Pro Perspectives 5/21/20

May 21, 2020

We’ve been talking about this building theme of higher prices — driven by the mismatch between demand, which is being turned back on like a light switch, and supply, which has been disrupted and will take time to rebuild. 
 
The demand light switch:  Stay-at-home orders are lifting, businesses are opening, people are getting back to work, and they are doing so with a 45-year high savings rate.  So, not only is their pent-up demand, they have money — the latest data shows a spike of savings up to 13% of disposable income – a near double from the beginning of the year. 

Meanwhile, the supply of goods and services has been disrupted, if not completely shut down, in some cases.  So we have a situation where money will be chasing fewer goods and services.  That tends to lead to higher prices. 

With this in mind, recessions have historically brought about housing price downturns.  I suspect not this time. 

Remember, the intent of policymakers (here and globally) to combat the global economic shutdown by flooding the world with money, was to ultimately inflate economies and deflate debt.

This was an explicit devaluation of cash against asset prices.  And as we’ve discussed, these policy moves will reset the price of everything (consumer stables, consumer products, services, labor … and also stocks, real estate, commodities … everything). 

So as people have been expecting housing prices to fall.   The early indicators are signaling the opposite. 

On the supply side, Redfin says the supply of homes was down 24% in April.  In addition, the recent new housing starts data showed a sharp plunge, as you can see in the chart below …

New listings on Redfin were down 42% in April …
 
What about demand?  Houses sold six days faster in April, compared to a year earlier.  And 27% sold above listing price.  And only one market of the 85 largest metra areas had a year-over-year decline in median sale prices.  

Again, we’ve seen early signals of the supply/demand mismatch in food prices.  Now we’re seeing evidence in real estate.  As economies reopen, expect more to come. 

Pro Perspectives 5/20/20

May 20, 2020

The Senate passed a bill today which could require Chinese firms, listed in the U.S., to de-list from U.S. exchanges or agree to audited financial reporting, just like any other company listed on U.S. exchanges.

This still has to go through the house.  But if this passes, this would likely lock out a lot of big Chinese companies from U.S. capital markets. Among them, one of the biggest e-commerce platform company in the world, Alibaba.  And China’s biggest e-retailer, JD.com.  This, while BABA’s stock is just 6% off of all-time highs, and JD.com was sitting on record highs. 

This is another huge signal that the trade war of the past two years, may be considered moot in the very near future.  The U.S. appears to be going to full protection mode, to counter the three-decade economic war that China has used to ascend from a $350 million economy, to the second largest economy in the world.  

For a country (the U.S.) that is just beginning to turn demand back on, through re-opening of businesses, this dynamic of increasing conflict with China, doesn’t bode well for an already disrupted supply chain.  We may find that the timeline for bringing manufacturing back home, will be much quicker than anyone expects — out of necessity to meet basic needs.   

Pro Perspectives 5/19/20

May 19, 2020

As we discussed yesterday, stocks were challenging the top of the range (post-crash), where some big technical resistance resides.  We have a big retracement level at 2,930, and the widely watched 200-day moving average, which comes in below 3,000 now (the purple line the chart below).

As you can see in the chart, for a third time, stocks have backed off of this area.

Still, the market sentiment is gradually improving for all of the reasons we’ve been discussing in my daily notes:  1) New York, the hotspot for the virus, now has the lowest new Covid hospitalizations in more than two months, 2) the opening of state economies has, thus far, come with no spike in infections, and 3) the expectations bar has been reset on the vaccine timeline (reset to sooner, rather than later).

Now, as people are getting back to work and back into the community, demand has been turned on like a light switch.  So we have pent-up demand meeting what I suspect will be revealed as a severe supply shock, as businesses attempt to build inventory in a world where the supply chain has been disrupted.  As I’ve said, add this to wage subsidies, and we have a formula for higher prices.  

What’s the play for higher prices?  Commodities.   

Pro Perspectives 5/18/20

May 18, 2020

Stocks open the week very strong – and up 4.5% since Friday afternoon.  This challenges the top of the range (post-crash).
 
Let's talk about why …

First, on Friday afternoon, Trump announced "Operation Warp Speed" which includes the funding and manufacturing of vaccine candidates, which would (in theory) have a vaccine ready to roll out the moment it's approved.  Who approves a vaccine?  The FDA.  Who has already proven to have tremendous influence over the FDA timeline?  The President.  

In short, the expectations have been reset on the vaccine timeline.  

As we've discussed, the expectations bar on the health crisis has already been set very low.  That sets the table for positive surprises.  And markets like positive surprises.  Add to this, we had news this morning on success in a Phase 1 trial from Moderna's vaccine.  

So, aside from a vaccine (which may or may not ever materialize), where are looking for clues on how the reopening of the economy is going?  Georgia.  

With that, remember Georgia reopened for business on April 24th.  We are now twenty-five days in.  This is well within the window of time where we would see symptomatic people tested, and show up in the new infections/new case data.   

