Pro Perspectives 6/15/20

June 15, 2020

The media continues to bait readers and watchers with sensational "second wave" and virus “cases spiking" headlines. 

But there continues to be no story there.  The data doesn't match the headlines. 

For a point of reference, let's take another look at Arizona hospitalizations.

We looked at this last Thursday.  And you can see, nothing has changed. There is less than a handful of COVID hospitalizations in a state with a population of 7 million. 

So, for those looking to project another economic shutdown from a second wave.  Not only does the data not support it, but the administration has already made it clear that there will not be another shutdown. 

With that, we have some certainty.  The trajectory for the economy is clearly UP from here.  It's a matter of how much. 

Let's do some math to see how the full year might look. 

First, with two estimates of Q1 GDP already in, the economy is reported to have contracted by a 5% annualized rate in the first quarter.  So, over a twelve week period, three of those weeks were under nation-wide stay-at-home orders.  That's  one-fourth of the quarter, in what many people would consider to be in the state of economic stand-still.  

But as we know, the economy still operated.  Many worked from home. People shopped for groceries.  Delivery drivers delivered. Products moved. Essential utilities were operational.  There were winners and losers, but consumers continued consuming. The economy was still moving.  So, instead of a down 20% first quarter, the economy only lost 5% (annualized rate).  

Let's put that in perspective.  Our economic output was on pace to be about $22 trillion this year (current dollars).  The contraction in the first quarter cost us about $275 billion.  

Now, this perception of economic stand-still has also created an extremely overly pessimistic view on what Q2 GDP will look like.  At the moment, the Atlanta Fed is looking for down 48%, and the consensus view of economists has been tracking lower, now forecasting something close to down 35%.  

If we extrapolate from Q1, we should see something closer to down 20%.  But even if we took consensus view of down 35%, we get something close to a $2 trillion loss in economic output.   

That's a big number.   But remember, we have $3.3 trillion in fiscal stimulus now working 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+.  We don't have to do the math to see that the response is far greater than the damage, thus far.  

So, the big question is, what will the second half of the year look like?  The Conference Board, a think tank made up of public and private corporations and organizations, is projecting a bounce back of +20% (annualized rate) for the economy in the second half.  Even if the second half GDP were to be flat relative to a year ago (i.e. no growth, no contraction), this is all setting up for a lot of excess money to be sloshing around the economy. 
 

Pro Perspectives 6/12/20

June 12, 2020

Let's take a look at some key charts as we end the week.
 
First, on the same week that the Nasdaq recovered to new record highs, global stocks, broadly, had a sharp slide.  Where does that leave us?
 
Here's a look at the S&P 500 …

The S&P broke the big this recovery trendline, but still holds in a big support level, the 200-day moving average.
 
Since the administration is a keen follower of the Dow, interestingly, the technicals on the Dow have probably been better indicators to watch on stocks in recent years.  
 
With that, the Dow goes into the weekend, holding this big trendline that represents the recovery. 
As Bernanke once said in a 60 minutes interview at the depths of the financial crisis, QE tends to make stocks go up.  The Fed buys assets (primarily U.S. Treasuries).  The sellers of those treasuries (large institutions) tend to take the proceeds and buy stocks. 
 
This time around, the Fed has again gotten the desired effect.  They’ve promised to buy unlimited Treasuries. Stocks have gone up. 
Higher stock markets promote confidence and wealth — two things that help engineer economic recovery.  
 
Higher stock prices are great, but to have a functioning economy, much less an economic recovery, you have to have a functioning corporate credit market.  With that, early on in this crisis, the Fed stepped into corporate bond market, as a buyer. The mere presence of the Fed opened up private lending to corporates — and the corporate bond markets has been fixed.
This move by the Fed was a key piece in turning markets around.  It was on March 23rd that the Fed said it would buy corporate bonds and corporate bond ETFs.  It marked the bottom for stocks.   And on that day, we looked at this chart in my daily note of the highest volume corporate bond ETF, LQD …

Here's how it looks today …  
On a related note (to corporate credit):  Finally, let's take a look at oil.  
 
