Global central banks have explicitly devalued cash, flooding the world with trillions of dollars of new money (excess liquidity). Add to that we’ve have a supply chain disruption, meeting a demand shock. And as the economy regains it’s prior capacity, it’s unlikely that supply will be able to ramp at the same rate that demand will ramp. We should expect prices to be higher.
We’re seeing the excess liquidity effect on stocks (record higher prices). And we’re seeing both the excess liquidity effect and supply/demand mismatch effect in real estate (record high prices).
We’re seeing it in some commodities (gold is up 27%, silver up 49%), but most commodities remain cheap, but for how long?
Let’s take a look at some charts …
The broad commodity index is still down 20% from the highs of the year, and coming from a very low base (record lows).
Oil is down 35% from the highs of the year.
Food prices remain down on the year.
What’s up, big? Lumber.
Lumber is up 94% on the year. The price is up 230% from the April 1 bottom.
Is this what supply disruption meeting a demand surge might look like in broad commodities at some point in the near future? Maybe.
Yesterday, we talked about the $2 trillion valuation of Apple.
And we observed the disconnect between the value of the biggest company in the world, and the value of the most important natural resource in the world. While Apple has doubled over the past two years, the price of oil has about halved.
What’s the relationship? Well, one might think that the performance of Apple is a proxy on the global economy — foretelling, not just an aggressive economic recovery, but one where global asset prices (generally) will be inflated by the excess stimulus money floating around.
Maybe you would expect something like this relationship we saw through the economic ebbs and flows of 2016-2019 …
This relationship hasn’t happened. Oil has only returned to pre-lockdown levels (flat-ish). While Apple is up 80% over the same period.
Interestingly, Tesla has also made a huge run since the Pandemic was globally recognized back in early March. The stock has more than tripled from that point — and up nearly 6x from the lows of mid March.
Does this have anything to do with oil? Maybe. It may have a lot to do with oil and climate change activism.
Climate change activists believe that climate change is an existential threat to the world. And because they view Trump as a climate change denier, they have explicitly said he is an existential threat to the world.
If they believe he is an existential threat, to what extent would they be willing to fight to remove him from office? At the very least, let’s just say that the virus has created a path to his removal.
With that, consider that the financial backing of climate change activism is nearly unlimited. A group called Climate Action 100+ has the most powerful investors in the world (representing $32 trillion in assets under management). And they are dictating how major energy companies are deploying capital on new projects – forcing the pivot to climate responsible initiatives. And then you have every major global government entity/cooperative behind the activist movement, feeding the effort with cash and subsidies.
Now, with that, it seems clear that global capital has indiscriminately plowed into Tesla (likely by the entities mentioned above), as if this company represents the contra-oil industry. If that’s the case, at a market cap of $360 billion, Tesla as an “industry”, relative to oil and gas, is cheap.
Stocks reversed into the end of the day, after printing a new record high.
This comes on the day that Apple became the first two trillion-dollar company. Just two years ago (almost to the day), Apple became the first one trillion-dollar company.
Want to replicate Warren Buffett's portfolio? Put about half of your money in Apple, and you're about there. Buffett now has $133 billion worth of Apple — 45% of Berkshire Hathaway.
If we look back to the first crossing of that trillion-dollar market cap threshold, by Apple, it wasn't long before both Amazon (September of 2018) and Microsoft (April of 2019) joined the party.
Will they follow Apple's lead again? Very likely. Both are valued at $1.6 trillion at the moment.
This is either what it looks like when money around the world finds a store-of-value in monopolies (it's like buying gold), or we're looking at the early signs of a global reset of all asset prices, thanks to the trillions of dollars-worth of new money that policymakers have dumped onto the world. It's probably both.
This is not necessarily reflecting a higher value, just a higher price. And that's a formula for a lower quality of life.
Conversely, what's the right price for oil, if these stocks are foretelling a global recovery? Back in August of 2018, when Apple became the first trillion-dollar company, oil was trading over $70. Today, it's trading $42.
"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.
This is the global "debt monetization" event people thought we were witnessing during the Global Financial Crisis (GFC). The difference? In the GFC, people thought the result of the Fed's actions would be hyperinflationary, and therefore a defacto debt and currency devauation. It didn't happen. When you give people money in a debt crisis, they hoard it. With that, we didn't get hyperinflation, instead we got a deflationary bust.
The Virus War is the opposite. Never has there been a more applicable environment to inflate away the value of everything (in the medium term) to keep the economy (the world) intact (in the near term). It's the only option.
Again, as we discussed yesterday, this is a brew for massive inflation when we come out on the other side of the virus. That means, just as people are wanting to hold cash, it's the worst place to be. The early evidence: Almost everything (all global assets) was up today.
With this backdrop, the first place you look, as a preservation of buying power: gold.
"
As we discussed back in this March note, the policy response made it (and continues to make it) a "buy everything market." Let's take a glimpse of what that has looked like since that March 23rd low in stocks (a little less than five months ago).
The S&P 500 is up 56%. Oil is up 91%. Gold is up 33%. Copper is up 41%.
Now, as we also discussed in my notes surrounding that stock market low, "in historical crises Wall Street panics well before Main Street panics." That was the case once again. By the time the economic shut down hit, and Main Street started panicking, the bottom for Wall Street was near.
So, now Wall Street has recovered. And not surprisingly, well before Main Street has recovered. And Wall Street is now pricing in a wave of inflation. That's whats next for Main Street.
We’ve had a crazy seven months. The next two-and-a-half months may be even crazier, heading an election that has big global ramifications.
The stakes are extremely high.
