From spending time in several small town economies over the past week, I have a few observations:
Granted, I was in an attractive vacationing area in a sparsely populated area, but tourism is hot! Resorts and cabin rentals were booked – and booked out for some time.
This is consistent with what the CEO/Founder of Airbnb, Brian Chesky, has said in recent weeks. After his $40 billion-dollar IPO was shelved by COVID in March, Airbnb proceeded to lose 80% of its business over the next two months. It looked like the death spiral. But by June, the year-over-year comps had recovered!
According to Chesky, after months of lockdown, people are looking to get away, to change scenery. And they have been looking to do so in areas within driving distance of about 300 miles. That indeed seems to be the case.
Surprisingly, in a world derailed by a widespread infectious disease, it hasn't been enough to kill the "sharing economy." And that's probably a good leading indicator to a recovery in Uber's ride sharing business (which was down 73% in Q2), and in air travel.
Second observation: With over 20 million people unemployed in this country, there were help wanted signs everywhere. Some restaurants were shuttered due to lack of staff. Others were running on skeleton crews on modified hours, and yet (in their words) were still making more money than they had ever made.
Bottom line: The demand is strong, but the supply is suffering in a number of ways (including a labor shortfall in services and fulfillment). Employers can't compete with the government for low wage workers.
This brings us back to the point of my last note. While the federal unemployment subsidy (the extra $600/week) has been a disincentive for getting people back to work, if left with the choice of taking it away or continuing it (even into the end of the year), we have no choice but to continue it. If not, the economy implodes and takes with it trillions of dollars of intervention bullets that have already been fired.
With that in mind, we expected the Democrats to use that Federal unemployment subsidy as ransom in new stimulus negotiations, in an effort to force the Republicans to agree to their wish list. That would include voting reforms, which would all but seal the election for them.
Consequently, we expected this to result in Trump's use of Executive Order to extend the federal unemployment checks.
Indeed, that's precisely what we got on Saturday.
Trump used Executive Action to keep the unemployment checks going, but reduced them $400, only if states contribute $100 of the $400. With this, the tables have turned on the Democrats here, and very quickly. They lose their bargaining chip in stimulus negotiations. This means, no voting reform. And if they fight the Executive Action, they become the clear obstructor in getting money in people's hands. Moreover, key Democrat-led states (with large fiscal issues) are most likely to balk at contributing to the Federal subsidy – a bad look.
With this, I suspect the next political card played by the Democrats will be a big one — a bombshell VP announcement of Michelle Obama. The bookmakers have this at 22-1 odds. That puts her behind five more likely candidates.
My view: This would be the most challenging set-up for Trump (for re-election), as it would bring about the potential for an Obama White House again, in the case of a Biden resignation.
She launched a heavily promoted podcast two weeks ago, and the early episodes sound like campaigning, rather than podcast hosting.
We came into the week expecting the Democrats to use the expiration of the $600/week unemployment as ransom for their bigger demands, which include mail-in voting.
The Republicans have made an attempt to strip that out from the stimulus package negotations, and just extend it. But the Democrats aren’t having it. It’s too valuable a bargaining chip for them. And they will now hold the economy hostage for their demands.
That doesn’t bode well for the economy, as $2,400 to $4,800/week of household income for the 30 million unemployed goes away today.
Again, as we discussed last Friday, this may require Trump to use Executive Order to extend the federal unemployment checks.
Can he do it? Congress has exclusive control of the purse. But once they’ve appropriated funds, “the President and executive branch enjoy considerable discretions has to how those funds are spent” (paper on Presidential Spending Discretion and Congressional Controls, here). Mnuchin said earlier this week that there’s still over a trillion dollars yet to be spent from the first package.
With all of this building, we ended last week with a look at this S&P chart, as it was breaching this very important trendline that represents the recovery from the March lows. …
Here’s how it look today, as we head into the weekend with no progress made on Capitol Hill …
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We had the second quarter GDP report this morning.
Remember, we've been following the consensus view and the projections from the Fed models here in my daily note.
Let's take a look at the evolution of those projections …
The consensus view has been running in the down 35% area. The Fed model has been projecting as deep a decline as 54% for the quarter. The official number for Q2 was down 32.9%. So, if we add this to the contraction of 5% in the first quarter, the economic hit from COVID (and the related shutdown) comes in at $2.3 trillion.