After a wild plunge deeply into negative prices, oil traded above $40 this week.  This is good news, but we need higher prices to keep the shale industry afloat –above $50.  Despite the aggressive policy response from the Fed, it looks like 29 companies in the U.S. oil industry, to this point, are already at some stage of default. The rest are in survival mode, slashing spending and production. 
 
They (Fed, Treasury, Congress, White House) won’t/can’t afford to let the dominos fall in the shale industry.  Expect higher oil prices. 

Pro Perspectives 6/11/20

June 11, 2020

Stocks were hammered today, following the 47% run off of the March 23rd lows. 

Why the aggressive 5% decline today?  As we know the bounce was bought and paid for by the Fed, Treasury and Congress (pumping a total of nearly $10 trillion into the economy).  And the extent to which the bounce will continue (and to what degree) has everything to do with how quickly (and to what degree) the economy rebounds. 

Remember, the liquidity insurance that has been pumped into the system buys time.  If the economy comes back stronger, earlier, the excess money in the system should drive a boom in nominal GDP, a boom in asset prices and a boom in wages — but also a boom in inflation.  If the economy were to come back too slowly, and the stimulus were exhausted, the Fed, Treasury and Congress would do more – but there would be significantly more damage to the country.

That said, as we've discussed in this daily note, the data we've seen thus far squarely supports the former — and supports the notion that we are in for a very hot second half bounceback in the economy. 

But yesterday, the Fed had a relatively conservative projection on the economic rebound (not too surprising).  They said they were looking for a V-shaped economic recovery, but running through 2022. 

Did people take that view as a signal to take profit today and de-risk some, because the Fed's economy projections were less aggressive?  Probably.  

Now, with stocks down, there was a lot of talk in the media today about "spiking" infection rates, and the fear of a second wave.

I've been seeing this headline now for days about the alleged "spike" in Texas.  And it was said over and over in the news today (including warnings on a couple of other states). 

So, I went to the Department of Health website in Texas and looked at the data. 

As we know, changes in cases are a function of changes in testing volume.  Hospitalizations give a better view of what's going on.  Here is what's going on in Texas …

For perspective, when Texas did the "first phase" opening of the economy in Texas on May 1, there were 1,778 confirmed COVID patients in the hospital.  Right now, they are into "phase 3" and the current number of COVID hospitalizations is a whopping 2,008.  That's 230 more people, in a state with 29 million people (you can see the data here).

Here's that same chart, if we manipulate the y-axis for effect. 

That, I assume the media would prefer to show. But same interpretation:  nothing to see here.  

What about Arizona?  

Arizona too is more than a month into the reopening. 

Here is what the current number of COVID hospitalizations look like in another state the media is flashing warning signals on.    
Hospitalizations are moving lower, not higher (see it here).  And notice the scale on the y-axis.  These are very small numbers/tiny relative to a population of 7 million. 

Add to this, we've talked about Minnesota, where widespread protests took place as early as May 26. That's 17 days ago, beyond the incubation period, and the hospitalizations rates have been falling, not rising (see it here).  What about NYC?  Protests began in NYC on May 28th, 15 days ago.  Same deal. Falling, not rising (see it here). 

Moral of the story:  Don't rely on the headlines.  Do some primary research.  See the numbers for yourself.  
 

Pro Perspectives 6/10/20

June 10, 2020

The Fed met today. 
 
People were looking for something new from the Fed.  What more do they want? 

The Fed has already told us they will do anything and everything to promote stability and recovery.  And they've done it.  If something else bubbles up, they will do more.  Powell has made it very clear that he will continue to protect the balance sheet of businesses and consumers.  And he has made it clear that they will keep the pedal to the metal until the economy is well into recovery. 

