Pro Perspectives 4/21/20

April 21, 2020

Let’s talk about debt.

Congress approved another $500 billion in aid/relief/stimulus today. 

That adds to the initial $2.2 trillion that’s just now working its way into the economy. And then we have the Fed, which has already expanded it’s balance sheet by $2.2 trillion to keep credit markets functioning/ as the lender of last resort.  Here’s what that looks like on a chart …

So, the Fed’s balance sheet is now about 27% of the size of the economy. That’s a record.  And that number go higher (probably much higher). 

In addition to all of the above, let’s add another $2 trillion that seems certain to come, which will represent another 1930’s-like “New Deal” — a massive government spending program, to rebuild America (likely focused on infrastructure, healthcare and manufacturing).

This all balloons debt levels, which were already running at record highs.  At the end of 2019, our government debt was already 107% of GDP.  

Does this mean people around the world will dump our bonds (our debt) and flee from the dollar?  In a normal world, in an average country, probably.  But we happen to have the world’s reserve currency.  And the ballooning of debt levels isn’t just a U.S. centric problem, it’s global. 

Global debt-to-GDP was at record highs already (thanks to the aftermath of the global financial crisis), and is accelerating rapidly in this global health crisis.  Why?  Global central banks and governments are all printing money, financing government debt, and spending to keep economies alive — to bridge the way back to a normal operating economy again.  It’s the only option. 

This is debt monetization in the name of salvaging economies.  And by design, with the printing of paper currencies, that debt will be paid back with easier to come by and less valuable money. 

So you don’t want to be a creditor in this environment. Debt is being devalued. 

 
And currencies are being devalued. But not against each other — paper currencies are being devalued against asset prices (like stocks, commodities, real estate). 

Now, clearly, for the moment, this all looks like deflation.  Stocks and commodities prices have crashed.  And economic data is crashing.  But don’t be fooled.  This is a global gameplan to reflate economies and inflate away debt. It’s coming.     

Pro Perspectives 4/20/20

April 20, 2020

When low probability events occur, things blow up.  

In this case, no one in the world considered a scenario where half of the world’s population went into lockdown.  

With that, we continue to see the fractures that emerge from this environment.  First, it was the Treasury futures market. 

Remember last month, in a time when the Fed is trying to force borrowing rates down, slashing rates to zero and cranking up the printing press, the yield on 10-year Treasury futures went UP.   Why?  1) A few hedge funds blew up, and were forced to liquidate long treasury positions (a position that had been working very well for them, until the moment it didn’t).  And 2) global central banks have been desperately selling Treasuries to meet the demand for U.S. dollars from their financial institutions.  To resolve this dangerous market dislocation, the Fed had to step in as the unlimited buyer of Treasuries, to get the market under control.  

Now we have oil.  Not surprisingly, it appears that (at least) the largest oil ETF didn’t factor in the scenario where the global economy shuts-down (demand destroyed), and then two of the most powerful oil producers collude to flood the world with oil supply.  That creates a situation where there is little-to-no storage around the world for oil.  The problem:  When the May oil futures contract expires, the holders of this contract are obligated to take delivery of physical oil.  There’s no place to put it. So, no one wants it. 

So when a multi-billion dollar oil ETF, like USO (designed to track the price of oil), has to sell their May oil contracts, to move into June contracts, they find no buyers. 

And with that, today, we get this chart …

Pro Perspectives 4/17/20

April 17, 2020

As we end the week, let’s take a look at some key charts.

We’ll start with what I continue to think is the most important data in this health and economic crisis — the daily intubations in New York hospitals. 

As you can see to the far right of the chart above, the daily intubations have declined five consecutive days. 
 
Meanwhile, in this next chart, there continues to be about 2,000 new hospitalizations a day.  Bottom line, the number of people getting to the severe stage (to the stage of intubation) have declined dramatically.  As we’ve discussed, something (a treatment) seems to be working.  And no surprise, since the data has revealed itself, the plans to reopen the economy are now underway. 
With the above in mind, we’ve talked about hydroxychloroquine, which has become a political football.  The FDA approved this drug to be used “off label” for Covid patients weeks ago (including in NY hospitals), yet we’ve heard little, if any, reports on how its working.  The Governor in New York has hosted daily press conferences for weeks now, and decided it’s not important to mention the drug trials and experimental treatments that could give us a bridge to a vaccine (and put a bottom in for the health crisis).  Yesterday, he finally did.  He actually said “maybe hyroxychloroquine works.”  I saw zero reports of that statement in the news. 

But, we did get a hopeful review on the success of Gilead’s experimental treatment (Remdesivir) late yesterday.  What do you know?  The media was all over it.  

Bottom line, as the data show, something is working!

As for Gilead’s stock, it is only up about 12% from the date they announced they were initiated phase 3 studies on this drug to treat Covid, back in late February. That’s strange behavior for a company that has been well in the hunt for a viable treatment. 