You can see the BEA's table above, we have peak in GDP in Q4 of 2019, where the economic output was an annualized $21.7 trillion. And the economy in Q2 produced an annual equivalent of $19.4 trillion of output. The difference is $2.3 trilion.
Now, remember, we have
$3.3 trillion in fiscal stimulus, half of which has yet to work through the economy. And the Fed has pumped $3 trillion into the system since March. That’s a total of $6.6 trillion. And it’s estimated that, with the Fed’s other facilities, the Fed could inject up to another $3 trillion+.
So, there's a lot of excess money floating around. The response is bigger than the damage. Unfortunately, that money seems to be funneling to the winners of the lockdown economy. Amazon, Apple, Google and Facebook all put up record numbers in the quarter.
The big question has been, all along, how much excess money will be left in the response, once the economy gets back to full operating capacity? That has always been dependent upon the path of the virus. And as we've discussed here, the data, on that front, look favorable. However, the politics and propaganda at this stage has become, perhaps, a bigger threat.
Yesterday we talked about the big announcement from Navarro, that the government would be reviving the once iconic American company, Kodak, by anointing it as the primary manufacturer of ingredients for medicines to be made in America (bringing the supply chain home).
As we discussed, this was a $100 million company on Monday that would likely become a $5-$10 billion company in the coming years. That means after the near quadruple in the value yesterday, it was still dramatically undervalued.
Here's what the chart looks like now …
The valuation touched as high as $2.6 billion today! It's still cheap.
Next, we have developments on the virus front …
The "second wave" of rising cases, is now more than a month and a half in, and indeed, as we discussed in my July 16 note, the rate-of-change in the death-to-cases ratio has only declined more rapidly as the rate-of-change in testing has increased.
To put it simply, those that were projecting a big spike in deaths, because of the spike in cases, have been wrong. Rather, the spike in cases is simply representing the slow closing of the gap between the reported infection rate and what the CDC believes to be the real infection rate (at least 10 times as many), while revealing a death rate that is converging toward the annual flu death rate.
With the above in mind, we have another big development on the treatment front. The controversy over an early treatment option for the virus is re-emerging. Doctors are standing up and making their case publicly for the safety and efficacy of hydroxychloroquine and zinc. The group met with Pence today asking for the administration to "empower doctors to prescribe hydroxychloroquine without political obstruction."
As Jay Powell said today, the path of the economy depends on the path of the virus. The developments above are positive for the economic outlook.
Finally, the battle between the Republics and Democrats on a new stimulus package is playing out just as we've expected it. The federal unemployment subsidy is the political football, and there is no viable path toward an agreement. With that, as we've discussed, it may boil down to an Executive Order from Trump to extend the $600/ week. Good news. It was reported today (by Jim Cramer) that a short-term extension is coming. Based on history, I suspect his "source" was Mnuchin.
Back in early March, before the shutdown, the government was beginning to scramble to get funding packages moving to respond to the virus.
They started with $8 billion, which is now a rounding error in the overall response.
Back then, we talked about the winners that could come from government spending packages. Here's an excerpt from my March 4th note:
"Likely winners in the U.S. will be healthcare (related to the healthcare crisis — hospitals, pharmaceuticals)… perhaps manufacturing, as an effort to bring the supplychain back home … that would [also] bode well for engineering companies, heavy equipment/ machinery makers, metals producers, natural resource stocks and maybe some left for dead industrial conglomerates (GE?)."
Let's focus on the latter part: bringing the supply chain home.
We're seeing it, and its the very early stages.
Through the Defense Production Act, we've already seen U.S. companies turned into medical supply manufacturers. And today, Navarro announced the first major step toward moving the manufacturing of medicines back to the United States. Indeed, he's doing it with a "left for dead" iconic American company, Kodak.
Kodak was a $114 million company yesterday. Today, it's worth three times as much. In five years, it will probably be a $5-$10 billion company, transformed by the initiative to bring the supply chain home.
If Trump wins the election, my guess is he will make more iconic American companies relevant again, as he has with Kodak. Again, GE is name that comes to mind that, in the eyes of the administration, could be a symbol of American manufacturing renaissance.