That means, they will let the economy run hot.  That means, they will tolerate inflation, and they will do nothing in response to inflation that would risk making the nearly $10 trillion of fiscal and monetary stimulus that has already been fired, impotent.  

As we've said, inflation is coming.  And, if anything, the Fed will be behind the curve, by their own design.  At some point, they will be chasing inflation, which will mean some abrupt brakes will be put on the economy.  But that won't be anytime soon.  They want to give the economy plenty of room to run, so that there is a clear exit from this recession, and enought time for the economic damage to be repaired.   

This is, and has been, a greenlight to be long asset prices: stocks, real estate, commodities, art, collectibles … even bitcoin.  The cheapest is, without question, commodities.  We've looked at this chart before from Leigh Goehring, one of the great research-driven commodities investors of our time (you can see more of he and his partner Adam's work at gorozen.com). 

Never before, have commodities been this cheap, relative to stocks. 

Pro Perspectives 6/9/20

June 9, 2020

Yesterday, we talked about what looked like a book-end event for the health crisis. 

The world has been paralyzed with the idea that asymptomatic people, which make up as much as a fifth of the population in a NYC sample, were unknowingly spreading a deadly disease.  The cases and case fatality data over the past two months goes a long way toward disproving it, but it's hard to ignore such an alarming assertion by the global health experts. It's enough to keep many in their bunkers, even as economies are reopening. 

With that, when the technical lead of the Covid-19 response/ head of emerging diseases at the WHO says that evidence shows it's "very rare" that asymptomatic people pass it on, it's time for a celebration. This should of been the top story everywhere. 

But few were celebrating.  And few were talking about it.  And then the attacks came.  And then the very same person that repeated over and over again yesterday that it was rare transmission, tried to walk it back publicly today.  But despite the window dressing on the clean-up attempt, the message came out looking very much the same, with the softer, yet inexact, phrase "much less likely" … instead of "very rare."   Here is here statement on Twitter …

As I said yesterday, it's more than fair to question the credibility of the WHO.  They've given us another reason. But it’s fair to question any expert opinion on this, at this point.  Meanwhile, the data continues to speak for itself.

On a related note, let's take a look at what the case reporting looks like in Minnesota, now 14 days after the first mass protest broke out in the streets.  As you can see in the table below, there has been no spike in hospitalizations.  The daily non-ICU hospitalizations have declined, so have ICU admissions …

Pro Perspectives 6/8/20

June 8, 2020

All along, we've been closely watching the timeline on the health care crisis, relative to the amount of stimulus that has been pumped into the economy. 

Remember, the Fed, Treasury and Congress have flooded the economy with stimulus that amounts to more than a quarter's worth of GDP. 

With that, consider this:  Despite the "stay-at-home" orders, the economy has still been running at better than 60% of capacity in the second quarter. 

This has set up a situation where, an earlier exit from the health crisis would leave potentially trillions of dollars of excess stimulus sloshing around the economy.  

Okay, so where are we on the health care crisis timeline?  

Remember, the first and most important marker we watched over the past two months was the daily intubations in New York hospitals.  When that number peaked and began to fall, it was clear that some treatment or therapy was working — preventing hospitalized patients from getting to the severe stage.  

The peak in that NY daily intubations number (the first week of April) was a big indicator that the health crisis had peaked. 

A few weeks later, we had the opening of economies (which started in Georgia).  We had no significant spikes in cases or deaths.  To the contrary, the data continued to decline from peak levels. 

Then we had new updated projections from the CDC as we headed into Memorial Day weekend.  They published new, lower estimates on the severity of the disease.  The best-case scenario, they said, would be a case fatality rate of just 0.2% – a small fraction of what was originally projected. And overall, the study showed dramatically more optimistic projections than we saw early in the crisis.

Finally, the WHO said this today:  It's "rare, that an asymptomatic person transmits" the virus.  In fact, it's "very rare." 

It’s more than fair to question the WHO’s credibility at this point, but this is very, very big news.  I suspect that is game, set, match on the health crisis. 