As you can see in the chart above, a spike hasn't happened. The path has continued lower, following the peak in mid-April.

Again, as we discussed last week, what’s the difference between now and two months ago, that might give us more confidence about the path?  1) Symptomatic people can get tested (much more easily) and quarantine.  2) There are behavior and process changes (both from consumers and businesses).  3) There are treatment options.  

 

So Georgia has been the spot to watch, to gauge how optimistic (or not) we should that the bottom is in for the economy.  All looks good. 

Speaking of the bottom in the economy, (Fed Chair) Jay Powell followed the script of his predecessor Ben Bernanke last night, and spoke directly to the public through an exclusive 60 Minutes interview. These interviews, where the Fed chair is explicitly reassuring the American people, has become a buy signal for stocks. 

Back in March 2009, Bernanke (Fed Chairman at the time) sat in front of a camera in an interview on 60 Minutes, explained what the Fed had done to support the economy, and said he was seeing signs of "green shoots" in the economy.  If you bought stocks at the open the next day, you felt 11 points of pain in the S&P 500 over the next 24-hours, and then 2,643 points of gain over the next eleven years (i.e. that was the bottom). 

Now, this is Powell's second time in front in front of the prime time camera.  Last March, in response to a 4% one-day plunge in Chinese stocks and some loss of momentum in the U.S. stock market rebound, Powell did a 60 Minutes interview, to reassure the public that the economy was in good shape, and that the Fed was there to ensure stability.  If you bought stocks on Monday morning, you made 8% in two months and went on to new record highs.  
  

Pro Perspectives 5/15/20

 

May 15, 2020

With the April economic data continuing to roll in, let’s take a look at the damage.

This morning, we had retail sales.  The year-over-year decline was 21%.  And industrial production was down 15% in April, compared to a year ago.

This has people talking about the evolving predictions on Q2 GDP.  The Atlanta Fed’s model, at the moment, is projecting a down 42% for the quarter.

That’s a huge number.

Here is what that evolution looks like, as we sit half way through the second quarter. 

 

But we still have plenty of data to digest for Q2, over the coming six weeks.  And this Atlanta Fed model has wild swings in relatively normal times.  I suspect we will see an aggressive swing in this chart too, the other way. If you’re betting on a down 42% Q2 GDP number, I’ll take the other side.

Why?

Let’s take a look at a couple of surprisingly solid data points …

Surprise #1:  We just went through two months a government directed national lockdown, on the basis of a highly infectious deadly disease, which has led to mass unemployment, and yet the consumer’s expectations on the outlook remain much healthier than at the depths of the financial crisis.
Surprise #2:  Next, here’s a look at U.S. capacity utilization.  What’s notable in this chart?  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.
With this chart above in mind, remember, the Fed, Treasury and Congress have flooded the economy with stimulus that amounts to more than a quarter’s worth of GDP.  This response implied economic data that would print down 100%, and capacity utilization at zero.  That hasn’t been the case.  With that, when it’s all said an done, the magnitude of the Q3 and Q4 GDP bounceback might make the Q2 decline look small. 

 

Pro Perspectives 5/14/20

May 14, 2020

Stocks have indeed fallen off from the big technical resistance levels we talked about a couple of weeks ago. 

Here's another look at the chart we've been watching …

The purple line is the 200-day moving average.  That is now below 3,000.  And for those that follow technical analysis, the big 61.8% retracement of the decline (at 2,931) has indeed proven to be a logical spot for sellers. 

As we've discussed, following a sharp 35% bounce from the lows, this technical set up has looked like a sensible place to mark the top of the range, until we get some visibility on what the world looks like with economies reopening.  

In the chart, a 10% range would be within the white box. That seems like a pretty fair guess, as to how stocks might trade in the near term (given the higher volatility environment). 

So what's the latest on how the economy is progressing on "reopening?"

As of today, 34 states have opened up, the earliest of which were 18 days ago.  And despite an increase in the rate of testing, the daily new cases across the country have been steady (at worst), if not declining.   So far, so good. 
  

Pro Perspectives 5/13/20

May 13, 2020

With $2.7 trillion worth of fiscal stimulus still in the early stages of working through the system, the Democrats are proposing another $3 trillion.

What’s this all about?

Buried among the many unimaginable giveaways, there are looking to push through mail-in voting.  Mail-in voting has been found to dramatically increase voter participation, which is believed to be a direct benefit for the Democratic party. This would be a significant edge for the Democrats in the November election.

And the democrats are in a race to get it to a vote.  What are they racing against?  The improving trajectory of the health crisis.  As economies open, and people return to life outside of their homes, the case that the Democrats have made for mail-in voting erodes rapidly.  The case:  “We can’t ask Americans to risk their lives, leaving the house and standing on line to vote.”

With the above in mind, expect everything to be negotiable in the package (by design), except “voting reform.”

Also expect the Republicans to give zero consideration to more stimulus, for the obvious reason, and until, at least, the impact of more than $5 trillion worth of Fed and government stimulus is known.