In 2007, GE was a $425 billion company, the second largest company in the world. Thirteen years later, and GE is fighting for its life, worth an eighth of its peak value. Billionaire Nelson Peltz has a large stake in GE, and we own it in my Billionaire’s Portfolio.
In my Friday note, we talked about the set up for a breakout in gold and the vulnerability of stocks, as we head into a very important week that will determine the path of the government-sponsored economic recovery.
After plans were reported over the weekend that the White House and Republicans in Congress agreed on more handouts, gold broke to new record highs, and stocks were bid for the day, as we opened the trading week.
Let’s talk about the Republican package. First, as we’ve discussed, Congress is very unlikely to come to an agreement on a new stimulus package (not next week, not before the election). With that, the Republican proposal is probably just an exercise. But as we’ve also discussed, they must figure out a way to extend the federal unemployment subsidy (I’ve seen reports that it expired over the weekend… the bill, itself, says it expires on July 31).
With the above in mind, Mnuchin said over the weekend that they may piecemeal (or “phase”) the next stimulus package. I suspect what he’s really saying is “we need to get the unemployment benefit extended (in some form), and fast, and we can’t let the Democrats hold the economy hostage, by negotiating mail-in voting against it.”
This is setting up to hit a crescendo by the end of the week. And it may require Trump using Executive Order (if possible) on the unemployment subsidy.
We end the week with the clock ticking on the July 31st expiration of the unemployment subsidy (the extra $600/week).
And we end the week a significant step closer to action against China, whether it be a U.S. led coalition that puts China in the economic penalty box, or something bigger (military action).
With this, gold is getting power from two sources. It is already well on the path to new record highs, on the bet that trillions of dollars of new money floating around the world will inflate the price of all assets. And now, global capital is moving to gold as a flight to relative safety, as the probability of war with China has risen. Gold crossed $1,900 today…
How high can it go? Let’s revisit an updated chart on gold from my March 5 note.
This is a classic C-wave (from Elliott Wave theory) here in gold. This technical pattern projects a move up to $2,700.
Next, not surprisingly, with an imminent risk to the economy (the expiration of the unemployment subsidy), and 2) the rising risk of geopolitical instability, stocks end the week in a technically vulnerable position.
As you can see, the S&P sits on this very important trendline (as I write), representing the recovery from the March lows. This doesn’t look good, and this line has already given way in the Nasdaq.
With the above in mind, next week will likely come with less than comforting price action in markets. But, even though Congress is very unlikely to come to an agreement on a new stimulus package (not next week, not before the election), I suspect/hope the White House will find a way to extend the unemployment benefits, in the current form (faults and all). That should keep the economic recovery intact.
As we discussed yesterday, if you've been listening to Pompeo, it's increasingly clear that he's setting the table for a large-scale confrontation with China.
Today, he took the case to the world.
If we had any question on how aggressive Pompeo might be, he led the way yesterday with a comment about the head of the WHO, saying he was "bought by China." Remember, Tedros (WHO head) was on the ground in China, through the depths of the health crisis there, yet refused to call it a pandemic until March 11th — over a month after it was known that there was human-to-human transmission and about 20 days after the virus had already reached over 20 countries worldwide.
Take a look at the language in Pompeo's message today:
"The only way to truly change communist China is to act, not on what they say, but on the way they behave” – followed by examples of China's IP theft, censorship, global propaganda campaigns, espionage, etc — and he documented the threat to its own citizens.
"It's time for free nations to act."
“For too long we let the CCP set the terms of engagement. But no longer. Free nations must set the tone.”
I’d say the line in the sand has been drawn.
And to be sure, it will be crossed. And now the table has been set for action to follow.
As we discussed yesterday, this will likely come before the election.
With this, gold traded near $1,900 today. We've talked about gold here in my daily notes quite a bit, saying a new record high was coming, given the recipe for a global reset in prices (i.e. inflation). The last $100 has been fast. We're in sniffing distance of the all-time highs now, and it's not only inflation-driven flows, but also flight-to-safety flows now.
The news of the day wasn't about China, the virus or earnings. It was this headline: "White House officials and some Senate Republicans are discussing a short-term extension of unemployment insurance while they negotiate a broader stimulus package."