So, importantly, while the health crisis ran about three months, we did not lose a full quarter of economic activity (which would amount to about $5 trillion worth). If we look at all of the economic data, at the depths of the lock-down, activity did not go to zero (far from it). 

The Q2 GDP estimate will prove to be way too pessimistic — the Atlanta Fed's model still projects down 53.8%.  And Q3, and Q4 are going to be very, very big.  We will have trillions of dollars of excess stimulus sloshing around the economy.  And, now more than ever, expect more of that money to flow IN to the stock market. 

With that, the S&P 500 went positive for the year today. 

With the tailwinds for the economy at the start of the year, if I told you that you could add zero rates, Fed QE and a few trillion dollars in fiscal stimulus to the economy, would you be a buyer or a seller of stocks?  I'm definitely a buyer. 
 
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Pro Perspectives 6/5/20

June 5, 2020

Yesterday, we talked about the consensus expectations for second quarter GDP.  And we discussed the reasons why the very low expectations are set up to be beaten (i.e. positive surprises).   

We had a glimpse of that this morning.  The May jobs data that was reported this morning was a huge positive surprise.  The market was looking for 8 million in new job losses in the month of May.  Instead, the report showed 2.5 million of job gains.

That leaves the unemployment rate at 13.3%.  The expectations were something closer to 20%.  And more broadly, we're heard views that it would reach as high as 30%.  But now, 50 days into the reopening of the U.S. economy (which started in Georgia), the employment picture is going the other way.  Very good news.

This is more early evidence that stimulus measures have indeed kept employees attached to their jobs, even through unemployment, which has allowed for a more seamless reopening of businesses.  Add to that, businesses are finding demand when they open the doors (which accelerates re-hiring). Protecting the balance sheets of consumers, has successfully kept that demand intact. 

With this backdrop, we've talked about the formula for a run in inflation, given the disruption in the supply chain, AND the trillions of dollars of new money that has been placed in the hands of businesses and consumers. This is the double-whammy of both demand and supply driven inflation.  

On the demand side:  We've now seen a record spike in personal income.  And a record level of personal savings.  That's driven, in part, by rising pay for essential workers, and federally subsidized unemployment.  And this has fed into higher wage growth (as you can see in the chart below, from today's report).  

Make no mistake, higher wages will be here to stay, out of necessity, to meet the rising price of assets.  That's what happens when policymakers make the choice to destroy the value of money — which they've done.  

In normal times, this (devaluation of money) would be a recipe for a lower standard of living for the nation.  But in this world, where everyone is in the same boat, and everyone has followed the same script, it may just be a global reset of prices and wages (little pain).  
 

Pro Perspectives 6/4/20

June 4, 2020

As the May economic data begins to roll in, let’s update the picture on the damage to the economy.

Last week, we had the first revision of the Q1 economic output.  It was down 5%.  Of the twelve weeks measured, the economy went into lock down for the last three of those weeks.  You can see that timeline here …

If we extrapolate the Q1 economic contraction to a full quarter under lockdown, maybe we get something in the neighborhood of -20- to -25%.

With that in mind, let’s revisit how the Atlanta Fed is projecting Q2.  Remember, just three weeks ago, the Atanta Fed model was projecting -43% for Q2.  Today, the model is projecting down 54%.  You can see what the evolution of this projection looks like (the green line) as the Q2 economic data has been rolling in. It has continued to move lower.

What is the consensus view of economists outside of the Fed?  The blue line shows the average forecast of a 35% contraction.

This continues to look like the expectations are set to be beaten (i.e. positive surprises).

The latest University of Michigan consumer surveys (sentiment, current conditions and expectations) all remain well above the levels of the Global Financial Crisis.

And “capacity utilization” was running at about 65% in the last report (from mid-May).

As we discussed last month, the important takeaway there, it’s not zero.  Despite what is described as an “economic stoppage,” the economy still operated at almost 65% capacity in the month of April.  And I suspect it will better in May, as economies began to open up as early as the last week of April.