Let’s take a look at stocks …
Remember, at the depths of the bloodletting in stocks, we talked about the way historical major turning points in markets are made — they are typically associated with some sort of intervention (in this case, we’ve had the mother load).  And markets can turn well before there is clarity on the outcome (the coronavirus, in this case).  So far, that has gone according to script. 

The S&P 500 has now bounced an astounding 32% since the lows just four weeks ago.  We’re closing in on this key technical level, the 61.8% retracement of the decline.  Between that, and the 200-day moving average, which comes in just above 3,000, I suspect we’ll find the top of a range in stocks in that area. 

From there, stocks will probably trade in a range until we have a better gauge on how the fiscal/monetary stimulus will match up against the timeline to return to normal operating capacity.  Remember, the Fed, Treasury and Congress have essentially plugged a quarter’s worth of GDP.  And there is more coming, which will likely include a massive infrastructure spend.

 

There’s a substantial amount of runway here, which I would argue, makes for a high probability that it will prove to be an overly aggressive backstop.  That would promote very hot growth in the recovery, and hot inflation.   
 

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The fourth was in 2008 and 2009 …
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Pro Perspectives 4/16/20

April 16, 2020

Billionaire Paul Singer, one of the best investors in the world over the past 43 years, says this is the perfect environment for gold, and thinks it can trade as high as many multiples of its current price. 

As we’ve discussed, with global central banks and governments explicitly devaluing cash, there will be a global reset of cash relative to asset prices (inflation).  It’s already starting in gold.  Spot gold prices are up close to 20% over the past month.

This is what we’ve been looking for.  Here’s an excerpt from my March 18th note, just as that move was starting: “Let’s keep in mind that the Fed has the printing press, and won’t lose the battle in the bond market.  In the very near future, the Fed will probably have the 10-year yield where they want it (maybe at 30-40 basis points), and be in complete control of the yield curve.   It may take that observation to turn around the price of gold.  When it does, we could see gold much, much higher (maybe $2,500ish).”  

As we know, the Fed has indeed won the battle in the bond market.  And they’ve done it by becoming the last resort buyer in the Treasury market, the municipal bond market and the corporate bond market.  The printing press has been working overtime. 

A month later, that leaves gold at $1720.  But that’s still $200 off of the 2011 Global Financial Crisis induced highs — another 12% higher from here.  But again, with global central banks and governments all-in, it’s just the beginning for gold.  

Let’s take a look at a gold miners ETF, as a leveraged way to participate in the gold bull market. 

As you can see in the chart, a return to the 2011 highs in this ETF (the record highs in gold prices), would mean more than a double (relative to a 12% gain in the underlying). 

Pro Perspectives 4/15/20

April 15, 2020

As we discussed at the beginning of the month, as we start seeing the March data roll in, reflecting the abrupt stoppage of the economy, it's going to be ugly.  We're getting it.  

Here's what it looks like …

And, as suspected, the media has pounced …
The month-over-month change in retail sales plunged at a record rate.  Industrial production plunged at the sharpest rate since 1946.  The housing survey that measures builder opinion on current and futures home sales collapsed.  

But remember, the losses reflected in these data (and coming data) have already been offset by intervention from the Fed, the Treasury and Congress — intervention that replaces more than a quarter of U.S. economic output.

So, it's a matter of, is it enough to plug the gap?  That will be determined by how long this plays out — the timeline on getting back to normal.  Fair to say, it won't be a quick return to normalcy.  But it's also fair to say — if you believe that New York represents the "turning point" in the health crisis, rather than the canary in the coal mine — that the bottom is in for the health crisis.  New York has now had three consecutive days of declining intubations.  Again, something (treatment) seems to be working. 

So we have one month of economic "shutdown" (so far).  And three months worth of fiscal and monetary stimulus to plug the gap.  The "time" variable is looking favorable.  Moreover, the phrase "economic shutdown" assumes a complete stoppage in the economy.  That's not the case.  Many areas of the economy are still operating.  Even the capacity utilization for the industrial sector is still running at 73% capacity through March – only seven percentage points below the long-run average, and still far healthier than the depths of the financial crisis period. 
 

Pro Perspectives 4/14/20

April 14, 2020

With trillions of dollars of relief/aid/stimulus money beginning to work it's way into the economy, the early stages of the global “asset price reset” is under way.

When global policymakers print money and drop it on your doorstep, the purchasing power of the cash in your pocket goes down. Inflation. 

This inflation scenario is what many were expecting to play out from the Global Financial Crisis response.  But it didn't.  Why?  

Because of this chart …

This is the velocity of money. This is the rate at which money circulates through the economy.  And you can see to the far right of the chart, it hasn’t been fast over the past decade (therefore, no inflation). 

We get inflation, only if the recipients of the money, spend it (if it circulates).  That didn't happen coming out of the global financial crisis.  Banks used cheap/free money from the Fed to recapitalize, not to lend. 

Moreover, borrows had no appetite to borrow, because they were scarred by unemployment and overindebtedness.  