We talked about this huge issue on Monday (the unemployment subsidy) and the looming expiration of that benefit, which has created leverage for the Democrats in new stimulus negotiations.
As we discussed, the economic recovery would evaporate on August 1, IF the gridlock on Capitol Hill were to result in the expiration of the Federal supplement for the unemployed. Whether it be the current $600/week or some other form with improved incentives to return to work, it has to continue.
Hopefully, we get the latter. Nonetheless, the prospects of having that continued, without the necessity of an agreement on broader stimulus is very positive news.
Let's talk about China …
If you've listening to Pompeo, it seems increasingly clear that he's setting the table for a large-scale confrontation with China.
And, not coincidentally, we'll likely see something materialize before the election.
Incumbent Presidents, when they’ve actively sought a second term in war time, have a 6-0 record.
Back in May we talked about the likelihood this escalation with China.
Here's an excerpt from my May 29 note …
"This is all beginning to look like China will be put in the trade penalty box, not just by the U.S., but in coordination by the global democratic powers.
In the near term, this confrontation with China will further disrupt global supply, which is already feeding into a formula for higher prices, which will soon be followed by higher wages.
In the medium term, a globally coordinated hardline penalty for China would force the movement of the global supply chain sooner, rather than later, and force the restructuring of economies (for the better) of the United States, Europe and Japan.
The question is, how would China respond to an economic penalty box? Likely with aggression. The CCP can't politically withstand the suffocation of exports."
With the above in mind, Pompeo has been out alliance building.
This collision course has been in the making for a long time. And, again, it's no coincidence that its all culminating ahead of the election. As bifurcated the outcome might be for the U.S., domestically, based on the election outcome, the outcome has even more extreme polarity for China.
China has spent the past 40 years executing on a plan to rise to a global power.
The chinese currency was its primary tool. By massively devaluing the yuan in the 1980s through the early 1990s, and then keeping it artificially cheap through a variety of managed peg strategies for the past 25+ years, China became the exporter to the world. The Chinese economy exploded in size, growing 37-fold since the early 80s, while the U.S. economy has grown just 3-fold. This has put China on the footsteps of its goal of global leadership.
And Trump's economic plan (demanding that China play by the same rules as its trading partners) has derailed it all. If Trump wins, and they abide by a trade deal, the Chinese economy falls out of the race for global power. If Trump wins, and they don’t play ball, but get put into the penalty box by global trading partners, they also fall out of the race for global power. The stakes are extremely, extremely high for China (and the world).
With the EU’s agreement this morning on a 750 billion euro fiscal package, the long-term prospects for 1) the survival of the euro and 2) a united Europe, just got a significant upgrade.
That should be a greenlight for a higher euro. And that should make European stocks a target for global capital flows (maybe rabid global capital flows).
Let’s take a look at the charts.
First, here’s the euro …
As you can see, the euro has been in a 12-year downtrend. The value of the euro hit an all-time high and peaked as the global financial crisis was erupting, and the ECB was caught on the wrong foot (raising rates, when they should have been cutting). The future of the euro has been in question ever since, mostly driven by Europe’s inability to unify and respond with expansionary fiscal policies, to help the economy. So, now they have.
And with that, the euro broke above 1.15 today. The mid 1.18s is probably next. And then we may very well see a euro back to 1.30-1.40.
The euro story aligns perfectly with the lower dollar story. On that note, we looked at the long-term dollar cycles last month (which argues that we’re less than half way through a dollar bear cycle). Here’s the chart again …
With the outlook for a higher euro, that makes European stocks a much easier decision for global investors …
The two spots with the most upside here, are not surprisingly, the two biggest pain points for the euro zone over the past 10 years: Italy and Spain.
Here’s a look at Italian stocks …
Italian stocks were just beginning to break out in February when the virus hit Europe and ravaged Italy. As you can see, with today’s news we have a bullish technical break to continue the “V”shape of the recovery.
Here’s a look at Spain …
This is the big laggard. If we consider that German stocks are nearing a full V-shaped recovery, and Italian stocks have broken out, Spanish stocks have another 33% upside to recover the pre-virus levels.
And remember, for global investors, they get a euro-denominated asset (in these stock markets), which can amplify the return, if the bullish euro scenario plays out.