So, what’s the disconnect in this data and in the Atlanta Fed model?

The models these economists rely on doesn’t account for the unprecedented actions taken by the Fed and Congress.

They have protected the balance sheets of consumers and businesses.  That’s the difference.

And today we had good news on that front.  The Senate passed revisions to the PPP loans. Small businesses will now have six months, instead of two months to spend the money that was intended to bridge them from closing to a full reopen.  And they will now only need to use 60% of it toward payroll, instead of 75%.  Translation:  It has become a more balanced mix of payroll grants and a pure cash grant.

With that, small businesses that were in decent condition have survived, and in some cases are flush with cash, as the doors have reopened for business. Plus, employees have been kept whole, through a combination of subsidized unemployment and an attachment to their jobs.

This all sets up for a huge bounceback in the economy.

Remember, between fiscal and monetary stimulus, we have more than a quarter’s worth of GDP already pumped into the economy.  That implies a complete stoppage of the economic heartbeat for three months.  That hasn’t been the case – far from it. The excess money in the system is going to levitate the nominal value of GDP.

Pro Perspectives 6/3/20

June 3, 2020

Stocks have moved aggressively higher over the past 24-hours.

The crash in stocks was fierce, and so has been the recovery — up 44% from the March 23rd lows.

Back in late April, we talked about the 2,930-3,000 area in the S&P (the white box in the chart below). This was a sensible area to mark the top of a range for a while – at least until we had some visibility on what the world looks with economies reopening.

Indeed, this area proved to contain stocks for the next month (through much of May).  And along that timeline, the temperature on the health crisis continued to cool — no spike in cases, and importantly, a continued decline in deaths.

So, when we came out of Memorial Day weekend, it just seemed like the pieces were in place for a defining “rip the band-aid off” moment for the economic crisis.

That’s what we got.  That Tuesday after Memorial Day was the day that stocks broke out.

With that, we are now just beginning to see what asset prices look like when a functioning economy meets an unprecedented sea of global liquidity.  I suspect it’s going to surprise a lot of people.

Just how big is the sea (of liquidity)?  Remember, not only has the Fed and other global central banks flooded the world with trillions and trillions of new money, but the Fed removed the reserve requirement ratio for banks.  It’s now ZERO.  At a zero reserve requirement ratio, the stock of money could increase infinitely.

Translation:  The value of money is being destroyed, which means the price of assets go up!  

As I said yesterday, cash is the worst place to be.  It’s time to be long asset prices.
Pro Perspectives 6/2/20

June 2, 2020

With $11 trillion of global deficit spending in response to the pandemic, and trillions of dollars of new money creation from global central banks, we've talked a lot about the wave of inflation that's coming (possibly very hot inflation). 

Let's take a look at some related charts …

Let's start with wages/income, which is rising (thanks to hazard/essential worker pay increases and Federal unemployment subsidies).

On Friday the month-over-month change on personal income for the month of April was +10.5%.  Here's how that looks on a chart relative to the past twenty years … 

With this, the savings rate reported on Friday showed a spike to a record 33%.
 
So, cash is being explicitly devalued by policymakers, yet people are sitting on the highest levels of savings on record.  Cash is the worst place to be. 

We’ve yet to see the impact of this excess money that’s sloshing around the economy in everyday consumer products — but it’s coming (i.e. higher prices).  

Where is inflation showing up now – the early warning signals?

> Gold —  Cash has already been devalued against gold by about 13% since the Fed started its Pandemic response on the evening of March 15th (two and half months ago). 

> Stocks — Cash has been devalued against stocks by about 14% since the Fed’s first response. 

> Bitcoin — It takes 74% more dollars to buy a bitcoin than it did just two and a half months ago.  

> Real Estate — The median home price is up 6.5% since the Fed’s initial response. 
In the post-Global Financial Crisis economy, cash was king.  In the post-Pandemic economy, hard assets will be king.