Let’s step back and gain some perspective on just how high the stakes are/must be…
It’s now seven months since the first virus case was diagnosed in the U.S. And in the days and weeks that followed, through social media, we saw imagery from China, of hazmat officials disinfecting streets. We saw videos of Chinese officials welding Wuhan residents into their homes. We saw videos of residents dropping dead in the middle of the street.
I think it’s clear now that there has been plenty of propaganda coming out of China, infiltrating our media.
Now that we have data, and seven months of history with the virus on the ground in the U.S., the world looks far less scary.
As we discussed last week, the virus isn’t nearly as deadly as it was initially said to be. If we assume, as the CDC does, that we are only diagnosing at best 1 out of every 10 infected, then the death rate is quickly converging toward the annual flu rate.
Remember, all along, we’ve discussed what China has to lose, if they are faced with another four years of Trump. It reveals their desperation.
Let’s revisit …
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 (allies Pompeo is building as I write), they also fall out of the race for global power. The stakes are extremely, extremely high for China (and the world).
We are now halfway through the third quarter. And this is the quarter where we will begin to see very clearly that the response is MUCH greater than the damage.
Remember, the economy is down $2.3 trillion from the Q4 peak.
And yet we have more than $6.6 trillion worth of fiscal and monetary stimulus still working through the system.
So what does Q3 look like?
The Atlanta Fed model is currently projecting 26% annualized economic growth for the third quarter.
The easy math on this says that the economic loss is, and will be, aggressively replenished – maybe even by the year end.
And that will leave us with trillions and trillions of dollars worth of new money floating around the economy.
Make no mistake, this is by design. Back in March, when Mnuchin and Powell were confronted with an apocalyptic scenario, they had one option, flood the world with money, reflate GDP and devalue debt.
Things are going according to plan. The downside? Inflation is coming.
With that, we looked at this chart of gold a couple of weeks ago, which projects a move to $2,700. It has since traded as high as $2,072.
And here’s a look at Bitcoin. This big downtrend broke in late July.
About a month ago, as all of the "spiking cases" hysteria was being peddled by the media, we took a sober look at the raw data (from Harvard, here), and concluded that the rise in cases, was 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.
That has indeed been the case.
As we discussed, the rate of change in cases has only led to the rate-of-change in deaths-to-cases declining, and declining rapidly.
Let's take a look at some updated charts …
First, here's another look at the path of the "case fatality rate" (my charts).
Again, as we discussed last month, despite the fears that the higher case numbers were going to result in more New York-like crises around the country, it hasn't happened.
The death rate has gone down since mid-May, and it has done so for a couple of reasons: 1) treatment options are working, and 2) the large majority of people are simply defeating the disease on their own, and more of those types are being revealed with more testing — and those people are testing because they are being forced to test to return to work OR because they simply can, now that testing is, largely, open and free for asymptomatics.
Next, remember, the CDC chief told us that we've likely only diagnosed about 10% of those that have, or have had, the disease in this country. That's based on surveys of blood samples taken around the country. So the CDC thinks the infection rate (i.e. cases) should be multiplied by a factor of 10.
That CDC projection now brings the number down within the range of annual flu deaths (0.33% in the above chart).
If we assume that were only diagnosing 1 out of 20, the COVID death rate goes to 0.17%. The 10-year average U.S. flu death rate is 0.13%.
The declines of yesterday in both stocks and gold, proved to be good buying opportunities.
As we discussed, the VP selection from Biden yesterday didn’t introduce any surprises, so markets should continue the focus on the big themes: the progression on the health crisis front, the massive global stimulus (and a bulldog President that will continue force things through to keep the bridge intact) and building momentum toward a showdown with China, which includes moving the global supply chain to “freedom loving” countries.
Within that second “big theme” (stimulus), we’ve laid out the simple math that shows the response has been bigger than the damage.
The economy in Q2 produced an annual equivalent of $19.4 trillion of output. That is down $2.3 trilion from the Q4 peak.
More than offsetting that is the $6.6 trillion worth of fiscal and monetary stimulus still working through the system.
Even ignoring the additional monetary stimulus that is available through Fed facilities, and ignoring the growth in money supply that will certainly come with the Fed’s loosening of bank reserve requirements, and ignoring the possibility of more fiscal stimulus, we still have more than $3 trillion in excess response.
As we’ve discussed, this will unleash a global reset of asset prices.
We’ve already seen a big spike in the wage data, thanks to an aggressive federal unemployment subsidy and increased essential worker wages (hazard pay), which is an important driver of prices. We’ve seen a spike in food prices, thanks to supply chain disruptions. And today, we’re seeing some of the growth in money supply show up in the consumer price index, as you can see in the chart below. This is likely just the beginning of an aggressive bounce in prices.
As we’ve discussed now for months, inflation is coming. Be long asset prices.
Big news came late in the day as Biden selected his running mate: Kamala Harris.
Harris has been the high probability pick, and that should be good news for market stability. And that should be good news for a Trump re-election.
As we discussed yesterday, in my view, Michelle Obama represented the biggest risk to Trump. It had the element of surprise. The media would have gone crazy over it. And it would have opened the door to another Obama White House, in the case of a Biden resignation. That could have been enough to get the Democrats over the line.
It didn’t happen. And for markets that like certainty, in a world of total uncertainty, this pick should be keep markets focused on the big themes: the progression on the health crisis front, the massive global stimulus (and a bulldog President that will continue force things through to keep the bridge intact) and building momentum toward a showdown with China, which includes moving the global supply chain to “freedom loving” countries.
This should continue to promote higher global asset prices.
On that note, let’s look at a couple of key charts …
Here’s a look at stocks.
The S&P 500 neared the all-time highs today and reversed into the close.
And gold sold off aggressively today into the VP announcement. But it retests the 2011 record highs, which should be a buying opportunity.
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.