 

Pro Perspectives 5/12/20

May 12, 2020

We've talked quite a bit in that past couple of weeks about the recipe for a return of inflation. 

Remember, we have deluge of money flooding the world from global policymakers, and pent-up demand that will be chasing supply that has been disrupted and will take some time to rebuild.  Add to that, the wage bar has been reset higher — from the impact of wage increases that have been given to essential workers to the impact of federally subsidized unemployment pay (exceeding that of median income).   

That said, as we've discussed, what will become a wave of possibly very hot inflation, first looks like deflation, in this environment.  After all, when you put money in the hands of people but tell them they have to stay home (with little visibility on an endpoint), it's safe to say that consumption (aside from necessities) is going to be crushed in the lockdown phase.

With that, there was a big deal made of the inflation data this morning. 

Here's a look at the chart of core CPI … 

And with this chart, we heard a lot of commentary about the prospects of negative interest rates, and fears of a deflationary spiral. 

But we have a very important catalyst at work that can turn this dynamic on its head.  The reopening of economies.  

This is a "light switch" effect for demand – not a return to pre-health crisis demand by any means, but it's the "rate of change" in demand (from virtually non-existent) that should put pressure on businesses to go from “opening the doors” to ramping up operating capacity (including staff and supply).  And again, this is where the supply disruption should be exposed and price pressures should appear.  We shall see in the coming weeks. 

Another very important spot to watch on the inflation front, as demand comes back into the economy:  On March 26th, as part of the Fed's policy response, they cut the reserve requirement ratio at banks to zero (from 10%). This was an incredible move – another explicit devaluation of money.  Banks no longer have to keep reserves to make good on your demand for your deposits.  If you need your money, the Fed will pass it through (the banks) to you. 

 
This move to "zero" incentivizes, if not mandates, banks to make loans (an infinite amount of loans).  What  does this do to the supply of money?  At a zero reserve requirement ratio, the stock of money could increase infinitely.

Pro Perspectives 5/11/20

May 11, 2020

In my daily notes, we spent the better part of the past month observing the daily changes in the New York data, as a guide on a turning point for the health crisis.  

Remember, all along, we were being told by the experts that New York was the ‘canary in the coal mine’ — it represented what was coming for the rest of the country.  It hasn’t happened.  The crisis in New York peaked the first week of April, with the peak of daily intubations.  And daily cases and daily deaths peaked nationwide and worldwide shortly thereafter.  

With this, all eyes should now be on Georgia, where the re-opening of the economy kicked off on April 24th.  We are now eighteen days in.  As you can see in the chart below, the curve peaked in mid April with 925 cases, and has been on the decline.  The number reported yesterday was just nine.  

Still, with the economy open for more than two weeks, we are in the early days of when symptomatic people would be tested and might show in the new infections/new case data. 

What’s the difference between now and two months ago, that might give us more confidence about the path?  Symptomatic people can get tested (much more easily) and quarantine.  There are behavior and process changes (both from consumers and businesses).  There are treatment options. 

So Georgia will be the spot to watch over the coming two weeks, to gauge how optimistic (or not) we should that the bottom is in for the economy. 

Pro Perspectives 5/8/20

May 8, 2020

No one should have been surprised by the magnitude of the losses in the jobs report this morning. 
 

In fact, the numbers are even worse.  There are states that haven’t processed applications that have been sitting with them for a full month now.   

That said, about 70% of the unemployed represent furloughed workers, which remain attached to employers.  By design, that makes for a quick and seamless return to employment, which would make the bounceback in the data as historic as the decline.

Now, the one spot we discussed yesterday to keep your eye on (wage inflation), did indeed deliver.  When I say deliver, I mean delivered a warning shot. 

The market was looking for 3.3% wage growth (already among the hottest number we’ve seen since pre-Global Financial Crisis days — i.e. more than a decade), but as I said, the high estimate of those surveyed in the Reuters poll was +7.9%.  That was the number — up 7.9% (year over year). 

So everyone will be looking at the spike in joblessness today and over the weekend (which will rapidly adjust with the opening of the economy), but they should be looking at this chart.   

Again, 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.   

With that, this chart from the Economic Policy Institute comes to mind …

You can see in the chart when productivity and hourly compensation decoupled leading to four decades of wage stagnation.  Productivity has grown 6x more than pay since 1979. 

The question is, will there be REAL wage growth, or just nominal?

Mostly nominal – meaning a reset of wages against a reset of prices.  As we’ve discussed, the brew for inflation is here.  We have a deluge of money flooding the world from global policymakers, and pent-up demand beginning to enter an opening economy, with a supply chain that will take a while to catch up. 

With this inflation picture, commodities were the movers of the week.  Of course gold continues to look good, as the historic inflation hedge.  And hedge fund legend, Paul Tudor Jones, was said to be buying Bitcoin this week as an inflation hedge.

What’s the commodity most levered to rising inflation?  Copper.  That looks like it’s breaking out.