now, with all of this, it was just two weeks ago that an official from the World Health Organization took five minutes to explain to us why the spread of the virus was "very rare" by asymptomatic people.  Take a few minutes to watch it for yourself, by clicking the image below (or here). 
 
As we discussed that day in my Pro Perspectives note, this would be a game changer – a cause for celebration.  

In the hours that followed, this official took a lot of heat, and by the next day, she was trying to walk it back.  But the retraction, wasn't much of a retraction. If we listen to her, it's fair to say that she didn't make a mistake, but the WHO doesn't want that message out as policy.   

You can see that in the video below (just click the image or click here). It picks up at 1:35 and runs through the 5 minute mark. 
 

By the way, this was not just some spokesperson, this was from the technical lead of the Covid response, and the head of emerging diseases at the WHO.  She's a Cornell and Stanford educated epidemiologist, who was on the ground in China for two weeks in March and regularly does press conferences.    

Finally, with this perspective and with the rising cases, keep in mind that young people are representing a large proportion of positive tests.  And many young people are asymptomatic.  And employers (such as restaurants) are requiring employees to get tested, in order to return to work.  As schools reopen, the numbers will continue to rise, and so will the positivity rate.

As for the economy, regardless of the trajectory of cases, Trump and Mnuchin have made it clear that there will not be another economic shutdown.  

June 23, 2020

As we continue to lay out the building inflation story, the markets continue to substantiate it.  

Yesterday we talked about the prospects of seeing a doubling of the money supply, thanks the Fed's massive response.

With more dollars floating around, the buying power of your dollar is going down.  Again, this means the nominal price of everything you buy is going up – and it's in the early stages.  

Today we had a new eight year high in gold.  And it's going higher. 

As you can see, we're nearing the 2011 record highs.  That's only 8% away.  But given the backdrop of trillions of dollars-worth of fiat money creation, gold has a long way to go. 

In a world where people were too scared to buy stocks at the depths of the decline, and are now too scared to buy stocks after the sharp recovery, those looking for "value" will find it in gold (and commodities in general).  Remember, billionaire Paul Singer has said gold is one of the most undervalued assets in the world – projecting it's fair value to be multiples higher from here. 

This, and the commodities story, aligns well with the broader dollar outlook (higher prices, lower dollar).

 
And the dollar outlook is looking lower against other currencies too (not just against asset prices).  Despite all of the talk about a "strong dollar", we've been in a bear cycle for the dollar for more than three years.  

 

We've looked at my dollar cycles chart above many times. If we mark the top of the most recent full cycle in early January of 2017, the bull cycle matched the longest cycle in duration (at 8.8 years) and came in just shy of the long-term average performance of the five complete cycles.  This argues for a weaker dollar ahead.

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June 22, 2020

Tomorrow will mark three-full-months since the Fed responded to the nationwide stay-at-home orders, with the nuclear option of central bank interventions

No coincidence, over the past three months, we’ve seen some huge runups in the prices of stocks and commodities (asset prices). 

The Fed has expanded the balance sheet now from $4 trillion to over $7 trillion.  And with the facilities they've already announced, that number will likely go to north of $10 trillion.   

So, how much of that money is already sitting in the hands of people?  

Let's take a look at M2 money supply.  This is financial assets held by households, including savings, bank deposits and money sitting in retail money market funds.    

As you can see in the chart, the M2 money supply has ALREADY grown by close to $3 trillion since the onset of the health and economic crisis in the U.S. 
 

And this money will multiply! 

Let's take a look back at the Global Financial Crisis response, where the Fed expanded the balance sheet from $870 billion to $4.5 trillion.  The money supply grew from $7.4 trillion to almost $14 trillion.  It nearly doubled. 

If the money supply doubled this time, we'd be looking at over $15 trillion of new money circulating in the economy. 

Aligning with that, remember one of the most aggressive moves made by the Fed, in this recent response, was the elimination of the reserve requirement for banks.  They went from 10% to zero.  

This move to a "zero" reserve requirement, incentivizes, if not mandates banks to make loans.  What  does this do to the supply of money?  At a zero reserve requirement ratio, the stock of money could increase infinitely.

With that in mind, as we discussed last week, if the very pessimistic forecasts hit for the first half of the year, we're talking about a $275 billion loss in economic output for Q1 and a $2 trillion loss in economic output for Q2.  That's a sum of $2.275 trillion.  Clearly, there is a lot of excess money in the response. 

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June 19, 2020

As we end the week, let's revisit this concept we've been discussing for the past three months, of the "global reset."  This is where prices and wages, globally, will have to reset higher. 
 

This is what happens when policymakers make the choice to destroy the value of money — which they've done.  

This past week, we've talked more about the wage story (higher wages), which is already materializing.  

And as you can see in the graphic below, the "asset price" story is already unfolding.  

Above, we're looking at the three month change in prices of major commodities, financial assets and currencies.  All up, dramatically.  No coincidence, this three month period takes us back, nearly to the day, the Fed went all-in, with the most dramatic intervention in the economy we had ever seen. 

Of course, that response has only been expanded since, and will likely be expanded more. 

Remember, as we entered this crisis, with all of the unknowns, we knew one thing, for sure:  The Fed and global central banks would do "whatever it takes."  Whatever line had been drawn, had been crossed in the Global Financial Crisis response.  That set the standard for central bank action.  From that point forward, it's "whatever it takes" to preserve stability and promote growth.  If the rules get in the way, they will change the rules.  

With this in mind, I want to copy in an excerpt from March 24th note – the day after the Fed's big response, and the day after the bottom in stocks.  "Make no mistake, with global governments and central banks following the 'print and backstop everything/everyone policies' we have explicit devaluations of currencies.  That makes it a 'buy everything' market."

The above graphic is proving this out, and it's in the very early stages. 

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