Pro Perspectives 6/24/20

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.  

Pro Perspectives 6/23/20

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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Pro Perspectives 6/22/20

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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Pro Perspectives 6/19/20

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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Pro Perspectives 6/18/20

June 18, 2020

Yesterday we revisited the wage story.

 

Not only will wages drive an inflation run we haven’t seen in decades, but wages will be a critical political chess piece in the November election.

 

As we discussed over the past couple of months, with the $600 a week federal unemployment subsidy, the government has become the biggest competition for labor as the economy has reopened.  That's what happens when the government pays people more to stay at home, than they made on the job. 

This may end up being the most politically explosive issue we've seen in an election in a very long time.  And we have a doozy of a list going into this one. 

With that, the politicians are circling.

The federal piece of unemployment is due to expire on July 31.  That's still about six weeks away. At that point, $2,400 a month goes away. 

The Democrats are fighting to get it extended through January.  Yes, January. Based on the number of unemployed that are making more on unemployment than they would working, this could keep more than 60% of the unemployed at home through January.  That would clearly handicap the reopening of businesses dramatically, and probably ignite some ugly inflation (at least in certain high consumption products and services) earlier rather than later. 

To counter this proposal, Republicans are looking at "back to work bonuses" that would expire right around the election.  The difference, it would get them back to work.  And for minimum wage workers, they would make more, adding in the Federal subsidy, than they would have made on unemployment.  

So, how will this play out?  Unfortunately, the infrastructure bill will be the victim of this political/election posturing.  Both the Democrats and the Republicans have proposed a big, bold infrastructure spend.  The Democrats are pursuing it as a way to cram "mail-in voting" into the bill, and the extension of unemployment benefits.  That would probably seal the election for them.  The Republicans have no choice but to reject those two demands, and will therefore blame the Democrats for blocking much needed infrastructure. 

Pro Perspectives 6/17/20

June 17, 2020

We’ve talked a lot about the perfect brew for an inflation run. 

First, we have a supply disruption that has been met with pent up demand.  That puts upward pressure on prices.  

Secondly, we have a massive policy response that far outweighs the losses in economic output, which means excess money is and will continue to be sloshing around the economy. 

And thirdly, we have the wage story. 

As I’ve said, the crisis-time wage increases won’t be temporary.  It will be very difficult to take back pay increases given to essential workers.  And for those in the lower wage range that have been collecting unemployment, they have been sent a message by the government (through the federal subsidy) that a living wage is higher than they’ve been earning.  

No surprise, people that have been earning more on unemployment than they were when they were working, are not finding it very enticing to go back to work.  And those that have been earning higher wages as essential workers, are finding those wages to be sticky, as employers fear losing them to an unemployment check. 

With the above in mind, Target announced today that they are raising minimum wage to $15 an hour.  That’s more than twice the national average. 

And the government is now looking at offering cash “back-to-work bonuses.”‘  

You can see in this chart from the NY Fed, the correlation between change in hourly compensation (wages) and cpi (inflation). It’s tight, and the trend has been lower.  But that’s changing. 

Wages are going higher.  And it's going to feed into the inflation brew.  
 
And this comes at a time when the Fed has been lulled to sleep by the lack of meaningful inflation over the past two decades.   Just this morning, in his Q&A with Congress, Jay Powell reiterated the Fed's belief that "disinflationary forces are here to stay for a while."  He went on to say, "we are living in an era of continued downward pressure on inflation."  Add to this, the Fed has already said that they plan to let the economy run hot — allow for sustained recovery — before they will start raising rates from the current level of zero. 

This sets up for a situation where the Fed will get behind on inflation, and at some point, will be chasing inflation. 

Pro Perspectives 6/16/20

June 16, 2020

We talked yesterday about the simple math that tells us that the response from policymakers over the past three months was far greater than the economic damage, derived from the nation-wide stay-at-home orders.

That means we're going to have a lot of excess money floating around the economy.  And that means a big bounce back in growth is coming.  And with it, inflation is coming too, as we have frequently discussed here in my daily notes. 

It's a matter of how big the bounce back will be, and how much inflation.

On that note, we had more evidence today that suggests the pessimistic projections on Q2 GDP is going to be proven very, very overly pessimistic.

We've already seen big surprises rolling in from the May data: personal incomes (record year-over-year change), savings rates (record high), along with a huge positive surprise in the May jobs report.    

Today we had a look at May retail sales.  Remember, the economy started opening up in late April, starting in Georgia.  So as we look at May data, we're getting early information on behavioral changes as people get back to some semblance of day-to-day life.  Is there a new normal, or will people go back to their lives?  

As we discussed here back in early May, the April data on the health crisis had already told us the bottom was in, and the worst case scenarios were off of the table.  And with that, we were set up to beat some very low and conservative expectations that were set by public officials.  

Indeed, that's what we're seeing.  In the chart below, you can see what it looks like when people are asked to stay at home for two+ months, but remain attached to their jobs and remain financially strong/solvent.  When orders are lifted, they go out and spend. They go back to their life-learned patterns and behaviors.   

Unlike the Global Financial Crisis, this is not a situation where overindebtedness and the lack of confidence in future employment has kept people in their bunkers, preserving cash.  This is/was a health crisis, that could have spilled over into a crisis of confidence, which could have caused lasting damage to the economy. 

The good news:  The data that's rolling in is building the case that the crisis of confidence has been avoided.  And that has everything to do with the policy response, by putting money in the hands of consumers, keeping them attached to jobs and protecting the balance sheets of consumers and companies.  

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.