In the current case, by design, money is being dropped directly into the hands of consumers.  And if they can keep people confident about their financial future, job security and earning potential they should spend it. That will promote economic activity.  That will also promote (maybe massive) inflation — a global reset of asset prices.  This assumes an economic recovery comes sooner rather than later.  Billionaire Ray Dalio said earlier this year “cash is trash.”  He was early.  Now he’s right.  Be long hard assets … stocks … Treasury inflation protected securities (TIPS), at the very least. 

Pro Perspectives 4/13/20

April 13, 2020

Earnings season kicks into gear this week.

We'll hear from the big four banks on earnings over the next three days.  Just a quarter ago, these were big reports, measuring the financial health of the banks, the appetite for credit and the health of the consumer (it was all very good).  This time, things are very different.  

Aside from a few companies (the near-term winners from the "stay at home" economy), these Q1 earnings will have little value.  With the uncertain outlook, what has happened in the rear view mirror doesn't mean much.  Even "guidance" for management will offer little, if any, credibility.   

With that said, this is the time, when broad sentiment is on its back, that corporate America will put everything on the table (all the bad news they can conjure up), in attempt to dial down the expectations bar as low as possible. 

That will set the table for positive surprises (expectation beats) in the future.

With the above in mind, if we expect a very ugly narrative to come from earnings calls, we should expect that to put even more pressure on Washington to get the economy re-opened. 

On the health crisis front:  As we discussed last week, if we look at New York as the potential turning point in this health crisis, rather than the canary-in-the-coal-mine, we may indeed be getting to closer the "other side" of this crisis. 

In my view, the most important indicator on the health crisis is the daily change in intubations at New York hospitals.  As we discussed last week, it has been on the decline.  The most recent number has gone negative (i.e. fewer intubations than the prior day).  Here's a look at the latest chart …

If we look at the intubations relative to hospitalizations, this ratio is falling dramatically.  Here’s a look at the daily new hospitalizations …

Again, while there is a lack of reporting on the effectiveness of treatments, we do see, in the data, that less people are getting to the severe stage.  That means something is working. 

With the conversation turning toward “getting back to work,” the fiscal piece of the multi-trillion dollar aid programs will begin hitting the hands of citizens this week.  With that, the economy has to be re-opened sooner, rather than later, so that the money can have somewhere to go (rather than under the mattress).  

That gold market is betting that the cash will indeed be circulated (i.e. inflation is coming).  

Gold broke out to new seven and half year highs today. 

Pro Perspectives 4/9/20

April 9, 2020

As we’ve discussed, the one ‘known’ in this unprecedented crisis, is that the policymakers will do whatever it takes.  If whatever they’ve done doesn’t work, they will do more. 

The Fed did more this morning.  For those that were worried about the high yield bond market.  That’s no longer a worry.  The Fed is now in. 

If there was any confusion on what the objective is here for the Fed, for the Treasury and for the White House, with the flood of liquidity, cash handouts, forgivable loans, backstops and guarantees — as Powell said today, it’s “for the common good”, “we need to make them whole.”

As we’ve discussed, this devalues cash.  And that, ultimately, will reset the value of everything (consumer products, consumer staples, stocks, real estate, commodities, everything).  That will come at some point, hopefully when the economy is recovering and beginning to thrive, once again. 

So the big question is:  How will the Fed respond? 

When we get to the other side on this virus, will the Fed panic when they see a spike in inflation, and chase it down with rate hikes until they tame it/kill the recovery? 

Powell says, no.  He said this morning they will be “in no hurry until the economy is well into recovery … and really on solid footing before (even) starting to pull back.”  

I suspect we will find this position of the Fed to be a necessity.  The Fed fears deflation far more than it fears inflation.  To best ensure a return to normalcy and an escape from deflation and depression, they will let the economy run and let inflation run hot.  That has gold on the move again today (up over 3%). 
 

Pro Perspectives 4/8/20

April 8, 2020

Yesterday, we looked at two very important charts from New York hospitals.  One showed a steep decline in daily ICU admissions.  The other showed a steep decline in daily intubations. 

Again, in my view, this was big news.  It was the first indicator we’ve had (aside from anecdotal) that New York hospitals may have found an effective treatment option. If patients are being treated successfully, they don’t require ICU – they don’t require a ventilator. If that’s true, the bottom is in for this health crisis.

So, who has this data? Apparently, only the New York Governor’s office. And yet it is no where to be found on their website. Yesterday, I included these two important charts (daily ICU admissions and daily Intubations) in my daily note, only because I captured a screenshot during the Governor’s daily press conference.

So today, we should all want to see what this latest update on these two important charts look like.

Ready? The Governor made no mention of them. Zero. In fact, they were the only two data points he omitted from yesterday.

Is it politically motivated? Is it a matter of managing the public’s perception on the status of the crisis, as to convince everyone to continue adherence to the lockdown? Probably a bit of both.

But probably no coincidence that the discussions of opening up the economy again have started over the past couple of days.

I suspect other investors are putting the pieces of this puzzle together in a similar way, and that’s why we’re seeing markets react with a “risk-on” tone over the past two days.