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.   

Pro Perspectives 6/1/20

June 1, 2020

As Mark Twain said, "history doesn't repeat itself, but it often rhymes."

In this case, it seems like we're seeing the major events of the twentieth century rhyme, in hyper-speed.  We have a 1918-like global pandemic, prior to which, the economy was set up for another roaring 20s-like era of economic prosperity.  Then suddenly, we have a 1930s depression-like economic contraction and unemployment (actually worse).  If we're not on the verge of another 1940s World War, we're certainly in another 1980s Cold War.  The 1950s-like family life has been reengaged through two-months of stay-at-home orders.  We have 1960s-like civil unrest.  And we have a 70s-like supply shock, which is brewing inflation.  Next up, the 80s?

On the supply shock front, we've talked about the building theme of higher prices — driven by the mismatch between demand, which is being turned back on like a light switch (from the reopening of the economy), and supply, which has been disrupted and will take time to rebuild.

We've already seen it in food/groceries.  Now, we're beginning to see it in retail. 

If you've been out shopping over the past couple of weeks, since stores have reopened, you may have noticed that inventory is light (if not bare).  In some cases, there are stores that haven't seen a truck with new inventory since they've reopened – and they don't know when they might see one.  This includes all sorts of consumer products (office supplies, computers, furniture, clothing).  

Add to this, you have a consumer sitting on a new record high savings rate.  That's too much money, chasing too few goods – the formula for inflation.

With that, let's take a look at copper prices, an industrial metal that tends to be an early signal on a turning point in the economy, and a good inflation hedge.  It traded today to the highest levels since early March, before the shut down. 

 

Pro Perspectives 5/29/20

May 29, 2020

In a prepared speech today, Trump formalized many of the threats against China that we've heard over the past few months. 

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.  

And how would Russia align?  They would likely stand back and watch. 

There was a recent article in Foreign Policy (here) on this, laying out the reasons why Russia and China would not form an effective alliance against the U.S. (and allies). 
 
Here's the gist:  "history shows that autocratic allies tend to fight each other more than the enemy. In spite of the Molotov-Ribbentrop Pact, Adolf Hitler turned on and invaded the Soviet Union, betraying his partner Joseph Stalin. The major military action of the Warsaw Pact during the Cold War was attacking its own members, Hungary and Czechoslovakia. The last time China and Russia were aligned, they nearly fought a nuclear war with each other in the 1969 Sino-Soviet border conflict. And Putin invaded Ukraine and Georgia at a time when these countries were involved in the Russian-led Commonwealth of Independent States.

Moreover, there are many conflicts of interest between Russia and China that will push them apart without any help from the United States. Depopulation in Russia’s Far East has led to fears that an expanding China will attempt a land grab. Russian colleagues report that Russia’s new nuclear-armed intermediate-range missiles are not aimed at NATO but meant to deter a rising China. More broadly, Moscow was the senior partner during the Cold War, and Putin will not be keen to now play second fiddle to Beijing."

Interestingly, the move in stocks today was up, following Trump's speech.  If you have money in China or Hong Kong, you're getting it out. Where will it go?  U.S. stocks, treasuries, gold … bitcoin.  
 

Pro Perspectives 5/28/20

May 28, 2020

We talked yesterday about the building path to confrontation between the U.S. and China.

Another step along the path came today, as the White House announced that Trump will  hold a press conference tomorrow, regarding China’s move to control Hong Kong.  

Stocks came off hard, late in the day, on the news.  And assuming this press conference doesn’t take place until late tomorrow afternoon, it’s a pretty safe bet that tomorrow will be a “risk-off” day for markets as we head into the weekend. 

Add to that, the President signed an executive order this afternoon, to pursue legislation to regulate social media platforms.  This should weigh on broader stocks too, as we end the week.   

We’ve talked about this slow moving “regulatory purgatory” for the tech giants, in my notes for the past two years.   

The tech giants have gotten too big to manage, too powerful and too dangerous for the economy (and society). 

But ironically, regulation only widens the moats for these companies, given their scale and maturity.  The higher cost of compliance, the smaller the chance that there will ever be another Facebook developed in a dorm room.    

That said, the regulation of the “disruptors” should open the door for the “disrupted” to survive.  But the position of dominance by Amazon, Facebook, Google (etc.) seems to have been set – the die has been cast.